First Horizon Corp (FHN) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation fourth-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, this call may be recorded.

I would now like to introduce your host for today's conference, Ms. Aarti Bowman.

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'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 in our most recent annual and quarterly reports.

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

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

Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan, and our CFO, BJ Losch.

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

I'll now turn it over to Bryan.

Thank you, Aarti.

Good morning and thanks for joining our call.

2012 marked another year of progress for First Horizon as we continued to successfully execute on our strategic priorities.

We grew Regional Bank loans and deposits, improving our balance sheet and business mix.

We reduced expenses, achieving near-term productivity and efficiency goals, and we made significant progress in winding down the nonstrategic segment, reducing its future earnings drag.

We also stepped up our return of capital to shareholders, repurchasing $131 million of common stock in 2012 versus $44 million in 2011.

I'm pleased with our accomplishments in 2012.

Year over year the Regional Bank's pre-provision net revenue rose about 7%, driven by a 6% increase in net interest income.

Our bankers focus on service resulted in positive balance sheet trends as we deepened customer relationships.

Year over year average core deposits were up 11% in the Regional Bank.

The bank increased average loans 10% from 2011, driven by 12% growth in the C&I portfolio.

The Regional Bank's net interest spread remained relatively stable at 353 basis points in the fourth quarter of 2012, down 3 basis points from the fourth quarter of 2011.

Loan growth in the bank offset the 17% decline in the nonstrategic portfolio, resulting in a year-over-year increase of 2% in consolidated period-end loans.

Our other core business, Capital Markets, also achieved solid performance, continuing to provide a strong source of fee income, producing a high return on capital and a full-year 2012 ROA of 2.5%.

Full-year revenues declined slightly due to lower fixed income activity.

Over the past year, we've continued to selectively add to our sales and trading team and to expand our product offerings and are well positioned at FTN Financial.

Turning to consolidated expenses, we focused on improving productivity and efficiency throughout the year.

We focused on all aspects of our call space.

The Regional Bank's revenue per FTE increased 9% from 2011's level.

We implemented $137 million of our $139 million targeted consolidated efficiency initiatives.

We also met our goal of reducing our annual run rate of consolidated expenses to $1 billion by the end of 2012.

Fourth-quarter expenses were $253 million, excluding approximately $19 million of restructuring charges.

Putting the legacy issues behind us, as you recall, in the second quarter, we took a $250 million charge to cover projected losses for GSE-related repurchase requests.

We had no repurchase provision in either the third or the fourth quarter.

As BJ will discuss in a couple of minutes, mortgage repurchase trends were positive at year end.

Asset quality trends continue to improve year over year as well.

Year over year nonperforming assets decreased 20%, and net charge-offs declined 43%.

Our allowance to loans was at 166 basis points at year end, down 68 basis points from the fourth quarter of 2011, reflecting overall improvement in our loan portfolios.

We are well positioned with our core businesses.

We have strong market share in our Regional Banking franchise, First Tennessee, and our Capital Markets business, FTN Financial.

The strength of these businesses and the steps that we have taken over the past few years have positioned us well for further improvement in our returns for shareholders.

In summary, in 2012 First Horizon made good headway toward achieving our long-term profitability targets and building a foundation for quality sustainable long-term performance.

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

BJ?

Thanks, Bryan.

Good morning, everybody.

I will start on slide six.

Net income available to common shareholders for the fourth quarter was $41 million compared to $26 million last quarter, which translates to a diluted EPS of $0.17 versus $0.10 in the third quarter.

We do have some significant items I would highlight that largely netted themselves out.

As we had previously communicated, we had $19 million of restructuring, repositioning and efficiency charges mostly related to severance from our voluntary separation program.

We also had about a $5 million or so writedown of an equity investment in our nonstrategic segment, and we had a loss accrual related to pending litigation matters of about $4 million.

We also realized in the quarter about $17 million in tax benefits related to decreases in unrecognized tax benefits and a subsidiary liquidation.

If you look on slide seven and our consolidated financial results, linked quarter total revenues, excluding those securities losses, were down about 5%.

With Regional Banking revenues up slightly and Capital Markets revenues down, total expenses were down 13% on a linked-quarter basis.

Consolidated net interest margin was 3.09% in the fourth quarter compared to 3.15% in the third.

Positive impacts to the margin this quarter were higher loan volume, an uptick in loan fees and lower deposit rates, which were offset by lower reinvestment rates in the securities portfolio, higher cash balances, pressure on yields in commercial lending, and changes in the mix of inventory in our Capital Markets business.

For the full-year 2012, our net interest margin declined 9 basis points overall to 3.13% compared to 3.22% in 2011.

The year-over-year decline was mostly from the lower yields in the securities portfolio and was somewhat mitigated by higher loan volumes and a decrease in the deposit rates.

We believe that while we may see fluctuations in net interest margin quarter to quarter in 2013, based on our current rate outlook, we currently expect margin to float down modestly each quarter through 2013, due to the effect the prolonged low rate environment has on reinvestment rates for longer-term assets.

