First Horizon Corp (FHN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation, third-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 been recorded.

I would now like to turn the conference call to Mrs.

Aarti Bowman, you may begin ma'am.

Please note that the press release and financial supplement which announced our earnings as well as the slide presentation we will use in this call this morning, are posted in the Investor Relations section of our website at www.FirstHorizon.com.

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

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

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

The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this Also please remember that this webcast is on our website and 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 will now turn it over to Bryan.

Thanks, Aarti.

Good morning and thanks for joining our call.

We are continuing to achieve positive results from successful execution of our strategic priorities, gaining market share and delivering steady loan growth, and solid returns in our core businesses.

We also continue to hit legacy issues and added $200 million to our mortgage repurchase reserve which resulted in a net loss in the third quarter.

Though it was an important step as we continue to unwind in the mortgage business as we sold more than five years ago.

We recently received significant new additional information on our outstanding GSE exposures.

As a result of that information, we significantly expanded our repurchase reserve for conforming loans sold to the GSE.

Also this week, we reached an agreement in principle to resolve certain rep and warranty repurchase obligations, subject to Fannie Mae's governance and regulatory approval.

While we obviously don't like incurring this unexpected charge, we want to continue being consistent and prudent with our repurchase reserve levels.

BJ will provide more details in a few minutes.

But please keep in mind that we are somewhat limited in what we can say while we are working on the definitive legal resolution with Fannie Mae.

We are seeing good momentum in our regional bank.

The most recent FDIC data showed that we now have the number one deposit market share in Tennessee.

In middle Tennessee we grew four times faster than the market.

I'm especially pleased with these results since it demonstrates that our bankers have expanded our customer base and prioritized customer service, while at the same time we reduced costs and improved efficiency.

Year-over-year for the third quarter, regional bank expenses are down a full 7%.

We've grown bank revenues 2% linked quarter.

We've kept average loans in the regional bank at the same level year-over-year, loans to mortgage companies have fallen as the overall mortgage market has softened.

And we expect mortgage activity to remain muted in the fourth quarter.

Our bankers are continuing to grow profitable high-quality loans, with increases in both commercial and consumer lending.

Our loan pipeline remains solid, and loan closings were up in the third quarter.

Economic, political and interest-rate and uncertainty will continue to make quality loan growth challenging but we're seeing results from our strategy to grow our balance sheet with profitable, high-quality loans.

We aren't making unprofitable risky loans just to show quarterly loan growth.

Instead, we are positioning for the long-term, expanding and deepening customer relationships, providing a full product set that profitably serves our customers needs.

FTN Financial, our fixed income business, continues to be an important contributor of our business mix.

With pretax earnings of $10 million in the quarter.

Market conditions impact fixed income -- market conditions impacted fixed income average daily revenues, yet with uncertainty around the Fed's policy of quantitative easing.

The FTN Financial team generated an average daily revenue of $850,000 in the third quarter.

Asset quality trends remain stable.

Our net charge-offs declined 80% and reserve decreased 9% year-over-year.

Overall trends are stable or improving.

Our capital ratio remains strong with Tier 1 common at 10.2% for the quarter.

We expect to continue to generate excess capital.

We remain committed to strategically and prudently getting excess capital back in shareholders hands and will continue to evaluate capital return opportunities.

In the next few quarters we are going to be cautious about share buybacks with the addition to the repurchase reserve this quarter, the FHA investigation where we have limited visibility and the potential losses, and the upcoming stress test.

Our overall philosophy returning capital is not changed.

Our capital ratios remain strong as I said with Tier 1 common at 10.2% and we expect to generate excess capital.

It is easy to get overly focused on mortgage repurchase and litigation issues, but we are focusing on the big picture.

I'm pleased with the positive trends in the third quarter, the number one ranking in deposits in Tennessee, steady loan growth with yields holding up and higher revenues in the bank, and good asset quality metrics.

With that I will now turn the call over to BJ for more financial details about the third quarter, and then I will be back for some closing comments.

BJ?

Great, thanks Bryan.

Good morning, everybody.

I will start on slide 7 with our third quarter consolidated financial results.

As we mentioned, consolidated net loss available to common this quarter was $107 million or $0.45 a share.

The consolidated net loss was driven by the $200 million mortgage repurchase provision in our non strategic segment which had an after-tax impact of $152 million or per share impact of $0.64.

Let's turn to slide 8 where I will review with you the factors that led to our change in estimate for our mortgage repurchase exposure.

As Bryan mentioned at the beginning of the call, we recently entered into discussions with Fannie and reached an agreement in principle just a few days ago.

As you have seen with others in the industry that have entered into settlement agreements with either Fannie or Freddie, the population of loans expanded.

Compared with previous information, the additional information encompasses a broader population of loans including older vintages and expanded selection criteria from the remaining loan populations.

The addition to the reserve includes estimates for an expanded scope of selections, estimates for future losses from other populations as well as vintages prior to 2005.

As you will recall, we had used information on our Fannie exposure to extrapolate our estimated exposure to Freddie.

