First Horizon Corp (FHN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation first-quarter 2014 earnings conference call.

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

Later we will conduct a question-and-answer sessions and instruction will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn your call over to host for today, Ms. Aarti Bowman, Investor Relations.

Ma'am, you may begin.

Thank you, operator.

Please note that the press release and financial supplement, which announced our earnings as well as the slide presentation we use in 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 the call.

This morning 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, everyone, and thank you for joining the call.

I'm pleased with what we accomplished in the first quarter as we continue to take actions to build franchise value and achieve our long-term bonefish targets.

We're invested in our core businesses while controlling cost and improving productivity and efficiency.

We are winding down our non-strategic portfolio and taking steps to put legacy issues behind us.

And we are taking an increasingly granular approach in our efforts to improve economic profitability.

Our core businesses are showing solid performance.

In the regional bank, average core deposits were up 2% year over year.

Our specialty lending portfolios continue to grow on average year over year basis, asset-based lending was up 12%, commercial real estate grew 4% and mid-Atlantic increased 4%.

I'm especially pleased with this growth as it shows our focus on improving economic profitability is producing a higher return new loan origination mix.

Although the economic recovery remains slow and borrowers are still somewhat cautious, I'm encouraged by the first quarter's improving loan pipeline as well as a modest improvement in commercial line utilization.

FTN Financial, our fixed income business, continues to contribute significantly to our overall fee income.

Due to market conditions, we are still seeing lower average daily revenues.

FTN Financial remains a high return business, even in the face of lower flows and activity.

We see this part of the cycle as a great opportunity to continue to further invest in our extensive fixed income distribution platform.

We are doing this through strategic hires of sales and trading resources and through our ongoing focus on expanding our municipal products platform, including the development of our public finance capabilities.

Managing expenses is particularly important these days and we remain committed to improving productivity and efficiency.

Consolidated expenses are down 8% year over year.

We are working hard to streamline our workflow processes and shorten delivery times for our customers.

At the same time, we are continuing to make investments that enhance future growth potential.

For example, over the past several months we have opened banking offices in Charleston, Jacksonville and Houston.

As I said earlier, we are making progress in winding down the non-strategic segments.

Average loans declined 18% from last year and we settled with Freddie Mac in February.

Asset quality is showing stable trends.

Year over year, net charge-offs declined 38% and our net charge-offs ratio remains below our bonefish target.

Our capital ratios under Basel III remain strong with estimated Tier 1 common at 11.1%.

We submitted our initial stress test to our regulators in March and expect to hear feedback from them later in the second quarter.

To sum up, we spent the first three months of the year continuing to work on optimizing economic profitability, essentially building on the data and the initiatives we discussed with you last November at our Investor Day.

We are focused across the organization on making profitable, relationship-oriented loans.

We're making steady improvements.

We are on track with our strategic priorities and we are doing what we said we would do.

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

BJ?

Thanks, Bryan.

Good morning, everybody.

I will start on Slide 7 with our consolidated financial results.

You will see the first quarter our net income available to common was $45 million, or $0.19 a share.

If you look at Slide 8, first-quarter earnings were line with our expectations but we did have several significant items that affected those reported results.

First, we had a pretax $20 million gain associated with unrecognized servicing fees from our agreement to sell our MSR's.

We also had a $6 million security gain on an equity investment.

They were offset by $6 million expense related to efficiency initiatives, essentially a lease [abandonment] charge as well as some severance related costs and a $6 million net pretax loss from certain on-balance sheet actions related to resolution and collapsing of some securitizations that we did.

Segment highlights for the different businesses start on Slide 9. In the first quarter our core businesses contributed $33 million in net income.

And I will go into the details of the regional banking capital markets results in a couple minutes but let me hit non-strategic first.

You will see the net income in that segment was $12 million, up $6 million linked quarter.

Increase was primarily driven by the $20 million servicing gain that I mentioned earlier.

