First Horizon Corp (FHN) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the First Horizon National Corporation fourth-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 today's conference call, Ms. Aarti Bowman.

You may begin, ma'am.

Thank you, Kevin.

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 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 call, and is reconciled to GAAP information in those materials.

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

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

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

I will now turn it over to Bryan.

Thanks, Aarti.

Good morning and thank you for joining our call.

I am pleased with what we accomplished in 2013, as we continue to take actions to build franchise value and our long-term profitability.

We successfully executed on our blue chip priorities of providing differentiated customer service, being easy to do business with, and using the bonefish to drive profitability.

We continue to build our core businesses, wind down our nonstrategic legacy business, and de-risk our balance sheet.

We gained the top deposit share spot in Tennessee; we seized an opportunity for growth, successfully acquiring and integrating Mountain National Bank; and, facing a challenging environment, we focused on controlling what we could control, working to increase efficiency, productivity and economic profitability.

Our core businesses performed well.

From 2012 to 2013, average loans in the Regional Bank grew 2%, and average core deposits were up 2%.

Our specialty lending areas, in particular, should continue to provide growth opportunities as we deepen existing relationships and expand our overall customer base.

Our bankers are focused on making profitable loans that should give us high returns over the long-term.

On the expense side, Regional Bank expenses declined 7%, while we continue to selectively invest in additional talent, products and technology.

The Bank's efficiency ratio improved 297 basis points for the full year 2013, to 63%.

FTN Financial, our fixed income business, continues to contribute significantly to our overall fee income, with pretax earnings of $52 million in 2013.

Due to uncertain market conditions, we are still seeing lower volumes in fixed income.

However, FTN Financial remains a high-return business with an annual ROA of 1.4% and an ROE of 20.4%.

Our overall cost controls paid off in 2013.

Annual consolidated expenses declined 16%.

While we were disappointed with having to add $200 million to the mortgage repurchase reserve in 2013, we were able to make progress in winding down some of the legacy issues.

As expected, asset quality improved year-over-year.

Full-year net charge-offs declined 58% and reserves decreased 8%.

Nonperforming assets were up 4% to $435 million, which included about $50 million of nonperforming loans related to further implementation of regulatory guidance, as well as $17 million of ORE related to the Mountain National acquisition.

Our capital ratios remain strong, with Tier 1 common at 10.7%.

During 2013, we returned capital to our shareholders through share repurchases and common dividends.

At our recent Investor Day, we spent a lot of time talking about economic profit.

In 2014, we'll continue to work on optimizing economic profit across the organization from a business, product, and relationship standpoint.

Our bankers will continue their focus on growing relationship-oriented loans.

We will continue to refine our lines of business to emphasize higher return, more profitable, better credit-quality areas that maximize prudent growth opportunities.

We'll also continue to be focused on improving our efficiency and productivity.

Over the long-term, we expect these efforts to pay off with higher shareholder returns.

I'll now turn the call over to BJ for more financial details about the fourth quarter.

BJ?

Thanks, Bryan.

Good morning, everybody.

I will start off slide 7 with our consolidated financial results.

You'll see in the fourth quarter, consolidated net income available to common was $49 million or $0.21 a share.

You will notice two significant items in the quarter, one with respect to taxes and the second, the addition to our litigation reserves that I'll walk you through.

On taxes, you'll see that the effective tax rate for both the quarter and the year were negative, reflecting the combination of pretax income levels, permanent benefits from tax credit investments, life insurance, tax-exempt interest.

And in the fourth quarter, the tax expense was favorably affected as well by the pattern of quarterly earnings in 2013 as well as some discrete tax items.

To give you a quick high-level tutorial on effective rate methodology in a little bit simpler terms, what you do is you estimate earnings and known tax credits or differences at the beginning of the year to calculate an effective tax rate that you would use each quarter.

When you have a large change in the estimated earnings level, particularly when that changes later in the year, like what we had in the third quarter, it can have a very large impact in any given quarter, like what we see here in the fourth, to ensure that the full-year tax rate is appropriately calculated.

So, all-in for 2014, looking forward, what you should assume is an effective tax rate in the low 30s for us.

In addition, we made a $30 million addition to the litigation reserve related to existing legal matters.

So the net of those two items had roughly a $0.06 positive impact in the quarter.

Moving to segment highlights on slide 8. In the fourth quarter, our core businesses contributed $45 million in net income, up 13% linked quarter.

In the Regional Bank, net income was $43 million, down $5 million from 3Q.

Linked quarter, our NII was down in the Bank on lower average loan outstandings, while noninterest income was relatively steady.

Expenses were up, driven by costs primarily related to branch closings and an increase in professional fees towards the end of the quarter.

Loan-loss provision decreased, reflecting continued stable credit trends in the Bank's loan portfolio.

In our fixed income business at FTN, net income was $7 million in the fourth quarter.

Linked-quarter fixed income average daily revenues declined just modestly to $822,000.

Expenses decreased, primarily due to lower variable comp on that lower revenue.

