First Horizon Corp (FHN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the First Horizon National Corporation first quarter 2013 earnings conference call.

At this time, all participants are in a listen only mode.

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

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

I would now like to introduce your host for this conference call, Ms. Aarti Bowman.

You may begin, ma'am.

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 the call this morning, are posted on the Investor Relations section of our Web site at www.FHNC.com.

In this call, we will mention forward-looking and non-GAAP information.

Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly report.

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

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

Also, please remember that this Webcast on our Web site is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan, and 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, everyone.

Thanks for joining our call.

We are continuing to make progress towards achieving our strategic priorities as demonstrated by first quarter's 42% year-over-year improvement in diluted EPS.

We're positively shifting our business mix, reducing the non-strategic portfolio drag, significantly lowering expenses, and prudently returning capital to our shareholders.

In the first quarter, we repurchased $30 million of common shares, resulting in $205 million of total shares repurchased since October 2011.

We also raised our quarterly common dividend to pay out to $0.05 per share.

We're taking a closer look -- excuse me, taking a closer look at two core operating businesses, the Regional Bank.

The Regional Bank posted 6% higher pre-tax income than a year ago, benefiting from 6% average loan growth, a 4% gain in average core deposits, and an 8% drop in expenses.

Total revenue was down only modestly.

Our other core operating business, Capital Markets, continued to provide steady fee income and high returns, with fixed income average daily revenues of $1.13 million in the first quarter, and an annualized return on assets of approximately 2%.

As anticipated, asset quality trends remain favorable.

Year-over-year, non-performing assets decreased 18% and net charge-offs declined 42%.

Our loan portfolios continue to stabilize and improve.

The allowance to loans is 167 basis points, down 50 basis points year-over-year, but steady versus year end 2012.

Total expenses declined 25% from a year ago.

The improvement was driven by our efficiency efforts, lower pension expense, and no mortgage repurchase provisions.

We are on track to reach our targeted annualized run rate of expenses of approximately $925 million by year end 2013.

As BJ will discuss in a couple of minutes, consolidated net interest margin fell short of our expectations in the first quarter.

In our view, the interest rate environment is likely to remain challenging for the foreseeable future.

As a result, our ability to control costs is central to improving near-term profitability, but we are also committed to cutting costs without impacting our revenue sources.

We are building a platform that will enable us to grow and deepen customer relationship over the long-term.

Over the past couple of years, we've hired roughly 25 relationship managers in lines of business such as private client, business banking, commercial banking, CRE, commercial real estate lending, asset-based lending.

We also recently expanded our business activities in North Carolina, South Carolina and Virginia by selectively expanding products and service offerings in these markets.

We've had teams of lenders in those geographies for several years and now plan on building on their success, with a stronger focus in those markets.

We're also seeing growth on the retail side.

Fees in our trust services and investment management business were up 9% year-over-year, driven by new hires and client referrals in our wealth management area.

Our registered investment advisor, FTAS, surpassed $1 billion in retail assets during the first quarter, and now manages over $3.4 billion in assets, reflecting the 35% increase year-over-year.

We are adapting to customer preferences.

We offer best in class mobile technology.

We're rethinking our branch network from both a number and a size standpoint, as we determine the right delivery channel mix to best serve our customers.

We're upgrading existing branches through a combination of technology and staff.

And we've recently introduced a new branch prototype that is staffed by universal bankers who are trained to provide a wide range of services so we can differentiate our customer experience while being more productive in the process.

With our efforts in growing our business and the eventual stronger economic recovery, we remain confident that we can reach our long-term Bonefish goals.

In summary, on Slide 4, we are continuing to make progress and remain optimistic about First Horizon's future.

We're optimizing our business mix to grow selectively and profitably.

We've positioned our balance sheet for sustainable growth.

We're focused on return-oriented business that delivers solid economic profits.

These efforts, along with leading market share, our strong fee income mix, significant asset sensitivity, and our meaningful excess capital, position us well for higher returns over the long-term.

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

BJ?

Great.

Thanks, Bryan.

Good morning, everybody.

I'll start on Slide 6. Debt income available to common shareholders for the first quarter was $41 million.

Diluted EPS was $0.17 a share.

Pre-tax pre-provision net revenue was up significantly, both linked quarter and year-over-year, as we continue to manage what we can control to improve operating leverage.

Total revenues, you'll see, were stable with higher Capital Markets revenue offsetting lower net interest income.

And expenses were down 11% linked quarter as we continue to see the benefits of our efficiency efforts with salaries down 7% linked quarter and pension expense down significantly as expected.

Loan loss provision was flat to last quarter's level at $15 million, as credit quality continues to be strong and improving.

Moving to segment highlights on Slide 7, our core businesses continue to show solid performance, and as Bryan mentioned on Slide 4, our core businesses delivered a 12.6% return on tangible common equity and a 1.08% ROA for the quarter.

In the Regional Bank, our net income rose 5% on a linked quarter basis.

Revenues in the Bank were down 6%, driven by a decrease in net interest income, and from seasonal declines in NSF fees, but expenses in the bank also decreased 11% linked quarter driven by our efficiency efforts.

Salary expense was down 4% in the Bank, and the lower pension expenses there were the most significant drivers again.

In the Capital Markets business, our net income was steady at $12 million.

Fixed income average daily revenues was up slightly at $1.13 million in the quarter, compared to $1.09 million in the fourth.