Loan loss provision was a $3 million credit, largely reflecting a reserve adjustment from the sale of 3 [trusts], all of which were on interest deferral.

Expenses were $14 million in the segment for the first quarter, down due to lower net litigation expense.

And, as expected, we had no mortgage repurchase provision expense in the quarter.

Starting with the regional bank trends on Slide 10, you will see that net income in the bank was $36 million.

Net interest income decreased 3% as expected from fourth to first quarter due to lower loan balances, predominantly in loans to mortgage companies and fewer days in the quarter.

Fee income declined 4% link quarter.

Deposit transaction fees were down seasonally and were somewhat offset by a 7% increase in wealth fees and trust income growth of 2%.

Linked quarter expenses in the bank declined 4%.

Loan loss provision in the bank was $13 million in the first quarter compared to $3 million in the fourth.

That increase was driven by some refinement in our credit card reserving process as well as some other macroeconomic factors.

Overall, the consumer portfolio remained stable and we are pleased with how all of our portfolios are performing and expect continued strong performance in the bank balance sheet.

Moving on to regional bank balance sheet trends on Slide 11.

You will see linked quarter, the bank average core deposits, were up 2%.

Average loans were down slightly 1% despite a 24% decrease in loans to mortgage companies.

We saw linked quarter growth in other parts of the portfolios that somewhat offset that decline.

They included asset-based lending up 6%, CRE up 3% and Middle Tennessee and private client wealth both up 1%.

We recognize that loans to mortgage companies do add volatility to our portfolio balances, but as we talked about in November and in other places, we believe the strong economic profits and high returns on this line of the business more than compensates for the volatility.

And in addition, we are pleased to see growth in business lines and markets that we have discussed previously as being ones with current and future economic profit growth potential.

Competition for loans remains significant across our markets putting pressure on our loan yields.

However, we are encouraged by the recent growth that we've seen in places like CRE and ABL as well as an improving C&I pipeline.

Although overall our borrowers remain generally cautious, we are seeing some expansion from our larger commercial clients and some acquisition activity among our mid-sized customers.

And the consumer loan pipeline has rebounded substantially in the last month reflecting somewhat of a catch-up after the soft winter season.

We will continue to focus on our specialty blending areas that have higher returns and better economic profitability as well as our growth markets in Middle Tennessee and mid-Atlantic.

Turning to capital markets on Slide 12, that business had net income of $5 million in the first quarter.

Linked quarter our fixed income average daily revenues were roughly flat at $813,000 for the quarter.

Expenses decreased primarily due to lower variable compensation and were partially offset by a seasonal payroll taxes.

ADR levels continue to be below our normalized expectations.

The interest rate environment and the associated dynamics in the fixed income market associated with that continue to mute activity on the desks.

In the more normalized environment we still believe that fixed income ADR levels are in the $1 million to $1.5 range; however, for the next several quarters we expect those average daily revenues to remain generally consistent with what we've seen the last couple of quarters.

Turning to consolidate balance sheet margin trends on Slide 13.

Our average total assets remain stable at about $24 billion.

Linked quarter consolidated NIM declined 10 basis points to 288 basis points.

The decrease was due to lower loan balances, continued pressure on commercial loan yields and a higher amount of balances at the Fed as well as fewer days in the quarter.

You'll recall that on our 4Q call, the margin was to 298 basis points and we discussed it being elevated by roughly 4 basis points from acquisition-related loans and higher-than-expected cash basis income.

Sitting here today, we still expect quarterly net interest margin in 2014 to be in the 285 to 295 basis point range.

We have several assumptions related to that and they include rates staying at current levels or slightly rising, loan yields continuing to decline due to competitive pressure, loans to mortgage companies building modestly throughout the year, deposit rates paid remaining lower, new investment securities yields modestly accretive to current yields, capital markets inventory remaining stable and Fed balances at normal levels.

Our balance sheet, as you can see, remains highly asset sensitive.

And a 200 basis point rate rise to net interest income would increase roughly $11 million, or add roughly 38 basis points to our core NIM.