ADR levels, as you will see, were below our normalized expectations, as the current interest rate environment, as well as seasonality, muted fixed income activity in the quarter.

Over the long-term in a more normalized environment, we still believe that fixed income average daily revenues will be in the $1 million to $1.5 million range.

However, over the first half of 2014, we do expect average daily revenues to remain generally consistent with what we are seeing today in terms of 4Q 2013 levels, slightly below that normalized range.

Net income in the nonstrategic segment was $4 million.

Noninterest income was lower linked-quarter, primarily due to higher servicing income in the third that included terms of the servicing sale agreement.

Fourth-quarter reflected the beginning of servicing transfers related to our sale that will be substantially complete in the first quarter.

Expenses in 4Q 2013 included that $30 million addition to the litigation reserve, and the nonstrategic segment also included about $44 million as a tax benefit.

Moving on to the Regional Bank balance sheet trends on slide 9, our average loans in the Bank were up 2% full-year 2012 to 2013.

As anticipated, average loans to mortgage companies decreased due to lower refi volumes, but returns on that business remains strong.

And despite the decreases in that loan to mortgage company line, we are seeing good momentum in other loan portfolios.

From 2012 to 2013, commercial lending grew 10%; asset-based lending was up 6%; our business banking was up 9%.

And on the consumer side, private client and wealth management was up 8%, as well as our retail banking.

We will continue to focus on specialty lending areas that have high returns and economic profitability going into 2014 as well.

Moving on to the consolidated balance sheet and margin trends on slide 10, average total assets remain stable again at [$24 billion].

Linked-quarter, our consolidated net interest margin was up about 1 basis point to 2.98%.

Fourth-quarter NIM benefited from about 4 basis points of higher amortization associated with loans acquired in the Mountain National acquisition, as well as higher-than-expected cash basis income.

That benefit was somewhat offset by roughly 3 basis points of lower balances in mortgage companies and an increase in excess balances at the Fed.

Sitting here today, we do expect quarterly net interest margin in 2014 to be in the same 2.85% to 2.95% range that we have given over the last few quarters.

If you will recall, and as we see in the bottom left chart on slide 10, we had significant movement in our NIM from 4Q 2012 to 1Q 2013 last year, with stabilization in the margin throughout the rest of the year.

A similar pattern could occur in 2014.

Our assumptions around the margin for next year include rates staying at current levels or rising modestly over time; loan yields modestly declining due to competitive pressures; loans to mortgage companies decreasing from fourth-quarter levels; and new investment securities yields flat to slightly higher.

The level of excess cash at the Fed and our capital markets inventory are likely to fluctuate quarter-to-quarter, also impacting the net interest margin.

You'll notice that, to manage our interest sensitivity, we have recently begun adding fixed rate product in both loans and securities at about the three to five-year maturities, which has modestly reduced our asset sensitivity, and allowed us to compete well in the current environment for relationship lending opportunities.

Overall, you'll see that our balance sheet remains highly asset-sensitive, and should enhance our ability to generate higher returns over the long-term.

Moving to slide 11 and looking at our nonstrategic business, in mortgage repurchase, you will see that provision expense was zero in the fourth quarter.

Linked-quarter, the repurchase pipeline declined 37% to $197 million, and our ending reserve was at $195 million.

New requests and realized losses were up in the fourth quarter due to the implementation of our GSE settlement we announced in the third quarter.

We've not been named in any new lawsuits related to our private securitization since October of 2012, and we had no loan repurchase requests from our first lien proprietary private securitizations.

Linked-quarter, our litigation-related provision expense increased $30 million, primarily related to our formal mortgage business.

Turning to expenses on slide 12, you'll see since 2010, our consolidated run rate, excluding GSE-related and litigation expenses, has declined 30%.

We have improved efficiency in our core businesses, with costs declining across most categories, particularly in places such as compensation, occupancy, operations, and advertising.

Excluding the fourth quarter's $30 million of litigation accrual, we achieved our target of an annualized run rate in the fourth quarter of below $925 million.

We will continue to work on lowering expenses with ongoing efficiency initiatives and overall cost control, and I do anticipate that we will move below the $900 million annualized run rate in 2014.

Looking at asset quality trends on slide 13, we can see continued positive results.

Linked-quarter, our net charge-offs were roughly flat at $17 million, and reserves were relatively flat as well.

Improvement in the commercial loan portfolios offset a slight increase in the consumer portfolio.

In the commercial portfolio, we are seeing continued improvement in loss rates, grade migration, and overall credit metrics.

Nonperforming assets declined 10% linked-quarter as well.

Wrapping up on slide 14, our core business trends are generally encouraging, with our 12-month trailing quarter ROA approximately 93 basis points, and our core ROTC at 10.7%.

Solid returns in the regional banking and capital markets businesses demonstrate the strength of our core.

Our capital markets business continues to provide us with solid fee income while using capital efficiently.

And our Regional Bank specialty lending areas and market growth opportunities should drive profitable loan growth in the future.