Slide eight shows some highlights for the Regional Bank.

Linked quarter our pretax income was up 7%.

Revenues rose a 1%, driven by a 2% gain in net interest income.

Total fees were flat from last quarter, but we did have higher NSF, cash management, bank card and brokerage fees, which offset a decline in mortgage banking, debit card and insurance fees.

Expenses were up about $3 million, primarily due to higher advertising expenses from seasonal sponsorships.

Loan loss provision in the fourth quarter was a credit of $1 million compared to a $3 million expense in the third quarter.

Turning to balance sheet trends in the Regional Bank on slide nine, linked quarter average loans were up 1% from growth in both commercial and consumer portfolios.

We did see some growth in consumer lending through the financial centers, some modest growth in some C&I areas and continued strength in loans to mortgage companies.

Our total pipeline remains solid, and we saw an increase in fundings in the fourth quarter.

Year over year net commitments for commercial loans in the bank were up 12%, and the average credit rating of our loan portfolio has also improved as lower-rated loans pay off and we replaced with higher rated ones.

We expect that this slow growth environment will make the lending landscape competitive, but we believe that we should be able to continue to make profitable high-return loans.

Moving to Capital Markets where we had another solid quarter, pretax income was $19 million in the business in the fourth quarter.

Fixed income average daily revenue was $1.1 million compared to $1.2 million in the third as customers remained cautious due to market conditions.

And, as you will recall, we lost about two days of trading due to Hurricane Sandy.

Linked quarter expenses declined 11% from lower variable compensation in the business.

As Bryan said, over the past year in that business, we've expanded our product offerings with a particular focus on the municipal products sector where we added sales and trading resources and also launched a public finance initiative.

We made other strategic hires in sales and trading as well, further expanding the extensive distribution platform we have out there in the business.

Turning to expenses on slide 11, excluding restructuring charges of $19 million in the fourth quarter, we did reach our year-end 2012 goal of approximately $1 billion of annualized level of consolidated expenses.

We've targeted an additional $50 million of efficiency initiatives to be in the run rate by the end of 2013.

While a voluntary separation program led to severance-related charges in the fourth quarter, these actions should be a large contributor to our targeted $50 million of efficiencies in 2013.

We are targeting an annual run rate of less than $950 million by the end of 2013 now.

And we will continue to look for ways to reduce costs without impacting revenues, especially if macroeconomic factors are worse than currently anticipated.

Turning to mortgage repurchase trends on slide 12, our fourth-quarter trends were very encouraging here.

Mortgage repurchase provision expense was, again, $0, marking the second consecutive quarter of no provision, and we still expect that any ongoing GSE-related provision should be immaterial.

Linked quarter, the repurchase pipeline declined 25% to $334 million.

New requests decreased by 36% or $113 million, and resolutions were up 10%.

Our success rate in the fourth quarter improved as well to 59%.

We have not experienced a change in the nature of the requests from GSE, nor have we seen a recycling into older vintages from Freddie in particular.

As a reminder, we originated only a modest amount, about $1 billion of loans to Freddie in 2004 and a similar amount in 2005.

We have not been named in any new lawsuits related to our private securitization since October 2012, but we did receive one small indemnification request during the quarter.

We had no loan repurchase requests from our first lien private securitizations, and at this time, based on our private securitizations, origination mix, deal size, age and performance, we continue to believe that if any losses do occur, they should be significantly less than the GSE experience.

Moving on to asset quality on slide 13, trends continued to remain positive.

Our linked-quarter provision expense was $50 million compared to the $40 million in the third quarter, and net charge-offs declined 75%.

You will recall in the third quarter our provision included $30 million of provision and $40 million of charge-offs related to regulatory guidance on consumer loans and discharge bankruptcies.

This quarter, $20 million of charge-offs also reflect lower loss estimates for those discharge bankruptcies based on loan level data obtained from new appraisals in the fourth quarter.

And as you can see on slide 14, NPAs declined 7% from third to fourth quarter.

And for 2013, we expect credit quality trends to continue to improve, albeit at a slower pace.

Wrapping up on slide 15 with our bonefish, our core business trends are good with our core ROA at 114 basis points and core ROTCE at 13.3% in Q4 2012.

We had a lot of significant items that created noise in our consolidated financials in 2012, but the solid returns in our core businesses and our prudent capital management and deployment demonstrate the progress we are making toward our long-term goals.

So with that, I'll turn it back over to Bryan.

Thank you, BJ.

Our employees' hard work resulted in strategic progress in 2012.

We successfully executed on our priorities and focused in on our high return core businesses, differentiating our customer service, and returning capital to our shareholders.

Revenue growth is likely to remain challenging unless economic improvement is stronger than anticipated.

We are committed to improving productivity and efficiency to help achieve positive operating leverage.