We recently began adding fixed-rate products in both loans and securities with three to five year maturities.

These actions have modestly affected our assets sensitivity and allow us to better compete for relationship lending opportunities in the current environment.

But for the long-term, we have prepared ourselves very well to materially benefit from an increase in short rates.

Turning to expenses on Slide 14.

You will see that since Q1 2011, our run rate of annualized expenses declined 30% and you see that we exceeded our 2014 expense goal earlier than anticipated.

We've improved efficiency in our core businesses by reducing cost in areas such as occupancy, operations, foreclosed real estate, while also rationalizing our branch network.

We will continue to work on reducing expense in the non-strategic segment.

We saw 52% decrease in contracting -- contracted employment as we have significantly reduced sub servicing expense since we told the vast majority of our servicing portfolio.

We had extensive work going on, you see on the page, in many of our credit operational areas that will deliver lower cost, improved collections and better service.

And we continue to work on ways to reduce our square footage across the firm.

While we are obviously pleased with our expense discipline to date, more can and will be done on expense control in 2014.

Looking at asset quality trends on Slide 15.

You will see linked quarter net charge-offs declined 2%, nonperforming assets down 5%.

As we mentioned, we sold 3 trusts in the first quarter that were all on interest deferral, further improving our risk profile, and our reserves-to-loans sat at 164 in the first quarter.

We are seeing ongoing positive grade migration in our commercial portfolios.

Our bankers remain disciplined on underwriting and we are actively monitoring our consumer portfolios.

We expect continued stability in asset quality trends and are pleased with the performance we are seeing in credit.

Wrapping up on the slide 16, core business trends are solid with our 12 month trailing core ROA at 85 basis points and our core [ROTC] at 9.6%.

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

Our capital markets business continues to provide us with good fee income while using capital efficiently and the regional bank's specialty lending areas and market growth opportunities should drive profitable loan growth.

Our continued focus on economic profit will drive better returns over time.

We will continue to work on expense efficiency.

Our asset sensitivity provides meaningful upside.

And with a strong capital ratios and solid earnings, our ability to profitably deploy capital over time should be meaningful.

So with that, I will turn it back over to Bryan for some final comments.

Things, BJ.

We are off to a good start in 2014 and over the remainder of year we will continue to successful execute on our blue chip priorities.

We will continue to strengthen our balance sheet, improve efficiency and wind down the non-strategic businesses.

We are focused on improving economic profitability.

We should make progress towards achieving our bonefish targets and building franchise value.

Thank you to our First Horizon team for all that you do to develop our business and the momentum that we have in it each day.

Now with that then, we will open it up to questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

I'll start -- looking at the ADR range on Slide 12 of the deck, which goes back 10 years, it looks like really the only time over the past 10 years that you were in or above the range was during the financial crisis.

What makes you think that now that we are in the post crisis period we're going to go back to a level that's so much higher than where you were back in 2004 to 2007?

Steve, this is Bryan.

I will start.

If you look at that chart and the scale is a little broader there, but we were running in the high $700,000, $800,000 range even in those years.

And you will remember if you go back 10 years there were couple of soft years in there proceeding the 2007 timeframe.

That said, as we look at the business, we look at our positioning in the business and we look at what we think the trends will be over the long-term.

We are still optimistic, is a way to describe it.

We still believe that we have the share in the business that we can drive revenues in the business that are in that $1 million to $1.5 million day.

As BJ said in his prepared comments, as we look across the remainder of 2014 we think it remains below that range.

And it is going to be a period where interest rates are going to have a tremendous amount of volatility.

If you look at a map of our chart of the 10-year treasury for the last year you see a tremendous amount of volatility in it.

And you have some really good days and you have some really soft days.

And so all of that said, there is no science to it.

It is art.

It is a looking at our Business and understanding it and trying to lay out what our long-term expectations are.

It's still a very profitable business at $800,000 a day.

It produces high returns, as I said.