Expenses were up 7%, reflecting higher variable comp and a FICA reset that normally occurs in the first quarter.

Net loss in the Non-Strategic segment narrowed to $10 million in 1Q '13, compared to $15 million in the fourth.

Pre-tax pre-provision net revenue, you'll note, was breakeven, a milestone that we've been working toward for several quarters.

Revenues were up 30% linked quarter and included a $2.4 million gain related to a LOCOM reversal on a TRUP loan that paid off.

Expenses were down $1 million, or 3%, even as we added $5 million to our litigation reserve for some existing matters.

As expected, our mortgage repurchase provision expense was zero for the third consecutive quarter.

And our loan loss provision in the non-strategic segment was relatively flat at $17 million in 1Q '13.

Turning to Slide 8, as Bryan mentioned, our net interest income and our NII -- NIM was under pressure this quarter.

Our net interest income decreased 5% linked quarter and the margin was lower than anticipated at 2.95% in the quarter, compared to 3.09% in the fourth.

There are several moving parts in the results this quarter, some of which were expected and some of which were larger than anticipated.

As expected, fewer days in the quarter, a seasonal decrease in loan fees, lower reinvestment rates in the securities portfolio, partially offset by continued declines in deposit costs led to about a 4-basis point decline in aggregate linked quarter for those factors.

Three additional factors totalling about 10 basis points led to the greater than expected NIM contraction in the quarter.

First, commercial customer deposit inflows which were then held as excess balances at the Fed versus buying securities were much stronger than forecasted, resulting in about a 2 basis point impact on the NIM.

Second, changes in our capital markets inventories hedging versus 4Q resulted in a 3 basis point reduction.

And third, lower loan yields mainly driven by a larger than expected quarter-to-quarter decrease in loans to mortgage companies led to a 5-basis point reduction.

As I look at it, from a fundamental perspective, we continue to believe that we are managing our balance sheet appropriately for the long term.

You look at the chart in the upper right, it shares our net interest spread, our loan yields minus deposit costs declining at a modest rate, so competitive pressures continue to drive loan pricing and yields down across the industry, we believe our bankers are maintaining good discipline on both price and structure.

The quality of credits we are putting on the books versus what is running off is better, though the yield differential is and will be a challenge near term.

Our pipelines are strong and we're taking share, which will serve us well over time.

Now our loans to mortgage companies will ebb and flow based on industry mortgage origination volumes and movements in loan rates.

As one of our higher yielding loan portfolios, it may have a meaningful impact quarter to quarter on net interest margin or loan growth, but the profitability metrics continue to be very attractive.

Over the long-term, we continue to be positioned very well for rising rates and our asset sensitivity will drive meaningful revenue over time.

While this positioning may cause pressure in the near term, we do not foresee making significant changes near term to change our sensitivity profile.

Sitting here today, our forecast for the rest of the year calls for a quarterly interest margin in the range of 2.85% to 2.95%.

Some key underlying assumptions on that range are no material changes in key macro rate assumptions, continued modest loan yield decline due to competitive pressures, loans to mortgage company balances remaining at roughly 1Q levels, limited incremental securities buying with continued lower reinvestment rates, lower excess balances at the Fed, and similar capital market inventory dynamics.

In addition, we expect our consolidated loan portfolio to remain flat, as Regional Bank loan growth offsets runoff in the non-strategic portfolio.

Turning to Slide 9, the Regional Bank balance sheet trends were stable during the first quarter.

Average core deposits were up linked, 1% linked quarter.

Average loans were relatively steady, where we saw growth in areas like asset-based lending, which was up 2% and consumer loans, which were up 1%.

Offsets, again, were loans to mortgage companies declining and we are still seeing elevated levels of loan payoffs.

On a linked quarter basis, our net interest spread in the Bank declined 7 basis points due to the continued competitive low interest rate lending environment.

Our loan pipeline remains solid and was up 33% linked quarter.

Our bankers are making a lot of calls and are making high quality relationship-oriented loans.

We're focused on booking appropriate risk-adjusted returns on all of our deals.

We received third party validation on a quarterly basis related to our pricing and we remain competitive and disciplined.

The fundamentals of our balance sheet remain strong and we're well positioned for solid returns on both assets and capital.

Turning to Slide 10 on mortgage repurchase trends, our provision expense was zero for the third consecutive quarter, as I mentioned earlier.

Linked quarter, our repurchase pipeline declined 22% to $259 million, and our ending reserve was down 21% to $184 million.

We saw favorable metrics in the first quarter versus key assumption metrics related to our expectations, as you can see in the upper right-hand corner of the slide.

Our rescission, or success rate, is trending higher.

Our loss severity is right in line.

And our mix is more weighted towards Fannie, where we have better detail and insight into our exposure.

Although we saw a linked quarter increase in new requests, based on discussions and information provided by Fannie, we believe Fannie is accelerating, not expanding, its review of our portfolio to reach substantial completion sooner.

Bottom line, we still expect any ongoing GSE related provision to be immaterial.

We've not been named in any lawsuits, new lawsuits related to our private securitization since October 2012.

And we had no loan repurchase requests from our first lien private securitizations.

At this time, based on our private securitization origination mix, deal size, age and performance, we continue to believe that if any losses occur, they should be significantly less than our GSE experience.

Turning to expenses on Slide 11, our positive story here continues.