We will continue to work on expense efficiencies, and our asset sensitivity will, over time, help our overall returns.

We have made progress in positively transforming our Company, and expect additional positive trends in 2014.

And with that, I will turn it back over to Bryan with some closing comments.

Thank you, BJ.

As I said earlier, I am pleased with the successful execution of our priorities in 2013 and expect ongoing successful execution in 2014, while we expect this year's overall operating environment to be largely similar to 2013, with modest economic recovery, low interest rates, and a highly competitive environment.

We are seeing stable economic trends in and around our footprint with high-growth areas in middle Tennessee and our mid-Atlantic region.

2014 marks the 150th anniversary of the founding of our Regional Bank, First Tennessee.

Our nearly 150-year history -- over our nearly 150-year history, First Tennessee bankers have built strong and deep relationships with our customers and our communities.

These relationships will help prepare our success in 2014 and beyond.

Thank you to our First Horizon team for all that you do to build our business in momentum each day.

To sum up, over 2014, we will continue to successfully execute on our blue chip priorities.

We will further strengthen our balance sheet, improve efficiency and productivity, and work on winding down the nonstrategic business.

With our focus on improving economic profit, we will continue to make progress towards achieving our bonefish targets and building franchise value.

Operator, we will now take questions, please.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

So if I adjust out the $37 million tax benefit and then the $30 million of litigation expense, run rate earnings looked in the $0.12 to $0.14 range, depending upon what tax rate used, which seems very low.

BJ, are there other items weighing on 4Q results that we should be thinking about here when we move towards next year?

Yes, Steve.

What I'd say is the provision -- loan-loss provision was up modestly quarter-to-quarter, $10 million to $15 million.

That portends no issues at all that we see in credit quality; it's just the dynamics of what the reserve was set at, nothing more than that.

So that's probably a little bit of a driver.

We did see some higher year-end expenses, but nothing that I'm particularly concerned about --some related to the MNB acquisition and related costs there; some related to benefits, particularly as health care costs and burden for our employees is changing in 2014; higher professional fees, higher legal costs going into the end of the year.

So, that was a little bit higher than what we would normally see.

But there isn't anything that I would particularly point at that's soft, other than those items.

I still think that, as Bryan and I both talked about, we're pleased with what we're seeing in terms of discipline and growth in some of our specialty lending areas.

We expect that to continue, but it's a difficult environment.

We saw good growth in our fee income, particularly in the Bank.

Even though the Bank was steady, our brokerage business, our trust and investment management business was up double-digits year-to-year.

So, there's a lot of dynamics in there, but generally, we're pleased with how we're performing.

BJ, maybe to follow up on that, I know you said you thought you could get expenses below $900 million this year.

But given the pressures -- you know, revenue, the NIM guidance you just gave, and the core efficiency ratio, 76%, do you think you need to cut even deeper in 2014 on the expense side?

I think we always have to look for efficiencies.

And we've said that multiple times.

I don't think that we want to create an expectation of a program with identified targets for dollar amounts of expense reduction.

But do I expect to go below the $900 million annualized run rate number before the end of next year?

Yes, I do.

We will continue to move below that number and won't stop.

We don't see a bottoming out of our expense base.

We have to continue to look for more efficiencies, and as there continues to be pressure on revenue.

Steve, this is Bryan.

The culture we try to operate under is to spend every dollar like we owned 100% of the business.

We try to put an ownership mentality everywhere in the organization when you spend money.

And as I emphasized in my prepared comments, even through a period of significant reductions in expenses, we've continued to invest in technology and infrastructure.

And so we try to be extraordinarily thoughtful about the difference between good costs and bad costs.

And we don't want to cut costs to the extent of harming the business.

But as we've tried to demonstrate over the last few years, we are going to be disciplined about it, we are going to control costs.

And as BJ said, the $900 million -- less than $900 million is not a lower-bound.

To the extent we have efficiency opportunities that allow us to meet our long-term objectives, that allow us to meet and continue to achieve our long-term objectives, we'll continue to work on the cost side of the business.

Okay.

I appreciate that color.

Thanks, guys.

All right.

Thanks, Steve.

Jefferson Harralson, KBW.

I want to ask a question on the litigation charge.

Should we expect -- in your Q, you put out your possible but unreserved [for] losses -- I think, last quarter, was zero to $250 million.

Would this $30 million apply to that $250 million, so we should expect that number to come down?

Or was the $30 million also related to FHA, HUD, it's not in the $250 million?

Or I guess what -- can you give us somewhat of a preview or -- of what the Q is going to say and the possible losses?

Hey, Jefferson.

It's BJ.

Yes, generally speaking, in the Q, what you're, I think, referring to is the RPL or Reasonably Possible Losses.

And that does try to give investors an idea of potential losses that could be above the litigation reserve.

So yes, the way it works is, when you do make additions to the litigation reserve, the RPL for that particular matter or matters would then come out of the RPL.

Okay.

Thank you.

My follow-up on the -- at the Investor Day, you talked about taking -- possibly taking some asset sensitivity off the table.