So that's a very long way of saying it is our expectation, but given what we see today, it is going to be below that for a little while.

And could it be that way in 2015?

Sure, that's possible, too.

Yes.

I think, Steve, I would just add to what Bryan said too.

If you think back to what happened during the financial crisis, we saw a lot of dislocation in the markets and a lot of competitors left.

So we think we picked up some incremental share there.

We are also preparing very well for an environment that is very different as the GSE's change their shape and form.

And so while we are very strong there today, the business is doing a great job of adding capabilities like municipal and building that out such that we have an even more balanced platform.

And the third piece is that our corporate desk has done very well building itself up through an end to the crisis such to the point now that it is actually the one that's up year-over-year.

And so that's providing us with a very balanced client base that we can take advantage of through any markets.

So as Bryan said, it is hard to just pinpoint a range but we do believe that we've made structural and strategic changes that allow us to be there and do well over the long-term.

Okay.

That's actually very helpful.

And maybe just a completely unrelated follow-up.

BJ, can you give us some color on the improvements in the C&I pipeline that you noted in your prepared comments?

And do you expect a pickup in C&I in the second quarter given what you're seeing in the pipeline?

Thanks.

Yes.

I will start, certainly, and then Susan has a few comments that she can make as well.

But yes, we are very pleased with what we are seeing in our pipeline.

You can see pockets of strength in C&I, ABL, CRE most particularly.

Our bankers -- we've talked to our bankers as you know about balancing economic profit and loan growth.

And so what we're doing is managing that over the long term, but what we are seeing is that our bankers' calling efforts are building pipelines that we believe have a high probability of closing.

And what happens in C&I pipelines is that you do see the fundings but they don't happen for a couple of quarters.

But we do expect the second quarter should be stronger and we believe that we can maintain that momentum throughout the rest of the year.

This is Susan.

A couple things I would add is actually in March, so the last month of the quarter in terms of new fundings in the commercial side was almost double what it was in January and February.

So we had some (inaudible) momentum in March.

And as BJ said, we've got -- it's a diversified pipeline in terms of some for commercial throughout our markets and our growth market, particularly Middle Tennessee and Atlantic as well as in our specialty business like CRE and asset (inaudible).

This is Bryan.

Steve, I will tag on.

If you look at the pipeline and how it is built and it's sort of hard to note how the seasonality effects things at times.

But if you look at the end of the year to the end of the first quarter in the pipeline as we enter March, the pipeline is up significantly in the order of 35%, 40%.

So, there's probability of fallout in that but we think things are picking up.

And as I commented, we are seeing increased line utilization on C&I lending.

So there does appear to be some degree of strengthening.

And as we look at these pipelines, I'm very, very encouraged by the relationship nature and the structure and the pricing that we have in place.

So I think our bankers are doing a fantastic job developing business and doing it with the long-term profitability and customer relationship mentality, which I think is the right way to be doing business.

Okay.

Thanks for all the color, appreciate that.

Sure thing.

Thank you.

Emlen Harmon, Jefferies.

Could we just -- I apologize -- just hopped on here.

But thinking about the expense run rate, the -- I look at the composition expense for the quarter.

It seems like it is down pretty meaningfully.

Could you help us tease out the impact from payroll taxes this quarter?

And then, also, how much of a decrease was a drop in salaries versus incentive accruals, whether on the bonus side, or just commission-related stuff?

Hello, it is BJ.

I would say most of the salaries decline is related to variable comp.

And really mostly in fixed income.

We did have some impact from continued declines, or continued efficiencies, that we are finding.

You can see the FTE count is down from quarter-to-quarter, so, obviously, there is some impact in there.

But I would say largely it is from lower variable comp.

Got it.

Thanks.

And then if we look at just what the expense run rate is for the quarter, it seems to be meaningfully below what your guidance has been in terms of a $900 million annual run rate.

Is there any pickup in expenses that you'd be expecting as we head into the rest of year?

Not particularly.