Therefore, as we updated our Fannie estimates, we have extrapolated our remaining Freddie exposure using similar assumptions of future loss content.

The mortgage repurchase reserve balance is on slide 9. Second quarter's reserve balance was $123 million in the quarter we had $30 million of net realized losses and had a remaining balance of $93 million.

The incremental addition to the reserve of $200 million was calculated by incorporating additional factors; estimated with the Fannie agreement amount; future MI rescissions related to Fannie loans excluded from the agreement; Fannie bulk servicing sales excluded from the agreement; the extrapolated estimates for Freddie; and other mortgage related impacts.

So, at the end of the third quarter our reserve was therefore $293 million.

Turning to slide 10 looking at our segment highlights our core businesses continue to deliver solid performance with net income of $41 million or $0.17 a share in the quarter.

In the regional bank net income was $48 million a 13% increase from the second quarter.

Linked quarter, our non interest income in the bank grew 3% driven by growth in deposit transaction, brokerage and other revenues.

Expenses in the bank were up 2% due to an uptick in professional fees and advertising costs and loan loss privation decreased 61% to $5 million reflecting continued stability in the bank's loan portfolio.

In our FTN Financial business, net income was $6 million in the third quarter.

Fixed income revenue declined 7% on a linked quarter basis with expenses declining 3% due to lower variable comp and a reduction in legal and professional fees.

We continue to see average daily revenue levels below our normalized expectations as the interest rate environment and uncertainty about Fed policy negatively impacted fixed income activity across the state.

Over the long-term in a more normalized environment, we still believe that fixed income ADR levels in our business will be in the $1 million to $1.5 million range.

Again our net loss in the non strategic segment was $148 million, linked quarter's revenue were up 20% due to the effects of the agreement to sell substantially all our legacy mortgage servicing.

Expenses were $222 million which includes the $200 million of mortgage repurchase provisions.

Moving on to slide 11 we will talk a little bit about regional bank balance sheet trends.

Average core deposits decreased slightly to $14.5 billion primarily due to large commercial and public deposit variability towards the end of the quarter.

Average loans were relatively steady at $12.2 billion.

On a linked quarter basis, consumer loans were up 3%, and commercial loans excluding loans to mortgage companies were up slightly.

This solid growth was offset by declines in average loans to mortgage companies, which were down from $1.1 billion in the second quarter to about $950 million.

As expected, given the recent rise in mortgage rates and the resulting slowdown in industry mortgage refi volumes.

We expect balances to decline from these levels in the fourth quarter, given both rate uncertainties, and seasonal softness in housing demand.

New loan growth combined with asset quality improvement has been positive resulting in an increase in pass grade loans, emphasizing our focus on positioning our loan portfolio for returns and profitability.

Moving on to the consolidated balance sheet and margin trends on slide 12, you will see our consolidated net interest income declined slightly while our consolidated net interest margin was up slightly, linked quarter.

In the third quarter we saw higher reinvestment rates in the securities portfolio, stable loan yields, a modest decline in deposit rates paid, and lower capital markets inventory offset by excess cash balances at the Fed.

Linked quarter our net interest spread improved 2 basis points to 356 basis points.

Driven by those relatively stable loan yields and the deposit cost decrease of 3 basis points.

Sitting here today we expect a quarterly net interest margin in the range of 2.9% to 2.95% in the fourth quarter of 2013.

Currently our assumptions that would drive that include rates staying at current levels or rising modestly over time, continued modest loan yield declines due to competitive pressures, loans to mortgage companies below third quarter levels, modestly improved yields to new investment securities, an uptick in Fed balances going into year end, stable capital markets inventory levels and a flat to modest growth in our loan portfolio.

Over the long-term, our asset sensitivity has positioned us well for rising rates.

Our consolidated loan portfolios comprised of about 65% floating rate loans, all else equal in a rising rate scenario, a 100 basis point increase would produce a 6% increase in NII and a 200 basis point rise would be an 11% increase.

We continue to believe that an asset sensitive balance sheet is key to our ability to generate strong profitability and returns over time.

Looking at slide 13 on expenses, our cost control remains a priority for us.

You can see since 2010 our consolidated run rate excluding the GSE related expense has declined 19%.

We remain on track for our goal of annualized run rate of expenses at the $925 million level by year end.

Turning to slide 14 in the positive story on asset quality, linked quarter our loan loss provision declined 33% to $10 million.

The decrease was due to improvement in loss rates and grades as well as lower NPLs.

Nonperforming assets declined 5% and net charge-offs decreased 11% linked quarter.

We expect asset quality trends to remain stable for the remainder of the year.

Wrapping up on slide 15 with our Bonefish view, our core business trends are generally encouraging with our 12-month trailing core ROA approximately 100 basis points and our core [RoTCE] at [11.3%], and these solid returns in regional banking and capital markets demonstrate the strength of our core businesses.

And with overall Tier 1 common at 10.2% we continue to have a strong balance sheet to pursue profitable opportunities for growth.

We have a core banking and capital market franchise that we believe over the long-term will generate significant returns and profitability.