You guys sound like you did take some asset sensitivity off the table maybe just a little bit.

Can you talk about what the movement is on fixed-rate loans may have meant for your margin this quarter, if anything?

It sounds like maybe not much.

And would you expect to continue that trend into 2014, even though your margin guidance was unchanged?

Hey, Jefferson.

It's BJ again.

Yes, you probably wouldn't have seen much movement in a particular quarter.

But if you recall that chart that we showed that shows our sensitivity to moves in rates, that far end, that 200 basis point move, would have been $70 million, roughly, the last time we showed you.

And now it's $60 million.

So, we have dampened that.

And again, it's trying to be more selective on competing for fixed-rate loans in a reasonable maturity band.

We were seeing demand -- in certain specialty lending areas that we felt we could compete better.

What we had been doing was swapping those.

But what we decided to do is not swap them, take them on as fixed-rate; knew we could manage the duration, along with the fixed-rate runoff that we were seeing in the nonstrategic portfolio.

And it's allowed our bankers on the commercial side to compete just a little bit better for good-quality, relationship-oriented loans.

We had been doing it on the consumer side as well, particularly related to private client jumbo mortgage loans.

So we've continued to do that and be selective around there as well.

So again, it doesn't change our long-term asset sensitivity and upside, but it does give us a little bit more advantage in the current environment to compete.

All right.

Thanks, guys.

Sure thing.

Kevin Fitzsimmons, Sandler O'Neill.

Just two questions, quick ones.

Wondering on loan growth, if you can talk about -- it was a pretty steep decline in loans to mortgage companies, and we're seeing, obviously, the refi trend play out.

But what's your outlook on that?

Because that's been quite a drag to C&I.

So what's your outlook on that in coming quarters?

Are we getting close to stabilization or at least the decline slowing?

And then secondly, I know last quarter, Bryan, you talked about likely dialing back on buybacks as you go into the stress test process.

And we saw no buybacks this quarter.

How do you think about that lever post-stress test?

Is it something you think you can return to?

Or in this new world of stress tests, is it going to be something that you may just have to wait to build a little more capital first?

Thanks.

Okay.

Thanks, Kevin.

I'll do them in the order you asked them first.

On the loan growth side, I feel really, really good about what the bankers have been able to achieve in booking strong, high-quality, well-priced, well-structured relationships.

As you noted, we have seen a drift down over the course of the year in the size of the mortgage warehouse lending business.

I think, if I remember the numbers right, we've gone from substantially all, 80% or so, of refi-related activity in warehouse lending; I think, today, it's about 60% -- 55%, 60% in purchase money funding.

So we're seeing a big shift.

And I think if it's not at stabilization, you're very, very close to it.

We've seen it drift up and down a little bit, but it's sort of been in this $600 million to $700 million band for the last several months.

And I would expect that, nothing unusual in the mortgage market, it's likely to stay there.

Overall, in our lending businesses, our pipelines continued to look good.

We had a little bit more strength than I really would have guessed even at the end of the year, and our high probability of closing pipelines.

So I'm reasonably optimistic that the momentum that the bankers had in growing some of these lines of business in 2013 will transition into 2014.

You also asked about buyback.

As you said, in the third quarter following the charge, we said we were going to dial back the repurchase activity in the next several quarters.

We were in the midst of the stress testing.

We are making progress on the stress tests.

I think our submission under DFAST is due in early March.

We are continuing to work through that.

We do have about $37 million or so left under our existing authorization.

For those of you that looked at the details of that, that authorization actually expires, if not already, in the near-term.

Next week, I would expect that we would make a recommendation to our Board to consider approving up to $100 million of additional buybacks.

I don't think that that's anything that we would start executing on until we completed the stress tests and begin to see the results of that.

But over the long-term, we think we will continue to generate substantial amounts of excess capital.

And stock buyback is an important part of returning that capital to our shareholders, and we intend to use that lever prudently to get capital back in our shareholders' hands that we can't deploy effectively in the business.

Okay.

Thank you.

Thank you.

Emlen Harmon, Jefferies.

To kick it off, could you give us maybe just a little or make a progress report on how things are going in mid-Atlantic?

And just kind of how -- I know, obviously, you guys opened a new office in Charleston, I believe last quarter.

And I'd just be curious as to how the progress is going there and what kind of loan growth you're seeing out of that market?

Yes.

I'll start and then I'll ask Susan to pick up at a more detailed level.

I'm really encouraged by the progress that we are seeing in the mid-Atlantic region.

As you noted, we've had a number of opportunities -- Charleston is a good example -- to bring on to the platform very capable teams of bankers, and expand our presence where we think we can do business the way we've been doing it all across the state of Tennessee and in the mid-Atlantic region.

We're seeing good progress there.

Our bankers are making very good progress in building long-term relationships.

I'm pleased with what we are seeing in terms of expanding the relationships in the core part of the mid-Atlantic region, the Winston-Salem, Greensboro and North Carolina marketplace, where we have been doing business for in the neighborhood of 10 years.