Our total expenses declined 11% linked quarter, as we discussed.

Excluding 4Q '12's restructuring charges of $19 million, expenses were down 5% and our operating efficiency ratio improved more than 250 basis points.

We're seeing lower personnel costs from lower salary expenses and a decrease in head count and from freezing our pension program.

Additional expense items that declined included FDIC premiums, software, advertising, and sponsorship costs.

Our company-wide efficiency efforts are paying off and we believe we're on track to implement $50 million of targeted efficiencies, and achieve our annualized target expense level of approximately $925 million by the end of 2013.

Moving on to asset quality on Slide 12, first quarter loan loss provision as discussed was $15 million, flat to the fourth quarter.

Net charge-offs were $27 million, compared to $20 million in the fourth quarter.

You might recall that 4Q '12 charge-offs included a $7 million to $9 million favorable adjustment for lower loss estimates for discharged bankruptcies.

On a linked quarter basis, reserves decreased about $12 million and the reserve to loan ratio remains stable at 167 basis points.

Total non-performing loans were up due to the held for sale loan portfolio which includes repurchased mortgage loans and non-performing assets declined slightly from last quarter.

Wrapping up on Slide 13, we'll continue to be opportunistic in pulling the levers we need to, to control what we can control, to continue to improve our profitability and returns over the long-term.

We've done a good job improving our operating leverage with significant expense efficiencies, more than offsetting revenue challenges, and we'll continue to look for ways to do so.

Our core business returns are encouraging with annualized core ROA of 1.08% and our core return on tangible common equity at 12.6% in the first quarter.

The solid returns in our core operating businesses of Regional Banking and Capital Markets demonstrate the progress we are making towards our long-term goals.

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

Thanks, BJ.

I'm pleased with the progress we've made so far in 2013.

Focusing on our high return core businesses, differentiating our customer service, improving our productivity and efficiency, and returning capital to our shareholders.

We are positioning our company to take full advantage of the opportunities that will result from any strengthening of the economy.

Meanwhile, we will continue to work towards improving profitability, reducing the overhang of our legacy businesses, and moving forward to achieving our long-term Bonefish targets.

One side note, we are planning on hosting an analyst day in the fall of this year.

We'll have additional details coming out later in the second quarter.

I hope that you will be able to, or at least strongly consider joining us for that.

Finally, thanks to the First Horizon employees for their commitment and hard work.

With that, Operator, we'll now take questions.

(Operator Instructions)

Matt O'Connor, Deutsche Bank.

Matt?

Yes, this is Rob Placet on Matt's team.

How are you guys doing?

We are good.

Thank you.

Just first on your NIM outlook for the year, I was wondering if you could help us think about the trajectory of the NIM, over the course of the year.

Yes, it's BJ.

That 2.85% to 2.95% range, any of the three quarters could be anywhere in that range.

I would generally expect that it would, that it would come down modestly, but as you have seen, there is volatility from what we are seeing in the marketplace in terms of both macro rate movements and what we're seeing from competitive pressures.

So generally speaking, I think each of the three quarters will be somewhere in that range.

Okay, and I was just curious if you could paint a scenario, where you would have a flat NIM or even a higher NIM for the rest of the year.

Obviously, it's going to be loan growth and rate-driven.

But just curious what your thoughts are in terms of achieving the high end of that range for the rest of the year.

Sure.

I think if you look at the slide that we put out that walked forward, if you will, what we saw in the quarter, certainly I think loan fees come back after their seasonal declines.

We do have incremental opportunity, though it's obviously getting smaller from lower deposit costs, which can benefit us.

If some of the key macro rates move, such as LIBOR -- one-month LIBOR has been trending down.

If that stays flat to going up, that is incrementally helpful to us.

The 10-year, in terms of our loans to mortgage company business in particular, if that continues to stay at lower levels or come down a bit more, that could certainly help us, but we're staying fairly conservative on our outlook related to those, but those can certainly help us get towards the higher end.

Okay, great.

And then as it relates to your mortgage warehouse portfolio, I was just curious, could you talk to the meaningful drop in balances this quarter, what specifically drove it and where you see balances trending for the year and how you think about that portfolio on a normalized basis over time?

Yes, I think our outlook -- again, I'll reiterate.

I think our outlook for that portfolio is roughly in line with where we're at today.

I think we ended the quarter at an average balance of $1.1 billion and that's going to move.

I did mention that it was probably a larger than expected drop.

We had ended the year last year at $1.8 billion period-end and we were probably in the billion dollar range or just under it period-end for this quarter.

It was probably larger than expected drop.

Two primary reasons for that were, again, the first quarter is seasonally soft in terms of mortgage originations, which is obviously where that business is going to ebb and flow.

And the second, the rate dynamics that we saw on the long end related to refis was not as conducive.

So both of those factors contributed to a larger than expected decline.

I would point out, though, that if you look at year-over-year, our loans to mortgage company balances are roughly the same as what they were in 1Q '11.

So what we had seen throughout 2012 was significant strength and growth and it just came down a little bit faster than I would have anticipated.

That portfolio, again, as I mentioned, is very attractive from a profitability and return and risk perspective.

It's also one of our highest yielding commercial portfolios, with yields in the 480 range.

So I think that's going to have a bit of a disproportionate impact if it moves as much as it did this way -- or this quarter.

Excuse me.

Thank you.

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

I just wanted to follow up with a few questions on the mortgage business.