As we have done consistently over the last several years, we are controlling what we can control.

And when we encounter a challenge in our legacy mortgage business like the one this quarter, we deal with it quickly, prudently and transparently as possible and we move on.

And we will continue to maintain that philosophy going forward.

We are proud of our franchise.

Our leading market share positions in banking and fixed income, our outstanding execution on expense reduction, our strong credit quality and risk management culture, our solid balance sheet and capital position and most importantly our people.

These attributes will continue to enable our long-term success.

With that, I will turn it back over to Bryan.

Thanks, BJ.

Like BJ, I am pleased with the progress in our core businesses.

We are growing and deepening our customer relationships as well as gaining market share.

We are improving our operating efficiency as we streamline delivery channels and invest in new technology.

We're strengthening our balance sheet, focusing on profitable quality loan growth while continuing to do risk.

We are going -- we are doing the hard work necessary to unwind from the mortgage business we [sold] in 2008.

In summary, we are building a strong foundation for long-term profitable growth.

We are also making great progress in analyzing the economic profitability of our businesses and our products.

In a much more granular way so that we can better allocate internal capital for higher more efficient returns.

These actions will also help us achieve our Bonefish targets in the future, with that operator we will now take questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

I wanted to start looking at the 2000 to 2004 vintages underlying the $200 million reserve.

What were the loans sold over that period and do you have the average recission and severity rates?

What I will do is I will give you what our total originations were for Fannie and Freddie for 2000 and 2008 and that's about $148 billion.

And you will see that what we have been talking about before that's in the deck as well is our 2005 to 2008, which I think was about $57.6 million.

So obviously the difference is [toots] the other vintages.

Okay and BJ anything on the average recission in severity rates?

Are they any different from that vintage?

Not that I can see.

Okay.

And how are you guys thinking about the risk of having to provide for pre-year 2000 vintages?

Steve, this is Bryan.

With the agreement and principle place for Fannie, that is all encompassing so we don't expect that to be an issue.

We are not at the point of having an agreement with or really any discussions with Freddie at that point so I guess that's a possibility, but at this point in the cycle we've not seen any request from pre-2000.

We saw very few request previously in the period from 2000 to 2004.

Got you.

And just one final one for BJ regarding the sale of the mortgage service, or at least what's left, if there any gain or loss tied to that and maybe timing and what are the expenses that will go away with that?

Thanks.

Right up in the value in the book value that we saw related to the sale agreement is roughly $11 million or so.

We have a couple offsets to that of $2 million or so related to liability so associated with the sale.

So the net increase would be about $9 million or so on the quarter.

In terms of the revenues and expenses that go away, a good ballpark estimate for you would be about $20 million or so of fee income in the non strategic segment, and about $20 million or so of expenses over time.

Now we wrote up the value we have not yet transferred the servicing which will happen largely in the fourth quarter, so you won't see those expenses all go away nor will you see the revenue go away right now.

But going into next year that's kind of the estimated impact.

Okay.

Thanks for all the color.

Nicholas Karzon, Credit Suisse.

I guess first just starting on the loan growth side it look like the core regional bank loan growth so excluding the loans to mortgage companies actually grew a little bit quarter over quarter and just kind of wondering if you can give us a little bit of color in terms of what you're seeing on the demand side, and also if mid single digit growth is a reasonable expectation given what you're seeing over the next couple of quarters?

Nick, this is Bryan.

I will start.

I'm very, very encouraged by what I think our bankers have accomplished in the last several quarters.

We saw good closings in the third quarter as you said.

Now we saw very good progress in commercial and consumer.

The one exception is we did see the decline in mortgage warehouse lending which is not unexpected given what's happened in refinance activity.

Our pipeline as we start the fourth quarter continue to be very strong.

We saw a slight uptick even in our -- what we would consider the agreement in principle our high probability of closing loans.

We've continued to win very attractive long-term relationships that we think will fund up very nicely as the economic recovery continues to pick up over the next several quarters.

So I'm very encouraged by it.

Susan, if there's anything you want to add from a detail perspective?

Yes, I think I will.

We are as Bryan said, seeing some good relationship opportunities, new relationships as well as deepening relationships with existing customers.

We are even proactively going out to some of our best customers and seeing if we can take additional share of loans that they may have with other banks as a way to grow.

I'm also pleased to say that we are growing within our risk parameters and getting an appropriate risk return for those new loans that we are booking.

Thanks.

I guess as a follow-up can you give us the level of accretion from the MNB deal that you recorded in the third quarter?

It would be very modest.

A couple million dollars.

Okay.

Thanks for taking my questions this morning.

John Pancari, Evercore Partners.

Just quickly on the mortgage warehouse, do you view this current level at around $700 million as the bottom tier for that portfolio?

John, this is Bryan.

Earlier this week it was a little less than $600 million so the short answer is no.

It is going to ebb and flow based on our -- on our borrowers activity so it is down a little bit even from quarter end.

Through the early part of this week.

Okay.

All right.

And then on the expense side, as you approach the $925 million here, can you give us a little more color on where do you see total expense levels going beyond the end of the year?