To add on to that -- this is Susan -- I would agree with what Bryan said.

We've hired excellent bankers in mid-Atlantic over the last 10 years, as we started in the Winston-Salem office 10 years ago.

Bankers that we've hired in all these markets have deep experience, not only as bankers in the specific markets where we're hiring them.

We continue to see growth out of Richmond, Raleigh, Winston-Salem, Charlotte.

As you mentioned, we officially opened the Charleston office last quarter; hired several great bankers there.

They will be largely focused on private client commercial.

But we already were doing business in Charleston, both on the corporate side as well as commercial real estate.

So we've already got a headstart there in terms of developing relationships.

So -- and I'm very pleased in terms of the quality of credit and underwriting that I see out of those teams as well.

Got you.

So on a -- I guess on a -- maybe on a dollars basis, how are those markets contributing to the overall loan growth picture, if you will?

Well, Charleston is a very new effort.

In terms of percentage growth, the mid-Atlantic region is one of the higher areas of growth.

That portfolio in mid-Atlantic today is plus or minus $1 billion, so it's not -- it's roughly 10% of our portfolio.

But it's something we think that we can grow faster than the whole.

So it is very positive and it is growing.

Okay, thanks.

And then just on the provision -- or, I should say, the reserve build for the nonstrategic home equity portfolio this quarter, could you give us a sense of the driver there?

I might have missed it in the prepared remarks.

I'm not sure if that's actually related to the kind of legacy guidance that you guys got on reserving for the home equity portfolio, but just curious as to what the driver was there.

I'll take that question.

This is Susan.

We -- in the nonstrategic portfolio, as you know, that's a runoff portfolio for us.

As those balances go down, we will see some adverse selections in terms of those that remain in that portfolio.

However, in terms of -- I'm not seeing any trends that alarm me.

We continue to see -- we had a little bit of uptick in delinquency.

Some of that was seasonality.

There were a few larger loans that contributed to that, but no trends that we're worried about there.

So, some conservatism built into that additional reserve.

Nicholas Karzon, Credit Suisse.

I guess just to start with the completion of the servicing sale, can you give us an update on the timing and what we might see, kind of the impact from a magnitude perspective, and where that will appear on the expense side and the revenue side?

Hey, Nick.

It's BJ.

Yes.

So, as I talked about, we've completed a lot of the servicing transition in the fourth quarter, which was mostly the GSE-related type loans that were in the servicing portfolio.

What we'll complete in the first quarter is more the private loans that were in the servicing portfolio.

So, I don't have, honestly, off the top of my head, what the estimated impact would be, in terms of the difference between fourth-quarter and first-quarter, but Aarti or I are happy to follow-up with you after the call.

Okay, thanks.

And then as a follow-up on the expense side, I guess if we think about the run rate, I think you had mentioned there are about $20 million of expenses associated with that.

And the guidance you gave earlier was for a kind of a $900 million run rate.

So is that kind of down $5 million year-over-year?

Or is there further kind of expense reduction on top of that and maybe offset by some investment?

Oh, I think, in terms of investment, as Bryan said earlier, we're always going to continue to make investment, whether it's in people or incremental technology as consumer behavior is changing.

But no; we always talk about a net reduction.

And so we ended the year at roughly annualized expenses, excluding the litigation accrual, it's about $920 million.

I think I said earlier I expect to be below the annualized run rate of $900 million earlier than the end of the year, which means that I think our trajectory will be pretty good going into the first and second quarter.

And, like we talked about before, it's not going to stop there.

So, we think we have more opportunity to improve efficiency and we will continue to move it down below $900 million.

Paul Miller, FBR.

This is actually [Thomas Letourneau] on behalf of Paul.

(multiple speakers) Morning.

One quick question on the capital markets side.

I think you had $822,000 of average daily revenue this quarter.

And that's been below the $900,000 target that you've talked about for a couple quarters now.

Is $800,000 sort of the right level going forward?

Or do you still think $900,000 is the right number to use there?

This is Bryan, Thomas.

We still think -- we've talked about sort of $1 million to $1.5 million in average daily revenue.

The last couple quarters, it's been around $900,000.

And the way I think about it is, no, in short, we're not thinking about the range being any different.

We still think that's the right range.

And if you think about late 2008, early 2009 and 2010, we were well above that range, and we were talking about that range.

And this just happens to be a little bit aberrational period on the other side with Fed transitioning in QE, et cetera.

And it's just created a very cautious fixed income market.

So, I still think those levels are accurate.

As we've said in the prepared comments, we'd expect, for the next couple quarters, it could remain below that range, given what we see in terms of outlook.

But I'm still pretty comfortable with the low end of that range at $1 million.

Okay, great.

And most of my follow-ups have already been answered, so I'll hop out.

Thanks, guys.

Okay.

Thank you.

John Pancari, Evercore.

Could you give us just a little bit more color around the -- if at all, if you could -- around the mortgage litigation charge?