In 1Q, what was the split of purchase and refi?

I would probably say, Steve, it was in the 80/20 range, refi versus purchase.

Okay.

BJ, in the past, I think your balances were somewhere between $400 million and $800 million, in that ball park.

Do you have more capacity that you plan to maintain as volumes fall?

I'm trying to get a sense if we go back to that range or if for some reason we should stay above it.

Yes, I think, Steve, if my memory serves me right, the lowest that portfolio has gotten in recent memory was $330 million, something like that.

We would expect it to stay at these levels, over the rest of 2013.

It's hard to gauge where it goes beyond that.

As you can see, it can move quite a bit in any particular quarter, but there are a couple of things that we've done in that business where we believe we've gained share such that over time, we think the lows are not as low as what they would have historically been.

I would see it more in the $500 million to $1 billion range would be more on the lower end as opposed to what we would have seen previously.

But again, our current expectations based on rate outlook and what our bankers say in that business, we think it's $1 billion to $1.2 billion range for the rest of the year.

But I guess, BJ, we need refi activity to stay very strong, right?

If you're getting 80% of this business from refi?

Yes, that would be, that would be good assumption.

That helps.

Steve, this is Bryan.

We think -- and Susan can talk about the portfolio limits.

As BJ reiterated, we have worked to broaden and deepen our relationship with our mortgage banking customers.

We think we have, as BJ said, gained market share.

And we think that we're working really hard to be the first line used and increase utilization, and we think we will benefit incrementally, if actual purchase money does pick up as the housing recovery builds.

So we're optimistic that we have gained share.

It will be a bigger business, as we have highlighted the obvious this morning.

There's more volatility around that business, but we think we get paid very well for the service that we provide there and we have good, solid, deep relationships and like the business.

This is Susan, Steven.

To reiterate what Bryan said, we have taken the opportunity with some of our larger, longer-term clients to increase the lines that we offer to them in the mortgage warehouse business.

And also, as both BJ and Bryan said, added market share by adding some additional clients as well.

Okay, and I had one question on capital.

Looks like you paid out over 100% of net income in the quarter by the dividend and buybacks.

Bryan, is that how we should be thinking about capital deployment going forward?

I think in the short run, Steve, that's probably a good way to think about it.

If you look at the dynamics of our balance sheet with the continued runoff in the non-strategic portfolios, as we expect, and you see fairly limited opportunities for loan growth in a slower growth economy, I would expect that we would anticipate the return of a significant amount of capital to shareholders.

We don't think we need to build our capital ratios at this point.

And we're very comfortable using the combination of the dividend at now $0.05 a share and the buyback where we bought 30 million this quarter, returning that capital to our shareholders in the near term.

Okay.

Thanks for the color.

Sure thing.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, Kevin.

Just one near-term question on reserve releases.

With the reserve ratio getting down to where it is now, are we getting closer to what you view as the new normal?

Should we expect the declining piece of reserve release in the future?

Or, maybe limited or no releases going forward?

And then more of a bigger picture question, Bryan, for you on M&A or just expansion generally.

You mentioned the new Mid-Atlantic region, which is building on some of the presence you've had there before.

How do you see that expansion playing out?

Are there M&A opportunities out there you think could play out for you?

Is it more maybe a de novo or just putting teams on the field for right now?

Just if you can give us a sense how fast that could play out.

Thank you.

Okay.

Thanks, Kevin.

I'll let Susan talk about reserve releases and I'll come back on your M&A question.

Hello, Kevin.

It's Susan.

As it relates to our reserve methodology, we continue to use our ALLL model on our various portfolios and we then layer in expert judgment and we feel like there might be components that's not picked up in the quantitative model.

So we just, we continue to look at the mix in the portfolio, as well as economic outlook.

So, Kevin, on the M&A question, you might infer from our response to Steve on capital repatriation, we think we've got the excess capital, that if the right opportunity came up from an M&A perspective, we would be interested.

We think it's vitally important that we be disciplined, that we be good stewards of that capital, we put it to work in a way that produces strong returns for our shareholders.

As you mention, the Mid-Atlantic markets.

And then opportunities to fill in here in the state of Tennessee would all be attractive to us.

But we're going to be disciplined in the way we do it and we'll continue to keep our eye on the landscape and look at opportunities as we have the opportunities, to use the word twice.

Bryan, are there any key markets within Carolinas and Virginia that you would be higher up on your radar screen, or any size of company that it would have to be to make it worth it to look at such an opportunity?

Yes, Kevin, the -- our biggest presence today is in the Winston-Salem-Greensboro area.

We've got a small presence in building in Raleigh, a small presence and toehold with some folks in Richmond, Virginia, to name a few.

But if it were in one of the towns in the Carolinas.

As we've tried to relay over the years, we're very comfortable in doing businesses that have the demographics or the feel of the major markets that we serve in Tennessee, where we can over time build a top share that we can have local leadership and compete in a way that is similar to the way we've built out our business in the state of Tennessee.

So there are a number of those opportunities.

With respect to size, there's really no magic number in that regard.

Clearly, there's some scale benefit to, if you're going to do M&A, to being larger than smaller, but there's also the flip side, which is being focused in markets and being concentrated is very important.

And so when we look at it, we don't focus first on size.

We focus on what is the make-up of the customer business, what does the organization look like, how are we going to be able to integrate our products and services, what does it do for us in terms of bringing talent onto our platform.