We have already put in motion about $20 million of the currently-planned $50 million of efficiencies for 2013, and we will continue to diligently look for other opportunities to reduce expenses without negatively impacting our revenue-producing capability.

Credit-related costs should remain contained as credit quality gradually improved.

We expect a lessening drag in the nonstrategic business resulting from 2012 actions, as well as ongoing rundown in the portfolio.

2013 will be another year where we focus on execution, controlling what we can control and continuing to positively transition our Company.

Currently, we expect the operating environment to be similar to 2012 with modest economic growth, slow employment growth, and low interest rates.

We will continue to work toward improving profitability and moving closer to achieving our long-term bonefish targets.

Additionally, we expect to continue prudently returning capital to our shareholders in 2013.

Thank you to First Horizon's employees for your commitment and hard work.

And with that, operator, we'll now take questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

I wanted to start on capital.

Looking at the slide deck, the slide on the impact to Tier 1 under Basel III that you provided last quarter wasn't in there this quarter.

Just wondering, are you rethinking the 250 basis point hit to Tier 1 common under Basel III or the timing of recapturing that?

Steve, this is Bryan, and I will let BJ get into the specifics.

We really didn't see a need to put it back in there this quarter.

Nothing has changed.

The comment period ended, and I guess it's under review and advisement with the regulators how it will be impacted.

We don't -- there's nothing about our estimates that would have changed during that period of time or our expectations.

I think, as we said, last quarter and would reiterate, we will react accordingly to whatever set of rules come out around capital and Basel III, and we will manage our balance sheet in accordance with that.

So nothing has really changed about our expectations.

There is no new information, and so that forecast is largely unchanged from the time we talked about it in the third-quarter results.

That is helpful.

On the security portfolio yields, which have come down about 15 basis points a quarter through 2012, can you help us think about the pace we should expect in 2013 and maybe how much of that is accelerated premium amortization impacting the decline versus just reinvesting at lower rates?

Steve, it is BJ.

I'll start with the premium amortization question.

We had very modest amounts of that, so that is not an issue for us at all.

I think we have something like $24 million of premium amortization, so it is a very modest amount.

You should expect something probably similar to what you have seen.

We are very heavily agency and MBS in our securities portfolio, and obviously the reinvestment rates there are very challenging.

So you should expect to see similar declines in 2013.

And then following through on that, BJ, in terms of your margin outlook, should we expect pressure sort of 4 or 5 basis points a quarter rather than 2 to 3?

How are you thinking about that?

Yes, that's possible.

That would fall in my modest category.

Based on our rate look and we generally use blue chip consensus rate outlook, we expect that our margin will continue to come down modestly.

Because of the dynamics in our book, we have predominately a floating rate balance sheet.

So we've taken a lot of the pain, if you will, already over the last couple of years as assets have repriced downward.

So our bankers are doing a really good job as much as we can in a competitive environment to defend yields on commercial loans and get well-priced deals.

But with the securities portfolio and other dynamics, it is difficult.

We still believe that we have some modest opportunity to bring down deposit rates, not as much as we've had in the past couple of years, but some, and we will continue to do everything that we can.

But a lot of it largely relates to what the spread is going to be between short rates and long rate.

John Pancari, Evercore Partners.

Yes, on the loan front, I wanted to see if you can give us a little more color on what you are seeing in terms of loan demand and what is driving the growth in the C&I book.

And then separately, also on the loan front, can you just talk a little bit about the expected pace of the runoff in coming quarters of the nonstrategic book and how you view that changing?

Thanks.

John, this is Bryan.

I will start and then I will let Susan sort of pick up at a detailed level on what we're seeing.

We actually saw pretty demand in the fourth quarter.

We actually were a little pleasantly surprised at particularly December.

It looks like we had a less than insignificant amount of loan activities driven by proposed tax law changes.

So we had pretty good demand.

The pipeline, because we had such good closings in the fourth quarter, is down a little bit in the first quarter of this year or going into the first quarter of this year.

It seasonally does that after year, so we're not terribly surprised at that.

From an economic perspective, we think the economy continues to move forward at a modest pace.

We think our calling efforts have been very successful and are paying off very well with the kinds of opportunities that we are getting.

As BJ just said a couple of minutes ago, our bankers have done a fantastic job in competing in a difficult environment, trying to maintain attractive spreads and attractive structures.

So I feel good about that, but it is a slow economy.

With respect to the wind down of the non-strategic portfolio, I don't see anything any different.

I think the CPR on the home equity was about 19% in the fourth quarter.

It's been running between 15% and 20%, so I would expect that that portfolio will continue to run off in the 15% to 20% range in 2013.

I guess one of the mathematical realities of it is, it's a smaller percentage of our loan portfolio today than it was a year ago.

So it will have less impact on our loan growth percentages.

And as I pointed out earlier, we produced about 2% loan growth even with that in 2012.

So I feel good about that momentum.

Susan, any comments you want to make about the marketplace?