What type of -- are there are any additional out right cost save opportunities that you're going to be prepared to quantify or is it just simply going to become blocking and tackling type of approach?

This is Bryan.

Maybe you can get me and BJ to disagree on this even here.

We go back and forth about whether we all have goals or just making it foundational expectation.

We haven't set any goals at this point.

I mentioned in the prepared comments the work that we are doing to further disaggregate the business and I think that is going to be a continued driver of efficiency efforts in the organization.

If you think about what we've done over the last couple of years, we have been very proactive in reducing costs, we've reduced them very substantially and every step that you go it gets harder and harder so you got to have more and more information to either benchmark against or look at the profitability and to look horizontally across the organization.

And I think the disaggregating work that BJ and the finance team have led will be very helpful in allowing business unit managers and leaders to look at their businesses and understand the cost components in a whole and different way.

So I think that will be a driver.

Now we are going to continue to focus on the expense leverage.

We think we have continued opportunity there.

We don't think the buckets are huge.

With think we've got to continue to disaggregate and go at things and look at processes across the organization and look at them in terms of line of business and product sets.

I'm optimistic that we will continue to see progress.

Yes, I would just add to Bryan a little more empirically.

I don't see the $925 million being a flattening out through 2014.

I think that is a waypost, if you will, for the end-of-the-year and I think based on how our people are managing expenses and what Bryan just talked about I would expect that to continue to bring that number below that level going into 2014.

Okay.

All right, thank you, and lastly on the mortgage litigation side.

I know you probably cannot say much but I know Bryan you indicated that you have limited visibility on the HUD side can you give us anything else there in terms of the duration or how much time we could be sitting here waiting for a potential answer there?

Yes, the short answer is we don't know how much time and because we are not completely in control of the timeline.

I made some comments about a month, a month and a half ago which are really not anything has changed in that regard since then.

You may recall from our second quarter release in Q, we talked about having a very small sample to look at.

We did complete the re-underwriting.

We had as you might imagine a very different view about the level of exceptions or underwriting errors that were in that portfolio.

We have submitted that, returned that information and shared that with FHA and HUD.

But we've not had any real further discussion on that.

In addition, we've done some work about around sampling methodologies and things like that and we have some very significant questions that about how samples were selected so and so forth.

We don't have a real timeline.

We've got some very substantial differences in our view about how we are viewing -- reviewing -- viewing the data and how the data was even selected so we think it is going to take some work and some time to sort of work through that.

Kevin Barker, Compass Point

Help us understand some of the capital ratios you are targeting with return to capital, the shareholders given all the litigation that's out there?

Give us a little more color around that.

Yes this is Bryan, Kevin.

We've been fairly open about -- we think on a longer-term basis the organization needs to be in the 8% to 9% tier 1 common.

And as BJ and I both commented earlier we are a little over 10%, 10.2% at this point.

We did take this charge and we think we're going to continue to generate excess capital as the next several quarters continue to unfold.

We don't have a short-term target at this point about where we ought to be at December 31 or March 31.

We are just looking at all the moving parts.

We recognize that we have a new stress test process that we are going to work through with the regulators over the next several months.

And as we look at what all the moving parts and the mortgage repurchase charge that we took this quarter and the unknowns around FHA we're willing to let capital build for the next couple -- few quarters anyway.

Okay.

And then if you were to -- if capital is building and let's just say you did have some settlements come through and it did hit your capital and everything works out could you to offset some of the capital hit from this litigation, would you consider selling your vis-a-vie shares or -- and do you see maybe the Sentinel Insurance ongoing litigation that's occurring there as being a source of capital?

Well, you know, there are always a number of different levers that are available to us as an organization and I wouldn't prejudge what if anything we might do if we were to reach a settlement on any matter that's outstanding.

We will judge that in the context of the timing and the settlement and make those decisions.

I feel like we have a very strong capital base, I feel like it's adequate to cover us and to support exposures.

As we work through the stress test we will have the opportunity to work through that with the regulators again so I would be hesitant or hate to judge or prejudge what we may or may not do, what levers we may or may not pull at this point.

Paul Miller, FBR.

My questions have been answered, thank you very much.

Emlen Harmon, Jefferies.

I was hoping just on the agreement with Fannie Mae, I was hoping you could talk a little bit more about the decision to go back to the 2000 vintages.

Bryan you indicated earlier you guys hadn't seen much in terms of requests in those vintages before, so just curious if that was a stipulation of the agreement from Fannie's perspective, if you were starting to see more putbacks from that vintage from them?

Just some color around that would be helpful.

Yes.

This is a discussion that really unfolded pretty rapidly in the last two to three weeks and as we analyze the data from our perspective 2005, 2008 was a much more appropriate time frame.

But they have a template in the way they work through these things and I think it is a reasonably generic template for what we can tell across other settlements that have been reached.

In 2002 -- 2000 to 2004 needed to be considered in that.

So, as we work through it and all the moving parts we think we've reached a reasonable number to settle this as BJ and I both indicated it is an agreement in principle at this point.