We're not really bounded by size so much, but more focused on what does it do in terms of the accretive nature to the franchise.

Okay.

Fair enough.

Thank you.

Thank you.

Erika Penala, Bank of America.

Good morning.

This is [Abraham] on behalf of Erika.

Good morning, Abraham.

Good morning.

Just a couple of questions.

First, on expenses, I think it's quite clear in terms of your guidance, in terms of where you want to be at the end of the fourth quarter, the $925 million annual run rate.

When we look out, should we expect that, that could go lower given if we stay in this revenue environment, or should that be stable to higher, given the investments that you are making in some of the Mid-Atlantic markets that you talked about?

Yes, this is Bryan.

Assuming steady state, anything in terms of expanding the franchise through M&A off to the side.

That expense base would have some natural downward bias and just by virtue of the continued runoff in the non-strategic portfolios and the costs associated with that.

We don't set a $925 million target as a target anymore than we set the $1billion dollars that we talked about last year.

We're constantly looking at that cost structure and looking for ways to get more efficient in the way we deliver products and services.

So I would say in combination of what we think is happening in terms of the make-up and structure of the branch network, use of technology, the runoff in the non-strategic portfolio, there continues to be some amount of downward bias over time and that number -- the current type operating environment.

We'll be focused on it in that regard.

Got it.

Thanks a lot for that.

And just one follow-up.

Thanks for the detail, BJ, on the margin.

I was just wondering if you could give some more color in terms of the decline in the securities yield.

You talked last quarter about it is an MBS heavy book which is equalizing lower, should we see the rate of decline modulate as we go forward to sink in with your margin guidance that quarterly NIM should not fall below 2.85% at least?

Yes.

So we're not doing anything different with buying in the securities portfolio, either in terms of mix or growing it.

Particularly, you would have seen it relatively flat this quarter.

Our yields have been coming down in that portfolio the last couple of quarters, anywhere between 12 basis points and 20 basis points.

And so, I think you should probably assume that we'll see similar reductions in that yield over the course of 2013.

Thank you.

Jefferson Harralson, KBW.

Good morning, Jefferson.

A capital question.

With the dividend increase and the increased authorization, was there some stress test that you had to do to make those happen and can you comment on how that works?

Jefferson, this is Bryan.

We've -- we regularly do stress testing and we provide that to our regulators, both at the OCC and the Federal Reserve.

We've had a number of capital actions where we would have submitted that information as part of that process, whether it's TARP repayment or beginning the buyback.

As we've talked about in the past, we think it's appropriate to approve these authorizations in, I would say, modest -- somewhat modest steps and continue to look at capital and continue to stress test.

So there's nothing new about the stress testing that we've been doing.

As you know, the provisions under Dodd-Frank have stress testing and ultimately public disclosure of that stress testing for all institutions I think greater than $10 billion.

The OCC and the Fed have been rolling out requirements for that stress testing.

So we're focused on that process, which will begin later in 2013 and continue for, will continue ongoing.

But there's nothing new or different in terms of the stress testing that we've been doing.

And the $100 million NCPP you did this quarter, I'm assuming that's going to replace the $200 million TRUP you have.

I haven't seen any announcements along those lines.

Is the $100 million seemed extraneous if you're not replacing the $200 million.

I think, Jefferson, it's BJ.

What we did was a couple of things on the preferred.

One was we saw an opportunity to lock in very historically low rates on a piece of the capital structure that we had, that we wanted to eventually add to.

And so we thought we did a pretty good job timing the market and doing that.

Yes, over time, we will use it to opportunistically retire other parts of the capital structure as appropriate.

But, you could assume that it was a little bit of a pre-funding effort, but one that we think over time was a smart move for us.

All right, thanks.

Final follow-up on that, if you could just give a little more color on that, that's the increase, or the size of that reduction and the mortgage warehouse business.

It seems like a big number for a quarter where -- it seems a lot bigger than we had refinances fall during the quarter.

Can you talk about the $700 million?

Is there one or two big clients that really came down, or maybe pull some credit from somebody or is it just that volatile?

This is Susan.

It's not embedded in any one or two clients.

It's really based on the economic environment of lower activity.

And again, there is seasonality to it.

We were at almost the exact same level this time, 3-31-12 as we are 3-31-13.

All right.

Thank you very much, guys.

Thanks, Jefferson.

Todd Hagerman, Sterne Agee.

Good morning, Todd.

Good morning, everybody.

Good morning.

Bryan, I just wanted to drill down a little bit more in terms of the loan pipeline and the funding side.

As you mention, your expectation in the mortgage warehouse is to stay relatively steady over the course of the year.

But what catches my attention in both the pipeline, as well as in the capital markets business, is it seems like there was some amount of pull-through in Q4.

And then I'm just curious in terms of the mix, with the pipeline build now in the first quarter in CNI, what is the shift there from quarter to quarter, if you will, and the dynamics between the two quarters?

Yes, I'll start and then Susan can talk more particularly about the details.

Clearly, the pull-through in the fourth quarter was good.

You may recall, we mentioned there was a fair amount of tax-motivated things that occurred in the fourth quarter.

Our pipelines were a little lower at the fourth quarter.

We saw a natural build.

And there's some seasonality around closings in any given year.

The pipelines, as we measure them, the growth is pretty broad based.

We see strength in a number of asset classes.