Our bankers are saying that they feel like 2013 will feel much like 2012 in terms of competition, in terms of opportunity.

We do a great job of winning business, new opportunities with existing customers and also bringing in new prospects.

So the outlook really is that we will do everything we can to bring in that new business, but we do realize that the competitive environment will continue to be a strong one.

Okay, that's helpful.

And then my follow-up on the capital deployment front, can you just, Bryan, talk a little bit about your thoughts around buybacks?

I know you are going through the process now in terms of determining what you are doing to do.

But can you give us a little color on how you are thinking about the pace of buybacks for 2013 and then any other deployment opportunity?

Yes, as we pointed out reasonably consistently for a while, we feel good about our strong capital position.

Our balance sheet is in a $25 billion plus or minus area.

We are generating strong returns.

We think we're putting the mortgage repurchase behind us with the actions we took in the second quarter.

So we still feel good about our ability to return capital to shareholders.

We will and have worked with our regulators in the past, and we will work with them in the future to manage through that.

Buyback is one important element of it.

The dividend is another element.

We think depending on where you are in terms of pricing at any one point in time, stock price at any one point in time, that changes the various elements of buyback versus dividend.

Over the course of the last 15 months, we've bought back about $175 million worth of stock.

I think the average price was $8.50-something, and that is very attractive to us.

We think it is an attractive price, and we will continue to buy our stock when we have the opportunity.

I think it is appropriate for us in 2013 to evaluate the mix of dividend and buyback.

That is a long way of saying we ought to look at the rate of dividend that we pay, and I would expect that we would have an eye toward increasing that dividend over time.

So we'll continue to make sure we are smart with the way we manage this capital.

We'll continue to do it in the context of prudent balance sheet management, prudent risk management, taking all of our various risks and opportunities into context.

But we think there is a fair amount of capital that we can return to shareholders in 2013, 2014.

Jefferson Harralson, KBW.

Thanks, guys.

I think I may have missed it in the beginning, but how much is left on your current buyback authorization?

About $25 million.

All right.

And I want to ask you a FASB accounting question on the reserving.

I guess the FASB said that the new reserve rules could possibly move up reserves by 50%.

Have you looked at these rules yet?

Do you think the banks in general or you specifically it will result in increased provisions up until the adoption of these rules, or do you think it is a one-time true-up that these rules were to be adopted now?

Man, you are trying to get me on a technical accounting question.

I don't think that it's clear yet how they are going to make it -- make us do it whether it comes through the P&L as charges either over time or at one time or whether it's just charged through equity.

So I don't think that it is clear yet.

I do think it's clear that they have a lot of work to do with the industry, with investors, to make sure that it is done appropriately.

Because you don't want to have a situation where it is prohibitive for a bank to make a loan because of the reserve you have to set up day one.

That just doesn't make a lot of sense.

So I do think more work needs to be done.

I know there's a lot of activity in terms of comments back to them, and I'm sure we will get to the right decision over time.

All right.

Thanks.

And just one quick one on the mortgage warehouse business.

From what you're seeing, the trends that you're seeing, do you think that loan balance there will be stable or up some more for some period of time, or do you think we've reached the peak?

Thanks.

I think that that business has continued to be strong, and we believe that it continued to have strength with mortgage rates as low as they are.

About 70% of the business right now is refi.

And so if that starts to slow, you could see it start to come down, but on the flip side, there is talk about continued housing recovery, which would help in the purchased money market, which the business is well positioned for as well.

So we like the balance in the business.

We love how it is managed.

And so we see continued strength, at least in the near-term.

Matt O'Connor, Deutsche Bank.

Good morning.

This is Rob Placet from Matt's team.

Just given your outlook for the NIM from here, just curious if there's any thoughts on how we should be thinking about how this translates to net interest income dollars.

Do you think you could actually grow loans enough to be able to post positive net interest income growth from here, or should we kind of expect continued flattish trends?

That will be challenging.

We're going to try to defend our balance sheet as well as we can, and we see good growth on the loan side as we've talked about in our Regional Bank.

But we do -- it will be challenging to grow the balance sheet meaningfully with the runoff.

Like we talked about, we are defending our yields on our lending as well as we can, and so we'll just have to see.

But our people fight for every dollar of net interest income that we should.

But it is going to be challenging in this environment to do that, so we'll do the best we can.

Rob, this is Bryan.

I will add to BJ.

Structurally, the change that our balance sheet goes through, we face the same cyclical pressures that anybody does in the securities portfolio and then any fixed rate loans in the loan portfolios, and deposit pricing is what it is.

We saw a little bit of improvement over the course of the year.

And we'll continue to manage all of those with an eye towards how we produce the greatest profitability.

Structurally speaking, though, as we have runoff in the national portfolio, that tends to be lower spread, lower margin on the whole than the loans that were booked in the loan portfolio.

So that should offset some of the cyclical pressure that we have on the balance sheet.