I mean, any type of background around the rationale behind taking that incremental charge here?

Is it based upon some settlements elsewhere in the industry?

Or are you now at the table with certain parties -- versus, I know you mentioned earlier, that it seemed like other -- there was bigger fish to fry before they get to you guys.

So, if you could just give us a little bit of color there.

Thanks.

Hey, John.

It's BJ.

Yes, I think for competitive reasons that you might imagine, I can't give a lot of color to you.

We said earlier that it is for mortgage-related matters, and I did say earlier it's for existing mortgage-related matters.

So, that implies, obviously, it's nothing new that we hadn't seen before.

So we continue to try to be smart and thoughtful.

We obviously look at what's going on in the industry, but we care most about what our legal defenses are and what we think our exposures are, to protect our shareholders.

So I'm not sure I can give you much more color in terms of the number or what the matters are, but that's kind of how we think about it.

I'd add, John, that we -- when we talked about these issues in the past -- and as BJ said, we can't be very specific about what the moving parts are -- we've talked about, to the extent that losses are probable and estimable, we will record them.

And you can take some combination of all the things you've described and conclude that we had the basis that, one, conclude that it's probable and then, two, that it's estimable, and record the reserves.

So, in some sense I'd say, if nothing else, that's a sign of us making progress.

Okay.

Thank you.

That's helpful.

And then on the expenses, can you just talk a little bit more about your thoughts on the actual total expense level going into first quarter and possibly second quarter of 2014?

And more specifically, maybe if you can just give us a little color on how the legal and professional fees should trend.

Thanks.

Sure.

So I'll start with kind of what you ended with, with legal and professional fees.

We think the legal fees are obviously going to continue to be elevated for us.

We saw some higher legal expenses, if you look at our financial supplement, from third quarter to fourth quarter, which was some of the linked-quarter increase on the expense line.

We expect that to continue.

We don't see legal expenses going down for our firm, for the foreseeable future.

Professional fees is probably a little bit more timing than anything else -- year-end billing.

We do have a stream of professional fees that we paid for, whether it's legal, whether it's other consulting-type engagements.

But, generally speaking, I don't see that growing; I see it staying flat to probably declining.

But to give you a little bit more color on what we are doing around expenses, we are continuing to find more ways to be efficient from a horizontal point of view in the organization.

And by horizontal I mean end-to-end processes and things of that type.

So, underlying our fourth-quarter trends, we closed eight branches, trying to be more efficient both through our national acquisition as well as just general efficiency in our branch networks.

We'll continue to work on corporate real estate and trying to reduce excess capacity in square footage across our footprint to take down costs.

We continue to look for efficiencies in equipment, in technology, in many of our categories.

And if you look at our financial supplement, you'll see that virtually all of our categories are declining.

So, again, we're not stopping.

There's a lot that can be done.

And again, I think you will continue to see steady downward progress in our expenses in the first and second quarter.

Ken Zerbe, Morgan Stanley.

Just on capital markets, I know you're comfortable with the lower end of the ranges you mentioned.

But I guess we've seen sort of the downward trend in the average daily revenues.

I guess my question is just how much visibility do you have?

Because, obviously, it's kind of been on the lower end.

But could it just as well be on the positive side?

I mean, it seems that, to me, at least, that you have very little visibility going forward.

So I'm just wondering if your guidance for capital markets is more sort of just whatever it is currently expected to stay there, versus that you know the underlying trends, if that makes sense?

Yes.

Let me take a stab at it -- this is Bryan -- and then BJ can pick up on it, Ken.

You know, you never have 20/20 foresight on that, so -- but it -- so it is always a little bit murky.

But we do have a sense as to what the flows in the business look like.

And there's some days when you see the fixed income markets moving up, you'll start to see investors come in, and you'll have very good average daily revenues.

And you'll see -- when it's trending the other way.

And so you take that as a data point.

You take what we hear from our customers and what we understand about their balance sheet, and what's happening in terms of loan growth, and what's happening in terms of where they are, investment in their securities portfolios.

And we take a bunch of data points like that and sort of try to weave that into our expectations.

But as I said when I started, there is a bit of murkiness about it, because it is, one, what rates are doing; and, two, how people feel about the movement in rates that is largely going to dictate whether they're buying or selling at any one point in time.

Yes, I think Bryan hit it.

Just to give you a little bit more kind of numerical color, before maybe mid-December, our average daily revenues would have been more in the high [$800,000's], almost towards [$900,000].

And the last two weeks of the month are historically and seasonally very slow, bringing us down to $822,000.

As Bryan said, we continually have dialogue with our capital markets folks about where markets are and where they're going.

We see daily sheets on where our ADR is.

But again, it's really hard to look forward and understand where rates are going to be or where buying sentiment is going to be.

So again, that's why we feel comfortable saying we don't see the environment significantly moving up or down from here.

So we're comfortable with where we're at and what we've talked about.

Got it.

And do you guys happen to have the ADR average for the first couple weeks of this month?

Yes.

I think it's about where it was.