In fact, there's some asset classes that we're surprised at how strong they are and particularly in areas of commercial real estate at this point.

So it's pretty broad based.

We feel good about the make-up and the customer mix in there, and are optimistic based on what we've seen to date that we're going to have pretty good pull-through on that.

Susan, anything you want to --

Yes, one of the things that BJ mentioned, too, we have seen some growth in our asset base lending business.

We continue to see opportunities there.

And then just in our core markets -- our core CNI, not a lot of organic growth in terms of companies doing a lot of expansion, but with the calling effort of our relationship managers, both long-tenured and some of the ones we've brought on, we continue to have some success in terms of taking long-term business away from competitors.

We -- if you look at the first quarter, we had good success all across the state in terms of the business that we want.

We had strength in the east.

We had strength in the middle.

We had strength in the west.

So it's pretty broad based.

But as Susan said, there's not a whole lot of incremental borrowing.

There's a lot of moving market share around and we like our prospects at that and our folks are working hard to grow that business.

That's helpful.

And then just a follow-up, I'm assuming then also the commitments have also meaningfully trended higher as well just with respect to that pipeline.

Yes, we've seen an increase in those, in the commitments as well.

Although, in terms of existing commitments, there's still some pressure on utilization as customers who are -- we still have some customer deleveraging.

And then if I could, just lastly, just in terms of capital markets, Bryan, in terms of the quarter to quarter, some of the other, some of your other competitors saw a little bit better strength in Q4, again, because of the fiscal cliff and everything else.

But your activity levels in the quarter, again, at the lower end of your guidance, but I'm just curious in terms of what you're seeing in terms of the customer flow Q1, going forward in terms of that pipeline.

Again, with a lot of the political noise that occurred between Q4, Q1 -- how that may be affecting your outlook on the average daily revenues in the business now going forward.

Yes, our expectation is that we'll be pretty steady.

We expect to be in the lower 50% of our $1 million to $1.5 million average daily revenues based on what we see is the catalyst for our customers buying in this environment.

The biggest driver of volatility is going to be expectations about the direction of rates.

If you look at the last 75 days to 100 days, you've seen a lot of volatility in what people are thinking about rates.

We feel very good about the fundamental make-up of the customer base, the products that we're adding, like the general issue -- general market issue, the municipal expansion that we've been building out.

We think it will be a pretty steady business.

Our business is a distribution oriented business.

We don't position for proprietary trading and we think it will be steady as people have cash flow to continue to reinvest, volatility will come in from movement and direction of rates.

But generally, have a pretty positive outlook over the remainder of 2013.

Thank you.

Marty Mosby, Guggenheim.

Good morning, Marty.

Good morning, guys.

On the mortgage repurchase, if you look at the reserves that you and have you take out the impact of what you already have in the remaining pipeline, it would look like the new demands at the pace that they were at this quarter, you could cover about three more quarters.

Which in my mind, given your guidance that you don't need any more reserving or any meaningful increase, it looks like these activities, as we get closer to year-end, would actually be behind us.

I just wanted to confirm that, that timeframe looked right.

Marty, it's BJ.

Yes, in my initial comments, I did talk about Fannie seems to be accelerating requests.

But in our discussions with them, not expanding them.

So that would naturally mean that they are trying to get through the pipelines faster and that's obviously a benefit for us.

So, again, what we watch more closely than quarter to quarter requests is the conversation and data that we get from them about aggregate exposure and terminal exposure, and we feel very comfortable with where that's at.

We would obviously want it to be resolved sooner rather than later as well.

If you just plow through the math, it looked like you had two or three more quarters at the rate that they were at and then it would be behind it.

The other thing, BJ, I wanted to ask you about was the capital markets inventory impact on the net interest margin.

It looks like that's coming through the securities, the repo line where you're putting more of that hedging on the balance sheet.

Do you think that, that's a permanent 3 basis points or is there some opportunity that maybe you would go back to how maybe some of that's more off-balance sheet and you can get that 3 basis points back in the near term?

Yes, that's -- yes, you're exactly right in terms of what the dynamic was this quarter.

It's all dependent on what we're trying to hedge from a long position perspective.

It just so happened that in the first quarter, we had more on-balance sheet hedging, which shows up, as you know, in your trading liabilities and on the asset side in the repo.

That could change next quarter.

It could stay where it's at.

So what my more conservative assumption is, is that it stays where it's at.

But again, as you know, that's not where we make money in that business.

That, we use the balance sheet to facilitate the fee income side and the distribution side of our business.

It's going to have a disproportionate impact on the NIM, but a very modest impact on NII.

Yes, I was just looking at it.

It wasn't the inventory getting bigger.

It was just the hedging activities, and if that was the shift back, that would at least put some upward movement on the margin, at least being able to recapture that part of it.

Thanks.

That's right.

Nicholas Karzon, Credit Suisse.

Hello, Nick.

The first question I wanted to start out with was that the non-interest expense in the non-strategic segment, it looked like it actually ticked up quarter-over-quarter if you exclude the legal accrual in the fourth quarter.

I was wondering when we should start to see this come down.

It's roughly $130 million on a run rate basis -- when that starts to come down and what portion of that is variable versus fixed over the next couple of years?

Nick, it's BJ.

I actually think that on a linked quarter basis, in aggregate, expenses were down $1 million and if you exclude that litigation reserve and add $5 million, it was actually down $6 million.