And then as BJ said, it's hard to sit here today and say what interest rates and what the curve may look like over the course of the next year.

But we've been very focused on how we manage that margin, our spread, the new loans that we're putting on the balance sheet, the relationships and how we price those, and we've had some degree of success, and we will continue to focus on how we manage through that in what is otherwise a little bit difficult operating environment for the industry.

Right.

Got you.

Just switching gears a bit, in terms of your Capital Markets business, what should we expect in terms of revenues from here?

Are you guys still in that $1 million to $1.5 million daily revenue range?

And then also, just in Q1, should we expect a seasonal uptick versus Q4?

I think we've said for a couple of months now that we expect the business to remain strong, but probably in the low end of that range.

We saw $1.1 million this quarter, $1.2 million last quarter.

As you all well know, reinvestment rates, as we just talked about several times for our Company, it's the same for any of our community banks or others that we serve through our Capital Markets business.

So it's very challenging.

So our business, since it is so diverse and we deal with so many account relationships, we can continue to do a great job keeping that type of average daily revenue going, and we expected to do that, but probably toward the lower end of that range.

Ken Zerbe, Morgan Stanley.

First question, in terms of mortgage banking, I guess we've had two quarters of tough results.

Part of that looks like it has been driven by the warehouse evaluation adjustments.

Can you just remind us about how that volatility or those -- I guess the negative items the last couple of quarters is calculated or what that's driven off of?

And is there any reason to think that results are more sustainable at this level versus something a little bit higher?

Ken, it is BJ.

I would probably say that quote- sustainability is more towards this level.

If you look, we do break out in our financial supplement the mortgage valuation line item in our mortgage results.

And you will see, I think, this quarter it was [1.7] or [1.8] adjustment.

It can go either way.

So that is relatively modest.

But what is going on right now is in our net hedging results related to our MSR book, we've largely tried to make that a neutral hedge, and where we will make money on the hedging results will really be on carry.

And what is going on right now in this rate environment is that the carry on those hedge assets is lower, and it continues to come in.

So I think we're doing a good job managing that MSR asset for low volatility.

But you should expect that it will have modest hedge results more in line with what you have seen maybe the last couple of quarters.

Okay.

That helps.

And then just one final question, in terms of the put back provision or the lack of put back provision, can you just remind us, what are you doing -- are you doing anything differently than some of the larger banks that have had -- that posted put-back costs this quarter because I guess the GSEs are looking at the earlier vintages?

What do you do differently?

Why might your results have been different from theirs?

Thanks.

We have been pretty consistent over time trying to have a healthy relationship, I will call it, with both where we certainly look at every loan.

We push back where we need to, and we repurchase where we need to.

So I don't think that anything has changed there.

I do think in the industry we have seen a few that have talked about Freddie recycling back into 2004 and 2005 vintages.

We haven't seen any of that.

And as I said in my initial comments, we did a very modest amount of business with Freddie in those vintages, only about $1 billion or so of originations in each of the tiers.

So we are just not seeing a lot of the dynamics that others are, and we expect that to continue and our trends to continue to be positive.

Paul Miller, FBR.

I don't know if you addressed this, but we saw some pretty strong growth on the C&I front on a lot of different regional banks, some of them in the Midwest.

What did you see there?

Are you seeing pipelines starting to open up?

Are you seeing a lot more interest on that front in your markets?

Go ahead, BJ.

Yes, I would say I would echo what Susan said a couple of questions ago, which is the sentiment from our bankers is that 2013 looks much like 2012.

There is some demand, but not a lot.

It's more taking market share than it is purchasing a lot of new equipment or business expansion, per se.

There is certainly pockets of that in different areas, but I wouldn't say that the loan demand is going to pick up.

And did you address loan pricing?

I mean it's a tough environment for everything, but outside of competitive yields, what about the underwriting?

Is the underwriting holding up in the market?

This is Susan.

We are seeing some underwriting creep.

We are being very selective on the new opportunities that we choose to bring in, but we are seeing it in certain segments.

We are seeing some deterioration in the pre-role as it relates to guarantor requirements, upfront equity, et cetera.

So we are seeing some of it, and we're just being very selective and prudent in what we choose to bring on the balance sheet.

That is a continuation of the trend over a period of time, and it doesn't seem to be abating an awful lot right now.

It's still a pretty competitive environment for every deal that's out there.

As I said a little bit earlier, Paul, the pipelines were off a little bit seasonally in the first quarter last year, and they are again this year.

But they seem to be pretty steady.

We feel good about the trends in calling efforts.

We feel good about the relationships that we are calling on and winning.

And as I mentioned earlier, fourth-quarter closings were pretty good, and there's some positive strength in December, some of it driven by tax transactions by customer.

So we feel pretty good about the momentum.

But it is an economy that is growing -- a GDP growth that seems to still be fairly modest by all the measures and people's expectations for 2013.

Kevin Fitzsimmons, Sandler O'Neill.