They've got to get approval from their governance processes but we have moved the ball down the field and I think it is important that we get that part of the GSE repurchase exposure ranked in and done.

Got you.

Okay, thanks.

If I look at just -- if I look at the repurchase reserve, what was charged off this quarter was $30 million, it sounds like you've got about $80 million of expectations for Fannie [lagging], a big chunk of that new provision went against some of the other potential rep and warranty counterparties, I guess.

Are you seeing or are you expecting settlements from any of those guys in the near future?

Are you seeing a pickup in request from those other bodies?

This is Bryan again, Emlen.

The Freddie Mac is the other big piece that is out there in terms of a potential settlement.

As I mentioned earlier, we really haven't had any active dialogue at this point.

Our sense is that Fannie Mae may have been a little ahead in terms of submitting requests, but we expect that over the next couple of quarters we will see some substantially all or most of the Freddie Mac requests we sense they are making a significant effort to get this wrapped up over the next quarter or two or three.

We have seen a pickup in their request to date.

And as BJ described, we are in a process where we don't have as much information and we haven't had as much information around Freddie Mac as we've had Fannie Mae so we have done some extrapolation and we basically used this, in this process reserve to a level that we think gets them to a similar level of Fannie Mae.

I would just add as well and remind you that we were largely a Fannie shop up until 2008.

So most of our Freddie originations were during 2008.

That could also be part of the lag, if you will, that is contributing to it.

Jefferson Harralson, KBW.

A follow-up on that.

You are saying that Freddie was basically only 2008 or mostly 2008?

It was most of our 2008 originations.

Yes.

Okay, so the extrapolation that you are talking about for Freddie isn't so much that '00 to '04 timeframe but the widening of the scope?

Good question.

As Bryan talked about we've always had much more limited visibility from Freddie than Fannie.

So with that even though we understand where we did the originations, what the vintages were and what our actual claim requests are coming in from Freddie, the reality of estimating future exposure is reliant on our history largely with Fannie.

When we entered into these discussions with Fannie and they indicated that they were going back in vintages and we recognized that there was an expanded scope of selections as we are doing our loss content estimates for Freddie we have to take that into account.

They may or may not behave the same.

But the way that we are trying to allocate our reserves we had to take that into account.

Okay.

All right, thank you very much, guys.

Brian Foran, Autonomous.

I was wondering on the warehouse banking business if you could talk about the profitability of that business now versus history?

It seems like it has been high but I also don't know how much of that is just changes in market structure and competition.

I guess overall can -- the balances are clearly resetting, do we have to reset the ROA on that business lower to or can it stay where it has been?

Hey, Bryan, it is BJ.

As we talked about before we really like the profitability and structure of that business model.

It is actually very much like our FTN financial business.

It is going to be extremely profitable and at some point just have very good profitability.

And good returns on equity and good returns on assets so what we've seen over the prior year was maybe abnormally high profitability from it as we saw a good volume there.

But even as the volumes come down, our expenses are very efficient and low.

We have not seen a significant deterioration in our yields in that business.

It certainly has gotten more competitive, but we have not lost any primary relationships that I'm aware of and again our pricing has held up well.

The business is very well-managed.

We like the returns on it and we are very pleased with what they are doing in this environment.

Then I guess coming back to the $925 million target and the expectation as it goes lower in 2014.

Any sense of how much lower it can go?

Go ahead.

You want to number?

I had to try.

BJ and I laugh about it because we've had this long running debate about whether we set goals and I don't want there to be a stopping point and he said well, if you don't set a goal it is easy to get to a stopping point.

We haven't set a goal internally.

I think we could be under $900 million.

I expect that we will be for next year.

I don't think I have a number in mind as a goal at this point.

If I could sneak one last one in, if you look back over time at the FTN Capital Markets business, is there any kind of consistency around when you do have these kind of funks where you dip below the normal fixed income average daily revenue does it tend to stay there for a while and remain cyclically depressed or does it bounce back?

And I guess if you could just link it back to the broader backdrop of interest rates?

I guess the concern would be maybe 1 to 1.5 is still a good normalized range but for the next year we're below that level.

There are some historical patterns that I will let BJ refer to.

But I would preface it by saying I'm not sure how good historical patterns will actually be when you have the Fed and its involvement in quantitative easing and the impact of, is the Fed going to taper its quantitatives or not.

What's going on in Washington over the last month or so around the size of the federal government particularly is the government open and what does the debt limit look like.

That may take some of the historical patterns and disqualify them as something for predicting for the future.

Yes, and what I would add is the way Mike, the head of FTN would describe it, it is spotty.

If you look at our average daily revenues today, $150,000, it is extremely sensitive day by day to what the news flow is and where the rates are moving.

So in the quarter we had days that were as low as a couple hundred thousand.

And there were days that were well over $1 million, to average to $850,000.

That would tell you that if there is a better stream are at least a more consistent stream of news that calms markets and makes rates a little more stable, that can certainly help us.

And we can go back up towards the $1 million.

But based on the uncertainty that we are seeing right now as Mike said, it is spotty.