So what is really in that, is continued credit-related costs to managing our non-strategic portfolio, which continued to float down over time as we work out those assets, and generally less expenses, as our MSR portfolio comes down, the sub servicing costs will come down commensurate with that.

So I do think it's coming down appropriately.

You can see that on Slide 7.

Okay, got it.

And then on the tax credit, it was a little bit lower, I think at $6.2 million this quarter than it's been the last couple of quarters.

I know that moves from quarter to quarter, but what's a normalized level to think about that at?

About $6 million to $7 million a quarter.

Okay, thanks.

John Pancari, Evercore Partners.

Hello, John.

Could you talk about the trend in file requests on the private label side in the quarter?

I know you sound pretty confident still in the loss content there that will be manageable, but just wanted to get a little bit of color around how the file requests have trended on that side and through the quarter.

John, when you say file requests, what are you thinking about?

Well, I think you had indicated before and last quarter that full file request had started to tick up or you've had some requests on the private label side and, I know that could portend any full repurchase requests, but you haven't seen that yet.

I'm just curious if you are seeing incremental inquiries on the file request side at all.

We still need some clarification in our -- that's [the mix in the bullet] about that.

It's really not -- they are not put back requests, but we really haven't seen a lot of movement there either quarter to quarter.

Okay, all right.

So no real change through the quarter on the private label side in either direction for you to have any incremental concern on that side?

No.

No, John, this is Bryan.

It was very quiet in the private label space in the first quarter.

Nothing really substantive has changed since I would say early in the third quarter.

I think BJ mentioned October, but very quiet first quarter.

Okay.

All right, and then in your core loan portfolio, outside of the mortgage warehouse.

Can you give us a little bit of color around what yields are you originating new money on your, in your loan book, particularly in CNI, ex-warehouse, and commercial real estate, just so we can get an idea of the ultimate seasoning of that portfolio as rates remain low?

Sure, John.

Generally speaking, I'll give you a little more color than just the yields, but our new originations are predominantly floating rate on the commercial side, about 80% of what we're doing is floating rate.

In terms of core CNI, the yields that we're seeing are in the LIBOR plus 250 range -- something like that.

On the commercial real estate side, they are roughly in line with that, maybe a little bit better.

So when you combine floating rate assets coming on the balance sheet in a competitive environment, that pressures your yields in terms of what you have on the portfolio versus what is coming on.

What I would say as well though is that the new business that is coming on is very clean.

So when we run risk-adjusted return on capitals for individual credits, we're seeing very good risk-adjusted returns and future economic profit associated with that.

So our credit quality is stellar.

We're getting full customer relationships.

We're picking up share that we want to see, but in this environment, those yields are going to be pretty competitive.

Okay, thanks.

That's all I had.

Thank you.

Ken Zerbe, Morgan Stanley.

First question is just in terms of the legal accrual, this is the second quarter in a row that you've taken an accrual.

Looks like it ticked up a little bit.

Is there anything there we should know about?

I don't think so, Ken.

They were just for existing litigation matters.

In our Q, you'll see that we regularly disclose what reasonably possible lawsuits would be and what kinds of lawsuits we have.

And so every quarter we're going to get new information that will determine whether or not we need to add the litigation reserves or not, on some existing matters we felt the need to do so.

Ken, this is Bryan.

I'll add to it.

As we've talked about in the past, most of the accrual process for matters like litigation or for that matter, mortgage repurchase, are all driven by probable and estimable.

As we get, as BJ said, more information, that gives us the ability to establish accruals based on probable and estimable standards, we will include those when we have that ability.

So we don't talk specifically about individual matters, as BJ said.

We put as detailed of a disclosure as we think we can in the Qs and Ks.

And as opportunities and information come up for us to set up appropriate reserve for those matters, we take that step.

And was the $5 million related to private label this quarter?

No.

Okay.

As we said, we have not had any private label repurchase requests and I'll just use that as a reference point.

Sure.

Because until we have requests, it's not -- we don't have the ability to make accruals for it.

Perfect.

And then just one question, in terms of the pace of expenses, if we take what you reported this quarter, the $241 million, we back out the $5 million of legal accruals, you're at $235 million, multiply that by 4 and basically you're at $940 million or $941 million.

So you're -- based on this quarter's number, you're already within your $925 million to $950 million range.

Is that the right way to think about it?

Is there going to be -- do we see a tick-up in expenses, then coming back down again?

Seems like you are already -- if we carry this out -- you're already within your targeted expense guidance.

I think, Ken, we talked about $925 million this time as our target or goal for our annualized run rate by the end of the year.

So I think we're still a little bit above that by your math.

And we expect to continually bring that down as some of the further efficiency efforts flow through our numbers.

So for instance, some of the actions that we took in the fourth quarter, many of those employees were still on the payroll in the first quarter.

So they will come off in terms of salaries throughout the rest of the year.

So, as Bryan said, and as I've said, in this environment, we're going to continue to bring down our expenses appropriately without sacrificing revenue.

And so you should see that continue to glide down.

Thank you.

Kevin Reynolds, Wunderlich Securities.

Good morning, everybody.

Good morning, Kevin.

Most of my questions have been answered.

And I don't know if you have addressed this.

I apologize, I've been trying to keep up this morning.

Bryan, could you talk about the dynamics of the competitive environment.