I think our analyzed run rate, using the first quarter, would be around the $880 million range.

I would like to see it be there at least, or maybe a little lower.

I don't see anything in particular on the horizon that would make it go up other than something that could be positive, which would be higher fixed income revenues and higher ADR in that business.

But other than that, based on all the work that we're doing finding efficiencies and some of the things that I see, I feel good about where our level is now and it could get even better.

Okay, great.

Thank you very much.

John Pancari, Evercore.

Along those lines in the question on the comp expense real quick -- just similar run rate question, can you help us think about what is a good run rate going into second and third quarter on the salaries and benefits line?

Is it closer to the mid-120s or is it closer to this 119 level?

Assuming that as we talked about fixed incomes stays roughly where it is, I would say it is in that 120 range.

Closer to where we are at today.

Okay.

All right, that's helpful.

And then also back to the capital markets topic.

Bryan, I know you mentioned that there is potential for that -- this pressured ADR level to persist into -- through 2015.

If that looks like that shaping up to be the case, is there any additional rationalization of that business that you think is needed in that instance?

Yes, if -- let me back up.

That's a business where we, Mike Kisber and the team out at FTN financial spend an awful lot of time through any business cycle looking at and controlling their cost.

And so, yes, they will continue to focus on their cost structure and make sure that we are allocating cost to the right activities and controlling costs appropriately.

In terms of rationalization in a broader sense, if you say is there anything that you are doing that you need to stop doing from a product set or customer perspective?

No, I think we've got a very good business mix out there.

I would say, if anything, there will be additional opportunities for us to, as I said earlier, look for and hire specialized traders, sales folks, capabilities across our platform, most particularly in our municipal finance businesses where we have made a tremendous amount of investment over the last couple years and I would expect that we would continue to invest in it.

I would expect, yes, we will continue to look at our cost structure and control it.

But we will also continue to look for opportunities to invest in that business and continue to position it for the long-term, just like we are doing in the banking business and elsewhere in the organization.

Okay.

Thank you.

You're welcome.

Mitchell [Patel], KBW.

Just wanted to talk a little about litigation.

You settled with the FHLMC and wrapped up a lot of your GSE issues in the quarter.

I guess I just want to see is there any update on the litigation front specifically with regard to the FHA HUD inquiry?

And also how your thoughts around litigation are now impacting the way you're looking at using your capital through the buybacks, or just evaluating the common dividend?

Yes, good morning.

This is Bryan.

First, there's nothing in terms of an update on the FHA [VOJ].

I think somewhere in the appendices to the slide deck already got the current information and that's -- there's just not a whole lot happening there.

It is just a long process.

There are other matters that continue to evolve from day to day, but it is a bit of a slow grind.

And we continue to work and to make progress, but nothing to report at this point.

With respect to capital, as we've said really going back into I guess it was October or so when we reported third-quarter earnings, we talked about the fact that we wanted to continue to work through and resolve these matters.

Since then we have resolved Fannie Mae and Freddie Mac, the GSE repurchases that we discussed.

We continue to work on and evaluate where the other risks are as it relates to mortgage and overhang.

And also during that period we completed our stress testing effort.

It is not the first time we've run the stress test, but the first formal process with the [defast] that we submitted to the OCC and the Federal Reserve.

As I mentioned in my comments earlier, we should get some comments or feedback back on that later in a second quarter and we'll continue to evaluate that.

All of that wrapped up, we continue to evaluate our capital position.

We feel very good about the strength of our capital position.

We'd like to get a little bit more information on some of these matters and get some feedback on the stress test before we make any significant changes in the way we are thinking about capital and capital-to-return in the short term.

Longer term, we think our business will continue to produce significant returns and generate significant excess capital that through the cycle we'll be in a position to repatriate return to our shareholders.

And we will do all of that in due course as we think through all of these moving parts.

Thank you, guys.

(Operator Instructions)

Kevin Barker, Compass Point.