So we see it maybe for at least another quarter or two in a less than normal range.

Matt O'Connor, Deutsche Bank.

This is Rob Placet from Matt's team.

A quick question on loan spreads.

Slide 12 shows that loan spreads actually ticked higher this quarter.

I was just curious if there was any noise in there?

Is that indicative of what core loan spreads did this quarter?

And then can you just talk about the level of lending competition currently?

Okay.

Yes.

Well I think part of what we saw in terms of increase in loan spreads was related to consumer lending growth that we saw in the bank.

I talked about 3% growth link quarter.

A lot of that is actually installment lending, real estate installment lending, where we've seen pretty good opportunity to lend to higher quality borrowers more on towards the jumbo side.

And we've been able to get attractive yields there.

So it is really a little bit of a mix issue on new originations for commercial lending.

We've seen yields staying very stable and our bankers I think have done a good job on both new originations and renewals, even as pricing pressure has continued to come off quite a bit.

We expect to see some continued pricing pressure, but again I think we're doing a great job of talking to clients about the value added that we have.

As I mentioned earlier, we do have a focus on increasing to very highly rated borrowers.

And so those obviously come at slightly lower spreads.

But again I think our risk reward profile is, you know, we want it.

Okay.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

I know we've hit a lot on this this morning, the topic of the mortgage repurchase, but just extending it over to the private label side.

The fact that Fannie has chosen to broaden the scope of the loans that it's looking at in terms of timeframe back to 2000, does this change the risk profile of what's out there on private label?

I know in the slide you always talked about 2005 through 2007, you originated and securitized $27 billion, but do we have to think of that timeframe as expanding and do you feel better or worse about that risk today versus last quarter?

Thanks.

Kevin, this is Bryan.

This doesn't really change how we are thinking about the private label securitization.

The last securitization we did was in the fall, roughly about 6 years ago.

By the end of this year all of them will be at least 6 years old.

I think in the slides, I think 99% of them already are.

And those securitizations have continued to pay down, pay off.

At this point we have not received any request for loan repurchases.

It's detailed out the slides pretty well.

I think it's something like 75% or 77% of those securitizations are outperforming cohorts.

We didn't have the AltA, excuse me, the subprime securitizations.

Ours were principally jumbo and AltA.

We've seen better performances I noted.

So our thinking really hasn't changed.

We don't think that the scope changes there.

We think the reps and warranties are very different.

We think the timeline for making rep and warranty requests are potentially different.

There's a whole different environment around it.

So our view really hasn't changed at this point about exposure on the private-label securitizations.

But the big risk remain on the private label side then remains litigation and FHFA being the bigger one, correct?

I think that's right.

I think there are always risks around it, but it seems to us that the biggest risk is the FHFA litigation that we've detailed the performance in the slides again.

We've continued to see well over 50% of that pay down, a very substantial portion of those loans are current at this point.

Aggregate losses, our cumulative losses are a reasonably small percentage.

But that's on a drawn-out litigation process where I think there are 9 or 10, I guess folks still involved in that litigation.

I think we are in the third tranche to be litigated.

Maybe the second of two at this point.

But that's just going to take some time to resolve.

But that is the one litigation point that we see to be larger risk.

There are a few smaller ones that are noted in the slides and you can see the performance on those securitizations and cum-loss, et cetera, but by far the largest is FHFA.

Okay.

Thank you.

Ken Zerbe, Morgan Stanley.

Two broad questions for you.

I guess in terms of the settlement, can you help us be clear in terms of what exactly is that covering?

And the reason I ask is because there was some statements in your press release saying it excludes all the loans that you've sold through bulk sales that you no longer service.

And I look at your reserve and it seems that the Fannie reserve, the $80 million or so, it's a very small piece of the total reserve that you've built.

Just trying to get a handle on when we are talking about the settlement are we really talking about a much smaller piece than the total amount of originations at risk?

Yes.

I will answer that and again, as Bryan said at the beginning we've got to be careful because we don't have a final agreement in principle.

But what I would say is the settlement agreement will cover probably 70% of the loans and what would not be included would be about 30% of the loans that were ultimately sold to Fannie.

So again, we used the same methodology, the same views, the same information to build our estimates both related to the settlement and what those loans look like as well as what our future exposures would look like that were excluded from the settlement.

Okay.

All right, that helps.

And then the other question I had just in terms of the mortgage banking line, or the sale of the mortgage servicing.

You mentioned a number of $20 million earlier in the call, but I'm looking at your net servicing line, it's including the hedging and the runoff, but it's running somewhere in the range of $8 million to $9 million per quarter.

So how should we think about the $20 million versus the current run rate of servicing income?

Yes, so there's a couple different pieces to it.

The major components are the servicing income and the ancillary fees that come off of servicing.

You've got hedge results, which essentially look at the value fluctuation of the MSR asset itself as well as the offsetting hedge assets and so the net gain there.

You've got carry income related to the hedge assets as well.

So when we sell the servicing, the MSR gain or loss is going to go away.

The hedge assets are going to go away.