Whether there's been any change this quarter versus, say, fourth quarter in terms of how big banks are acting with respect to structure and price.

And the small banks as well and if there's any noticeable difference, how you think that continues to play out over the course of this year?

Good morning.

We continue to see competitive pressures being very intense.

There's probably no remarkable change in the first quarter, just a continuation of the trend line.

As I commented earlier, the opportunities that we -- and I think most people have seen -- are opportunities to gain market share or move relationships around.

In a lot of cases you would assume by definition that's the improved pricing structure and so you see that continued to play through.

We are not seeing a whole lot of difference in the behavior of large or small competitors.

As I've said in different times in the past, we tend to see better pricing and structure on larger, more significant deals, simply because there's not as much competition for those deals.

On smaller deals, there's an awful lot more competition.

So it's a bit dated, but we see deals where a borrower may get 15 term sheets on the deal.

And that's not -- that doesn't create the best dynamic for competition.

And that's one of the reasons that we are focused on the more specialized type businesses at the margin.

BJ mentioned the growth we had in ABL.

We've talked a lot about the contraction we saw in warehouse lending, but those are the kinds of businesses where we think we have a specialized product set.

We have a specialized capability and we have the ability to create attractive returns and provide valuable service to our customer base.

And so we're really looking at the business to be competitive in the core CNI and corporate business, as well as commercial real estate, but also, to expand our purview of those specialized opportunities to grow the business.

Healthcare is another example.

So the -- that's a long way of saying the dynamics haven't changed an awful lot in the last quarter.

It's still a very competitive environment.

Borrowers are not doing a whole lot of incremental new money borrowing.

It makes it a challenging environment for everybody in the industry to show incremental loan growth.

So we'll stick to our discipline and try to win good, solid customer relationship business and grow the business very patiently with our eye towards the long-term.

Thank you.

Mike Turner, Compass Point.

Good morning.

Most of my questions have been answered.

Just curious what your expectations for the securities portfolio size will be going forward.

And then also, just what the reinvestment yields are in that portfolio.

Yes, so it -- we would expect that the securities portfolio size would be essentially what it is here, give or take $200 million each way.

So, not any significant change in buying patterns or activity, and that our yields would continue to float down in the 10 basis point to 15 basis point range a quarter.

Eventually, they are going to flatten out, but they are still on a downward trajectory.

And what are you -- what are the yields of your repurchases right now?

What we're putting on in terms of securities?

Reinvesting in cash flows?

Yes, yes.

Really in the 150 [basis point ] range, something like that.

Okay.

Thank you.

Sure.

Emlen Harmon, Jefferies.

Good morning, guys.

BJ, maybe kick it off with you.

You talk about in your prepared remarks, talked a little bit about continuing to look at the branch structure.

Could you help us identify -- could you help us think about where the greatest opportunities are for savings areas of real estate, is it personnel?

Just what are the opportunities as you think about, from an expense perspective, as you think about just the infrastructure longer term?

Yes.

I think that obviously what we've already done in terms of our largest line item, anybody's largest line item in our industry in people, we've taken a lot of those actions already.

And so we'll continue to see the benefit of that going forward.

Our branch infrastructure is certainly one that we continue to look at.

Bryan mentioned that not only the number, but the size as well.

How do we right size the branch for the customer behavior that we're seeing to make our footprint smaller?

From a real estate perspective in aggregate, not just branches, but we have a particular focus on reducing the footprint, if you will, of square footage that we use as an organization to be more efficient, to move more into owned properties or long-term leased properties from elsewhere so we can continue to see opportunities to do that.

Our procurement group has done a good job working with our various businesses to renegotiate contracts and when one comes up for renewal, taking costs out of the organization there.

We'll continue to see that.

What we're focused on a lot going forward are things that we call horizontal opportunities.

So things like looking at end-to-end processes and taking pieces and parts out of that to make our experience for our customers better and take costs out.

Most of what we've done already is what I'd call vertical cost reductions, and these will, these will be a little bit more processing horizontal-oriented.

Got it.

Okay, thanks.

Felt like we got away from the mortgage warehouse there for a bit, but I'm going to bring it back really quickly.

Did hear from one of your competitors in that space this quarter that, there was a pick up in competition.

Could you give us a sense of, in that business specifically, what you feel like the competitive environment is and have yields come under pressure at all there?

Not particularly.

I don't think.

Our yields are very strong in the 480 range.

We've continued to pick up new incremental clients.

We've gotten additional business from existing, but it's going to ebb and flow.

There are some large clients of ours that will do business with us primarily, but others secondarily and vice versa.

So, what we're continuing to work on in that business is becoming more and more of a primary relationship for as many as we can.

But we haven't seen any particular competitive pressure that would give us any pause for concern that I've heard of.

This is Bryan.

I know this is a blinding glimpse of the obvious.

Everything we're doing right now is very competitive and it's all relative.

So, yes, to keep it in that context.

But it's a very competitive environment and we feel like we have to work hard to earn all of our customer business and we haven't seen a big change in the mortgage business.

Thank you.

I'm not showing any further questions at this time.

I would like to turn the conference back over to Bryan Jordan for closing comments.

Thank you, Operator.

Thank you, all, for joining us this morning.

We appreciate your time and your interest in our Company.

Please let us know if you have any questions or need additional information, and Aarti will be available throughout the day.

I hope you all have a great weekend.

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

You may now disconnect, and have a wonderful day.