A couple of questions, guys.

First, on the buyback, I know it's been asked a couple of times, in terms of the timing of when you may think we might hear of your next step on that front, are you guys limited or constricted by the timing of the CCAR for the large banks?

In other words, does your primary regulator maybe want to -- or maybe you guys all feel it is prudent to wait and see how that all fleshes out before you put a request in?

Just trying to get a timing of -- if that's a big lever that you guys have in your control, trying to gauge when the investment community might hear about it.

Kevin, this is Bryan.

The CCAR process -- and I don't know that I even know it.

The official date is generally March/April timeframe.

We're not a participant in that process, and it has not been a driver of the decisioning that our regulators or we've had in the past.

And so it won't be in 2013 either.

We will start the stress testing process later this year in connection with all the banks over greater $10 billion.

I'm not sure what all that means in terms of decisioning process from late 2013 forward, but any actions in early 2013 on to the end of the year don't seem to be constrained to a calendar in terms of what may be going on with the larger banks.

Okay.

Thanks.

Just a quick follow-up.

I know you've talked about continuing to look to trim expenses.

And it seems like my question is, how do you guys feel in 2013 about producing positive operating leverage?

Because it seems like it's pretty tough on the revenue front.

We have a lower base in Capital Markets revenues whether that bounces back up or not, we'll see.

Spread revenues, seems like it's going to be a challenge given what BJ said on the margin, and loan growth is pretty modest.

So even though you are saying you are going to cut the expenses down to $950 million, do you feel if we continue in this environment, that at some point do you feel you have to look at trimming it even more just to get that positive operating leverage?

Thanks.

Kevin, this is Bryan again.

The expense focus that we've had -- it changes from year to year based on what area we're focused on.

The long and short of it is is we've got to be focused on all aspects of our business all the time.

Customer behaviors are changing -- the way customers use branches; the way customers use technology; the amount of paper that we process in the business and our operations functions.

All that changes.

So we continue to iterate our cost structure, and we'll continue to do that.

We think that rightly or wrongly that controlling costs for us and for the industry, for that matter, is likely to not be off the radar screen for a long time.

We've got to focus on how we get more efficient and produce more revenue by spending less.

And so we're going to be focused on that.

As BJ said, we feel good about where we got to.

At the end of the year, we hit sort of the $1 billion range that we had talked about going into 2013.

We feel good about the progress we're making on the $50 million that we have identified and are working on now.

A fair amount of that, as I mentioned earlier, is put into place with some of the voluntary separation program, and we'll continue to focus on controlling our costs and being smart with every dollar.

So that's a long way of saying, yes, I think it's important.

I think there will be other opportunities.

I can't sit here today and tell you what they are, but I can tell you that we're going to be focused on trying to control our costs and doing it in a way that doesn't impact our ability to serve our customers and produce revenue.

We're trying to be very, very thoughtful about it and do it in a way that doesn't impact our topline business, but allows us to drive greater operating leverage, as you suggested to our shareholders.

Craig Siegenthaler, Credit Suisse.

This is [Nick Carzon] standing in for Craig this morning.

I guess first on the charge-off level, can you give us an idea of the magnitude of the impact from the lower loss estimate from the discharged bankruptcies on the Q4 charge-off level?

Yes, Nick.

As you know in the third quarter, we took an estimate for that bankruptcy charge-off using the home pricing indexes.

In the fourth quarter, we were able to get actual appraisals run by loan data.

And it is approximately a $7 million to $9 million adjustment over what what we had in third quarter, positive.

Thanks.

And then I guess a second question just on the expense and the $950 million run rate guidance, I guess previously I thought of that as the $1 billion less roughly a $30 million lower pension cost, less the $50 million from efficiency savings.

Can you give me a little bit more color on how we should think about that or if the pension savings are still there or included in the $950 million?

Nick, this is Bryan.

Yes, the pension savings will still be there.

That plan is now closed.

We will probably -- what I've said in the past is, with the $50 million, I hope that we can realize half of that in the run rate for this year.

We would target to see our expenses in the $950 million or less range for the year.

And as I said to Kevin's question earlier, the expense focus is an important part of our business and is an important part of the industry right now, and we will continue to work on it.

But your math is generally correct in the sense that you've got to factor in the impact of pension cost reduction in addition to any cost-saving initiatives that we have put in place.

Great.

Thanks for taking my questions.

Sure thing.

Mike Turner, Compass Point.

Just following up on the comp somewhat, can you remind us or tell us how much sensitivity there is in comp to changes in Capital Markets revenues?

A good rule of thumb is maybe 40%.

Okay, great.

And then just confirming earlier comments on the buybacks, it sounds like you're not calendar constrained.

So does that mean you can essentially request increases of the buyback or dividend at any time?

Yes, this is Bryan.

That is the way it has operated in the past, and I don't expect that to be any different.

As I mentioned, the one caveat that to be anything that might change around stress testing is that greater than $10 billion organizations take it out.