The carry income from that -- from the hedge assets are going to go away.

The servicing income is going to go away.

And the servicing, the sub-servicing expense is going to go away.

So I tried to simplify it.

Aarti and I would be happy to give anybody more detail on it, but all in it adds up to about $20 million a year of revenue and expense that would really go away.

So it's fair to assume that right now this is actually -- you're not making any money on this business?

The carry income from the hedge assets is essentially where we would be making money from it.

But we think that we can reinvest that into something else that largely offsets it.

It wouldn't be very material to be able to offset that carry.

We don't have to be in the servicing business to do that, we can do that in the securities portfolio.

Kevin Reynolds, Wunderlich Securities.

A couple of quick questions.

One is, I guess, more housekeeping.

When you estimate the impact of that, the repurchase rebuild quarter what was the tax rate that you used on that?

Was it somewhere at 24%, 25%?

Yes.

We've been using all year an effective tax rate, which essentially you take your forecasted earnings for the year, you take an incremental tax rate on that and then you back out your permanent tax differences to come up with an effective tax rate.

So that's about 24% and that's what was used.

What was used here.

Okay.

And then I guess sort of bigger picture question.

As I look through -- I know you all have been pretty consistent in addressing the bonefish as the driver of your strategy and where you're taking this over the long-term.

But when I look at slide 15 at the bonefish, a couple of things that jump out at me is that right now it appears that net charge-offs, or credit costs, are below the range that you talk about for normalized and fee income's at the high end of the range.

So the last two pieces that could move there would be your margin and your efficiency ratio and I suspect that the margin would drive -- the margin higher would drive the efficiency ratio down if the others are all else equal at the top end of the range and topping out there.

So the question I've got is how much of that efficiency ratio moved from the mid-70s in the core businesses down to the low- to mid-60s?

It would be directly related to a margin increase in a different interest rate environment because it seems that just moving each of those numbers to the midpoints of the range you're talking about a 15%, 16% increase in the margin that would drive a 20% increase in the -- or improvement in the efficiency ratio.

So that's one conceptual question and then beyond that, what has to happen for us to get to the bonefish profitability targets and how long might that take?

Are we talking 18 months or are we talking maybe 3 years, assuming Fed policy doesn't change much?

Kevin, it's BJ.

I'll start.

If you actually flip to slide 5 where we talk about our core business positioning, we do have some commentary in the bullets around efficiency ratio and NIM about what that does with certain interest rate increases.

So on the efficiency ratio, you'll see at the bottom that a 200 basis point rise in rates would essentially improve efficiency ratio by 400 BPs and our margin would rise $70 million annually.

If you translate that into basis points it's roughly 40 basis points.

So going back to your comment, if our core businesses are at 321 today, whereas consolidated to 299, as non strategic rolls off what we're going to have left is roughly that core business number.

You add on a 200 basis point increase in rates and we are pretty close to in the range of our long-term targets.

On the efficiency ratio side, the non-strategic portfolio is obviously not helpful to our efficiency ratio.

So if you combine increase in rates with the continued run off of those expenses, we would project that on a 200 basis point rise or more that we would be able to be getting into our efficiency ratio target.

So as you alluded to, we constantly recalibrate our ability to get to these bonefish targets.

Right now it is largely predicated on rates rising and so we are trying to manage our asset sensitivity for the long term to be able to do that while also being prudent and trying to manage as well for short term and controlling what we can control.

I feel comfortable that over time that we can get there.

I'm not sure I can take a time frame unless you can tell me when rates are going to rise.

But we are going to continue to do everything that we can do to tighten up these numbers as we wait for rate changes.

Kevin, this is Bryan.

I will pick up on BJ's comments.

I think one of the more difficult questions that we are keeping an eye on in the short run is what are interest rates going to do and when are they going to move.

As we've talked about and as evidence in capital markets business the long term point of the curve has gone up very substantially since May of this year.

It's come back down on talk of whether the Fed tapers it's quantitative easing or not.

We are going to pay a lot of attention to expectations of rates and I think that if it looks like everything is getting pushed out, I think you referenced 3 years, 18 months to 3 years, where we think rates are going in that period will maybe cause us to rethink what our interest rate sensitivity positioning ought to be and whether we need to be as asset sensitive or whether we can use some of this time to do some fixed rate customer lending that allows us to build relationships.

So it's hard to answer in the context of market expectations today because they have been so volatile over the last several months as talk about what the Fed may or may not do is driven the long end of the curve.

But we're keeping an eye on it.

We're paying a lot of attention to it and we are making evaluations or decisions around how we position our balance sheet in the context of where and when we think rates will actually trend up.

Marty Mosby, Guggenheim.

I wanted to ask you about the servicing.

You had about $15 billion.

Is all of that going away and what portion is going?

Can you give us a little feel -- maybe I just missed it, but is it a complete sell or is it the sell of everything that doesn't have some kind of still overhang issue tied to it?

What's the magnitude of that?

Yes, it's substantially all of our servicing.