Given the very competitive market for loan portfolios out there, are you seeing any opportunity to significantly reduce your nonstrategic portfolio at or above fair-value from where it is right now?

Yes, Kevin.

This is Bryan.

Good morning.

Well a good example -- we sold three of the trust preferred loans that BJ mentioned.

So we are looking selectively for opportunities to sell those assets at or above book value.

And if it make sense, we'd sell them in any transaction that makes sense.

It doesn't look to us like the market for loan assets has changed so significantly that there's a single or three single transactions that could be completed and wipe the slate clean in terms of a nonstrategic wind-down.

But that's not to say that we don't continue to look at it and we won't continue to evaluate it in the future.

But from our perspective, we still believe that being very strategic in identifying transactions and capitalizing when we have opportunities to sell those assets at attractive prices is the way to go.

And for those where we continue to work through the resolution and to capture the runoff, the pay down at par value continues to be the smart way to approach it.

As I noted earlier, those portfolios in the aggregate are down about 18% year-over-year.

There's no reason to expect that that trend line would not continue throughout 2014 given the age and the maturity of it.

That's a long -- very long way, I suppose, of saying we don't take anything off the table and we are not saying that we have to do anything.

We're very comfortable working through in the fashion that we've been working through and we will continue to evaluate opportunities as they present themselves.

Have you ever considered doing a -- marketing a large piece of the portfolio, or are you continuing to do it piece by piece?

Well we have, Kevin, over time continued to evaluate.

I would say there's nothing that we've considered in the last year or three that where we thought about whether it made sense to do a large transaction.

It was our view, particularly with the largest piece of it, the home equity portfolio, that the credit characteristics and the loss content in it was much better than market expectations.

We still believe that that continues to be the case.

It is a -- unfortunately so -- a very low yielding portfolio, which reflects the high credit quality that was retained on the balance sheet when it was originated in 2005, 2006, 2007 and 2008.

And so we've always believed that for the biggest piece and the most marketable piece, the home equity portion, that the economics of retaining it were better than the economics of selling it.

And our loss curves and our history has, to this point, generally proven to be right.

We've seen very good performance in it.

And you'll note in the appendices to the slide deck that Aarti put out this morning, credit quality remains strong, FICO scores are still north of 725 and the 730-plus range.

Those are updated, refreshed FICO's and we still continue to see very good performance characteristics in the portfolio.

How concerning the home equity portfolio, given the increase in payments -- or somewhat considered a payment shock in the next few years as these loans start to amortize -- is there anything you are doing to prepare for that regarding maybe a building of reserves or modifying a significant amount of these home equity portfolios, or even selectively selling a portion of them?

I will take that question, Kevin.

This is Susan.

As it relates to the home equity portfolio, we do -- we update our analyses on a regular basis and we do shock the portfolio looking at potential interest rate increases.

We also do analysis every quarter on what's entering the repayment period from draw.

We actually are seeing a look over the last five quarters as loans are leaving the draw and entering repayment, we are actually seeing some improvement in both 30-day delinquency and charge-off rates even after they -- than we saw a few course ago.

Some of the tactics that we are using that will continue to manage the risk and improve outcomes, we are now reaching out to our home equity borrowers, both in the nonstrategic and regional bank portfolios, further in advance of them leaving the drop period and entering repayment.

So letting them know up to 9 months in advance through different outreach methods, online banking statements, proactive calling, your payment will change, please call us, we want to work with you.

So we are doing a number of outreach activities to continue to help our customers and also improve -- continue to improve the outcome.

Thank you for taking my questions.

Thank you.

Thank you.

And ladies and gentlemen, that does conclude our Q&A session for today.

I'd like to hand the conference back over to Mr. Bryan Jordan for any final remarks.

Thank you, Ben.

Thank you all for joining our call this morning and thank you for interest in First Horizon.

Please let any of us know if you have any further questions today or tomorrow, or early next week, or need any additional information.

I hope you all have a great day.

Thank you.

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

This does conclude the program and you may all disconnect.

Have a great rest of your day.