But, as we've done in the past, I would expect that we would continue to work with our regulators in measurable but meaningful steps to repatriate capital and take this thing in a consistent and steady fashion.

And so I don't think that will be driven by the calendar so much.

Okay, great.

And then last, what should we assume for a tax rate this year?

I know that is a tough one to model.

What I would just assume is take our pretax income, whatever you have for that, multiply it by 38% or so, and then we normally have about $7 million to $8 million of permanent tax credits every quarter.

So I would put those two numbers together.

Okay, great.

Thank you very much.

Emlen Harmon, Jefferies.

Just moving back to the Capital Markets business, there's a couple of questions about the outlook there and interest on it a little bit.

But just the backup in rates that we've seen through the first part of this year, has that been a benefit to the business and started to drive a pickup in activity at all?

And then the follow-on to that would be, if we think about the longer-term picture from that business, we have some strategists this year talking about starting to see repatriation from fixed income into equities, and is that a potential catalyst, as well as some of your clients start to get a little bit more proactive with their portfolios?

It's BJ.

You will see different types of activities in the business literally every day, depending on whether rate is backed up that day or what the news flow is, et cetera.

So, if we average $1.1 million, sometimes we will have days that are closer to 2% and sometimes days that are closer to $500,000 or $600,000 a day.

So it really depends on day to day.

But we do think that it's largely on average in that lower end of that $1.2 million to $1.5 million range.

The dynamic that you are talking about could particularly backup in rates could help, but a lot of community banks, as well as larger banks, frankly, are still dealing with Dodd-Frank and what is going to happen with OTTI and what is going to happen with how you account for your securities portfolio in terms of which buckets you put it in.

So there's still a lot of uncertainty out there.

And combined with low rates and not wanting to extend too much on the curve, it makes for very cautious buying across all of our depositories, in particular.

Got you.

And I know historically you guys have said depositories are about 60% of the fixed income business.

Does that continue to hold true?

Yes.

I got you.

And then just one quick one on the legal reserve this quarter, the $4 million, $5 million, was that for an existing litigation, or was that for something new this quarter?

It is existing litigation.

Okay.

Thanks a lot.

Marty Mosby, Guggenheim.

So a set of questions.

One is the pension benefit that you get going into 2013, does it all come in the first quarter, or does it stay or step away?

Can you quantify that for us?

No, it pretty much happened in the first quarter.

So if you are looking at year-over-year comps, it will come in starting in the first quarter.

Because what is happening is when the pension plan closes, essentially the amortization, if you will, goes from being average service life to average natural life of the participant.

So it just lengthens out the amortization.

So you should see an immediate drop in the first quarter and then stay at those types of levels over the next several quarters.

And can you size that up for us?

Was it in the $13 billion kind of range?

Am I remembering that right?

I think we expect $30 million to $35 million year-to-year.

So roughly equal amounts over the four quarters.

Okay.

So $8 million to $9 million per quarter.

So that was a little bit higher than the TAM, okay.

So then as you've looked at this adjustment on the bankruptcies that we talked about being $7 million to $9 million and I look at graph on page 13, you would then expect to see the $20 million worth of net charge-offs next quarter move higher with some netting of this further improvement.

But this $7 million to $9 million adjustment would be temporary, if not permanent, right?

That's correct, Marty.

Okay.

So that is kind of where you have that kind of box, the $40 million negative that you have shaded there, it could almost be like a $7 million to $9 million positive.

It pushed the number down this quarter.

Yes.

And then as you see that moving forward, what kind of progression or improvement are we seeing in that net charge-off rate?

It has been going through the years, it has been going down a couple of million per quarter.

Is that still progressing at the same rate?

Are there still some pockets where you're seeing some incremental improvement?

And thanks for taking my questions.

Marty, really in terms of general direction on charge-offs, it's probably flat in the regional banks and some decline in the nonstrategic.

Thank you.

Christopher Marinac, FIG Partners.

I wanted to follow back up on the comment earlier about reserves and allowances going forward.

To the extent that now your charge-offs are on a different plane and hopefully continue, does that free up -- just because your coverage is now stronger on a historical loss basis?

Sorry, Chris.

Could you say that again?

If you look at the allowance relative to historical losses, just perhaps the last four quarters, that coverage is getting stronger each quarter.

So is that something that does permit you to rethink your allowance of provisions in future quarters?

We haven't -- we look at reserve coverage the same way every quarter.

So it doesn't necessarily change the way that we're looking at it.

We are looking at trends in our portfolio in terms of grade migration on the commercial side, and we're looking at low rates on the consumer side, as well as taking into account what we think the future holds for that.

So I would say that the group is using sound judgment, and I don't think that it varies materially from what we have seen in the past.

Susan, would you --?

I would agree.

There's a lot of moving parts when it comes, Chris, to looking at those levels of reserves.