We will still do a modest amount of -- so we'll ask for a modest amount of sub-servicing from that provider related to permanent mortgage loans that we still have on our balance sheet.

But by and large that $15 billion would go away.

Going back to the discussion about revenues.

It really is whatever revenue is in the non-strategic hedging-wise, everything.

Is that all pretty much just goes away?

That's right.

There would be maybe $3 million or $4 million a year of sub-servicing expense that would hang around related to the permanent mortgage loans that we're still keeping on balance sheet.

But everything else from an expense side related to sub-servicing would go away.

And then when we say down in the repurchase part bulk servicing cells as a part of what's left over, as you've sold of these you haven't really sold -- they haven't purchased a liability.

So that has still remained even though you've over time pushed -- been able to sell servicing, the liability from repurchase still has stayed with the Company, I think, right?

Yes, with the previous bulk servicing sales that is true.

That is true.

But as I think you are alluding to with agreement in principle with Fannie Mae, that issue is resolved and then any liability with the Freddie Mac or other loans would still reside with us.

And that's encompassed in the reserve that we've talked about this morning.

Okay.

That's what I was thinking.

And then, Bryan, as you've gone into, kind of what I was lastly want to think about was if you put the mortgage repurchase issue into four buckets, Fannie, Freddie, HUD, FHA, private label and just walked through it, the reserving you took this quarter, in my mind what we would've heard from Fannie and Freddie representatives this year they're wanting to kind of wrap this up and agree.

And in a sense as you are doing that you would expand the scope to include anything that you might think of.

Is that the process that you feel like you just went through?

With them as you're entering the settlement, in general, not specifically, but just in general this is kind of okay, if we can imagine what this is ever going to turn out to be if you are going to be in their shoes you want to put a final number on it.

Is that what we've got to here?

Yes, there's no doubt that we are frustrated that this issue is -- we are still dealing with it and we are frustrated and don't like making the additional charge.

But as we have done over the last 5, 6 years to the extent that we see a problem, we try to size it up and we try to aggressively deal with it.

And as we got into this process we saw a different look at the information.

We saw advantages included that we didn't expect to be included, et cetera, which we've been through before.

And we wanted to proactively deal with it in the same way we dealt with so many issues in the past.

And as BJ and I have tried to describe with Freddie Mac there are substantial differences in vintages and vintage years and ultimately there will be differences in performance.

But we felt like given what's encompassed here it was appropriate for us to have similar levels of reserves in terms of losses as we've seen in Fannie Mae, given that we have better transparency of the information of Fannie Mae.

As BJ described it, we've basically taken Fannie Mae and tried to extrapolate those results to Freddie Mac, recognizing there will be some differences, but we only have the information we have.

Christopher Marinac, FIG Partners.

Question about share repurchases on the equity side.

Is there a percentage of income that you need to manage to within your regulatory relationships?

Chris, this is Bryan.

No.

We've been over the last year or so returning substantially all of our net income.

And given the dynamics of our balance sheet where we have 18%, 20% run-off in the non-strategic portfolio that frees up the pro rata basis, 10.2% Tier 1 common using September 30 numbers.

We [accrede] at common that we wanted to free up there that supports growth in the balance sheet.

So historically we've had a view that returning a fair amount of our earnings, substantially all, is appropriate and we think that that's not likely to change over the long term.

We think, as I mentioned earlier, given the new information around the GSE repurchases that we got in the settlement, or this reaching this agreement in principle to be a little more cautious over the next couple of quarters as we deal with that, as we try to gain additional information with respect to the FHA investigation that's ongoing and as we work through the stress test.

But there are no bright lines that I'm aware of from a regulatory perspective, other than sort of the mix and it's what we've talked about in the past.

There seems to be a, what I think is a reasonable desire to have a threshold about how much is in dividend and how much is in buyback.

I may argue that the dividend could be a little bit higher, but I think there's some bright lines around mix.

But I don't think there are any bright lines about how much of earnings in that regard.

Great.

That's very helpful.

And then just the last question on the whole mortgage repurchase stuff today.

On slide 22 you mentioned within the pipeline request that there's $97 million of non-repurchase requests.

Could you remind us or refresh our memory from the past what covers this or a non-repurchase tranche request?

Non-repurchase type requests, those are things like missing documentation requests.

So they may or may not be related to a repurchase or make hold request, they may simply be there's an appraisal missing or verification of income missing or [stantswell] signature missing, that kind of thing.

Okay.

Would there be less lost content on that particular tranche?

Yes, on those types of things, yes, absolutely.

Great.

That's what I though.

Great.

Thanks, guys.

Appreciate it.

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

I'd like to turn the conference over to Bryan for closing remarks.

Thank you, operator.

We appreciate your interest in First Horizon and look forward to seeing you in Memphis on November 21 at our Investor Day.

We will focus on the progress we've made and how we are positioning ourselves to continue to move forward as we transition into 2014.

Thanks again for participating on the call this morning and please reach out to any of us if you have any follow-up questions or additional information that we can help gather for you.

Thank you again.

I hope you all have a great weekend.

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

You may now disconnect and have a wonderful day.