It's kind of very little changes, in the low [$800,000's], as I recall the number.

Okay.

All right, thank you.

Marty Mosby, Guggenheim.

Not to beat the same issue, but on capital markets, getting away from just the numbers and thinking about the market movements, we have the Fed's tapered decision and we had the stalemate in Washington, which obviously created a lot of uncertainty.

Those things should start to roll off.

So I was just wondering if you thought that could be a positive?

And then factor in maybe what we're seeing, from with you all and others, as core loan growth is picking up, typically, that's a substitute for buying securities.

So, just was wondering what you thought about the big pieces, what could be the catalyst for cap markets getting back to that $1 million a day?

Yes, I think one of the major pieces that we've talked about with our folks out there that could be helpful in the near-term would be if the rate curve, in the more three to five-year range, were to steepen a little bit.

I think we've seen some movement on the longer end of that.

But if it was more where the customer demand or buying appetite was, and we saw some positive movement from a fixed income perspective there, you could see some additional buying.

That's probably the biggest piece that we've seen.

There is loan growth.

There's loan demand out there.

But I wouldn't say it's outsized, Marty.

I might say it's still very competitive.

So, while we are seeing a little bit of that in pockets, and that can obviously impact the securities buying, we're not seeing it as a major drag on the fixed income flows we're seeing on the desks.

Okay.

And BJ, just a very specific question.

I was trying to run down the branch closing and possibly even the higher professional fees within the Bank.

I was looking at the restructured table, and it looked like there was about $1 million worth of, like, expenses on the employee side, but it doesn't look like there was any -- occupancy was actually, looked like maybe a positive.

So, I didn't know if you could give me a little feel for those unusual items this quarter.

Yes.

I think, off the top of my head, Marty, I think the eight branch closures had a net impact of about $1 million or a little bit more than that, in terms of the actual [critical] branches.

Okay.

Thanks.

Sure.

On the professional fee side, I think it was probably in the $2 million to $2.5 million range, net.

Christopher Marinac, FIG Partners.

I wanted to ask about commercial loan rates.

And I know we had a slight increase last quarter, a slight decrease this quarter.

I was just curious on what trends you've seen in pricing on the commercial side for this year?

Hey.

Chris.

This is Susan.

I'll take that.

We continue to be very disciplined, obviously, around pricing, as much as we possibly can.

It is very competitive in the market.

And so we are working with our bankers to make sure we are getting the appropriate risk/return.

We've seen a little bit of margin compression, obviously.

But the other thing that we've done, and we talked about this in Investor Day, is the portfolio optimization.

And so, with the positive grade migrations that we've had, and then bringing on really good-quality new customers, in terms of a risk/reward, we're very pleased with how that looks.

So, I don't know if BJ wants to add anything to that?

Okay, great.

And I guess just a quick follow-up.

BJ, is there a way to kind of quantify the cost of the new markets in Charleston and Raleigh, Richmond, et cetera?

It's pretty immaterial.

I mean, if you look at the number of bankers we're going to hire, it's pretty immaterial.

Maybe a couple-million-dollars.

Okay, but it's not a driver either way, to your point?

Okay.

This is Bryan, Chris.

Sort of the way to think about it is, you start incurring personnel costs on the front end and a tiny bit of occupancy for office space.

We're not building a branch network.

I mean, it's just sort of standard commercial office space.

And then, over time, you ramp up a loan book and portfolio of business, which offsets it.

So, think about the cost of hiring a handful or so of people in a market and a little bit of occupancy, and then that's offset over time by growth in the portfolio.

Kevin Reynolds, Wunderlich Securities.

Most of my questions have been answered, but I wanted to -- as we came back from the Investor Day, and we sit here today and look at the core trends inside the Bank, and look at it from 30,000 feet, you've got number one share -- or maybe it's number two, if somebody wants to slice it a little bit differently -- in the state of Tennessee.

The Bank is called First Tennessee, so you are the home team against which everyone attempts to steal.

You've got a huge target on your back here.

How do you -- as you look out long-term, how do you grow above -- at an above-market pace, if you've got the intensity of competition all focused on you, and you don't really have -- you know, you've cut most of your costs, your fee income businesses are what they are and kind of dependent on the market around you.

So it's going to be left up to the Bank, it seems, to grow from here.

How do you grow balances -- not necessarily margin but balances -- and penetrate the customer better and put a growth profile out there longer-term, when you're so dependent on the one-state economy here, as good as it may be relative to others?

Yes, I'll start with that, Kevin.

This is Bryan.

Yes, there are certain aspects of our business where it is more difficult to grow, simply because of the size that we have.

And our bankers work very, very hard because, as we talked about, it's very competitive for our existing customer base.

It's a great customer base.

It's been a lot of awful long-term relationships in there and it does make it tough.

We work a lot on penetration and cross-sale of products, things of that nature.

We work on bringing the wealth management product set and other things like that to those relationships.

But in some sense, it is a little bit harder when you're big to grow in an existing market.

But we don't view that as a bad thing.

We view that as a positive.