And we've released reserves in diminishing amounts over the last couple of years, and there is no expectation that we wouldn't continue to see some reserves free up as credit quality continues to improve going into this year, 2013.

We saw a very good performance, as I mentioned earlier, in terms of declining nonperforming loans, nonperforming assets.

Credit quality migration was very good across the course of the year.

And so that by in and of itself will drive lower absolute levels of reserves.

We also have to balance that with the accounting requirements and a balance with a regulatory view of reserving.

And then you couple all of that with the question that BJ got earlier with what do reserves look like in a new model as the FASB has laid it out, it is hard to say this is where it will end up.

But I think on the whole we should continue to see some degree of reserve release over the course of 2013.

Okay.

That is helpful caller, thanks.

And just a quick follow-up on the Capital Markets area.

Do you get any more efficiencies there from rethinking overhead, or it is purely backing the operating leverage model when revenues come back?

This is Bryan again.

That is a business that has very scalable costs for the most part.

There is data information services and some fixed costs that we have, but that's a business that has been managed historically for very limited fixed costs and very strong control of fixed costs.

And so you tend to get the operating leverage on the revenues increasing, and you see your costs come down when not.

So it is largely a variable cost delta that you're going to see in that business, depending on what that ADR that BJ was talking about earlier does.

Todd Hagerman, Sterne, Agee.

A couple of questions.

Bryan, first off, just in terms of the underlying profitability of the Company, obviously you made a lot of progress this year on the expense side.

In particular, you hit your $1 billion goal and reiterated the expectations for 2013.

I'm just wondering, as I look back at the Company, what you've done over the last one to two years, in particular, the efficiency ratio has moved a couple of percentage points this year, obviously the reps and warranties influence the numbers this year, but as I look at your bonefish targets and so forth, what would be your expectations in terms of, as we move past the reps and warranties issue, what your targets are -- what your scorecard looks like potentially in 2013 as I really focus on the ROTCE and efficiency at this point?

Yes, one of the things, I'm not looking at the slides, so I can't call a number.

But there is a chart -- it is our last or next-to-last slide in there -- that talks about our return on tangible common equity in the core businesses.

I think it is important to separate out what is going on in the nonstrategic and what's going on in the core.

I feel really, really good about the progress that we have made in winding down the nonstrategic.

I feel even better about the progress that we've made in our core businesses, our return, and this is just an equal allocation of our Tier 1 common across these businesses, producing a little over 13% ROE in the fourth quarter.

ROAs are strong and moving toward our bonefish goal.

We have, as you suggested, done a lot to control expenses, and our overhead efficiency ratio improvement in the bank has been good.

Capital Markets, as I said earlier, is largely a variable cost base.

All of that said, I think we will make further progress in 2013.

The biggest driver of benefit to us is the latent asset sensitivity in our balance sheet.

We benefit very significantly from a rising rate environment made at the time all based on the forecasting that the Fed and others have put out there.

But given that, we feel good about what we're doing in terms of making incremental progress quarter to quarter.

I would say our operating sentiment is, let's continue to control what we can control, but do it in a way that doesn't take misappropriated risk on our balance sheet, that takes the long view of the cycle that we're in.

Let's do it in a way that we put strong quality relationships on our balance sheet.

Let's take risks that make sense for the long haul.

And if we do those things, we'll make our bonefish targets work, and we feel very good about our ability to do that.

So we're taking a very deliberate and thoughtful approach, I hope, to the way we book business and drive toward our bonefish goals.

And I think we'll continue to make significant progress this year.

Dave Bishop, Stifel Nicolaus.

A question for you.

In the slide deck in relation to the margin on the Regional Bank side, you mentioned an increase in loan fees during the quarter on the Regional Bank side.

I think you discussed that before, sort of maybe one of the fallouts from Basel III due to the capital requirements on unused lines.

Are those being more well received on the client front?

What are you seeing there in terms of that?

This is BJ.

We started to do that, but it's still in the early stages.

Once these commitments are coming up for renewal, we are having conversations with our clients.

And as we talked about when we did share the Basel III slides and impacts, we are going to have to do that.

I suspect that we won't be the only one in the industry to do it.

I think everybody else is going to have to do it.

But we are just starting that process.

Got you.

And then just a modest increase in short-term liquidity and cash this quarter in terms of the balance sheet, any sort of impact there from the expiration of the TAG program, or is that any sort of positioning in anticipation of that?

I think we suspect that there was probably maybe $200 million of balances that were impacted by the TAG.

Much of that actually went to repo, so it didn't necessarily leave the Company.

And it's hard to quantify exactly what came in to us because of TAG expiration from other banks, but the gross amount we think is something like $200 million on our balance sheet impact.

Thank you.

I'd like to turn the call back to Mr. Bryan Jordan.

Thank you, operator.

Thank you all for joining our call this morning.

Please let us know if you have any follow-up questions that we can help you with during the course of the day or early next week.

I hope you all have a great weekend.

Thank you.

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

This concludes today's program.

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