We think that that allows us, over time, to be more efficient in those markets and to build out, as I said, those broader, deeper relationships.

In the short run, a lot of growth can continue to be driven by the specialty lines of businesses; our healthcare practice where we're not particularly large today but are growing very nicely; our ABL businesses.

The mortgage warehouse business continues to have leverage in that.

We've talked about balances coming down and mix change, but we think we've got opportunity to grow that, and to pick up existing market share.

And then, as we talked about a little earlier, we think in mid-Atlantic and regions like that of the country where we have a very small toehold, we have continued ability to pick up additional market share there.

So I wouldn't look at our positioning in Tennessee as anything other than being a very strong positive.

We're very proud of it.

We're very comfortable with that, and we want to continue to build on it.

And we are growing in Tennessee.

But I think, in the outside markets, in the specialty businesses, we can grow a little bit faster because of just the dynamics and where we're positioned there.

Thank you.

If I could add to that, Kevin, 70% of our loan balances are in Tennessee and 30% are out.

And Bryan just ticked through some of the largest growth opportunities we have in our specialty businesses in our mid-Atlantic group, which are obviously in that 30%.

So we feel pretty good about that.

In end market, where we have more mature markets and larger share, we build significant relationships.

And as we've talked about previously, utilization of commitments is at the lowest levels we've seen in quite some time.

And so, at some point, you're going to benefit from the relationships that our bankers have built when that utilization starts to come back.

And that's certainly going to grow balances at very minimal cost to us over time.

So, we feel very well-positioned to see growth when there is a little bit more optimism out there.

Kevin, this is Bryan.

At the risk of piling on, I'll make one more example.

Take Memphis in West Tennessee.

Over the last year, we have essentially changed and built our business banking franchise.

We've got a very strong leader in that business today.

And we see an awful lot of momentum in that business, just with some changes we made in the way we were doing business and leadership there.

And we're seeing very good progress in that.

So, that's a market where our -- Memphis is a market where our market shares are extraordinarily strong.

But we see, just by fine-tuning the way we're doing business, and how we're doing business, and the leadership in the business, we've got good growth opportunities.

Michael Rose, Raymond James.

I just want to follow-up on all the expense and revenue discussion.

Just following up on the last question, how should we think about future investments?

In particular, it's middle Tennessee, which I think you made a pretty big deal out of during the Investor Day.

How should that interplay with the expense cuts and your branch structure?

Thanks.

Yes.

Michael, this is Bryan.

In middle Tennessee, the big investments that we will make in, I think, the next year or so will continue to be in people.

It will be in talented teams and individuals that can help us build relationships in that marketplace, help us grow our presence.

Now, from a branch infrastructure standpoint, we have roughly 45 branches in the market.

We might move a branch here or there over the next couple of years, but for the most part, we have the branch infrastructure.

And so our efforts are on building out teams of bankers in commercial banking, private client, medical and healthcare, to put more activity through the branch infrastructure, the infrastructure we've built there.

So I think the largest part of our investment will continue to be on the people side.

Great.

Thank you.

Jennifer Demba, SunTrust.

Going back to the legal and professional fees topic for a minute, do you have a guesstimate of how much of your expenses in that front in 2013 were related to mortgage putback?

I'm just trying to get a sense of what could be your normal run rate, once you get through that headwind.

It's BJ.

I think, related to mortgage putback, I'll broaden that, if that's okay, to kind of just general legal costs and litigation, which has been higher.

If you look in our supplement, which would be on slide 7, breaking down the noninterest expense, you will see the legal and professional fee line has been in the $12 million to $15 million range over the last five quarters.

I'd say probably 80% of that or so is legal-related costs and litigation defense-related costs.

So, that, again, is, I think, going to stay around for a while until we resolve some of our legacy issues.

So, I'm not sure that that line is going to go down in particular.

But again, like I said, professional fees, I think, were elevated in the fourth quarter.

And we do expect those to moderate and possibly come down next year.

Okay.

And one follow-up on a different topic.

Just back to the non-Tennessee markets, you said you were happy with the progress there.

Are you considering any other non-Tennessee markets for expansion at this point?

Or are you happy with what you have?

Jennifer, this is Bryan.

Yes.

I don't want to be specific about what those markets may be, but we are always in progress of trying to identify teams of folks that we can bring onto the platform that are aligned in the way they do business.

So, yes, we would be considering other markets at any given point in time.

There could be several of them.

Okay.

And dare I assume they would continue to be in the smaller, on the middle size, as opposed to the larger markets?

Yes, I'd say yes, as a general rule, that's right.

And there are a few larger markets that, if we had the right opportunity, we might consider.

But, generally speaking, we're focused on these midsized markets that allow us to do business, like we have here in the state of Tennessee.

Thank you.

You're welcome.

Thank you.

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

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

Thank you, operator.

Thank you all for joining the call this morning.

Please let us now if you have any further questions or need any additional information.

I hope that you all have a great weekend.

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

You may now disconnect, and have a wonderful day.