First Horizon Corp (FHN) 2014 Q3 法說會逐字稿

Good morning, and welcome to the First Horizon National Corp.

third-quarter 2014 earnings conference call.

(Operator Instructions)

Please note: This event is being recorded.

I would now like to turn the conference over to Aarti Bowman.

Please go ahead.

Thank you, Amy.

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 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're 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'll now turn it over to Bryan.

Thank you, Aarti.

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

I'm very pleased with our third-quarter accomplishments.

Our loan portfolio growth was the best in some time, showing that, given our customer focus, we can generate high-quality incremental business in a competitive environment.

We kept cooperating cost in check, yet didn't scale back on investment spending.

We accelerated the rundown of our non-strategic portfolio, selling a block of held-for-sale mortgage loans at a significant profit, the second sale of this year.

Last but not least, we returned capital to shareholders, repurchasing 2 million shares of stock at an attractive price.

Our core business posted solid performance.

Year over year, the regional Banks' average loans were up 6%; linked quarter growth was 4%.

Growth was driven by specialty lending areas and our expansion markets.

Year over year, commercial real estate loans rose 31% to $1.2 billion, or 7% of the total portfolio.

Asset-based lending increased 13%.

Commercial and private client wealth management portfolios were each up 9%.

And within our markets, mid-Atlantic booked 29% loan growth, while middle Tennessee grew 10% year over year.

Average core deposits were up 1% year over year in the Bank, and net checking accounts grew by 3%.

Our active calling program's emphasis on customer service, and investment in additional talent and products, are enabling us to grow our portfolios, yet maintain our risk-adjusted pricing and our underwriting discipline.

Our other core business, FTN Financial, performed well, even though market conditions weighed on fixed income activity.

As anticipated, average daily fixed income revenues were flat to last quarter, and are likely to remain so in the near term.

Meanwhile, we are building out our municipal products platform, and developing our public finance capabilities.

When the fixed income market conditions improve, we will be prepared to take advantage of opportunities that FTN's extensive, unique distribution platform provides.

We made good progress at winding down the non-strategic portfolio, with average loans declining 17% from last year.

We also made a significant addition to our litigation reserve.

We sold non-strategic loans in our held-for-sale portfolio for a pre-tax gain of about $40 million.

Recall, in the second quarter, we had an $8-million gain on a valuation adjustment related to a non-strategic loan sale.

Year to date, we have booked nearly $50 million in gains related to loan sales.

We will continue to actively look for economically attractive opportunities to accelerate the runoff of our non-strategic portfolios.

Asset quality trends were stable.

Year over year, net charge-offs declined 32%, and non-performing assets were down 36%.

Our reserve-to-loans ratio was at 151 basis points in the third quarter.

As most of you are aware, we are very focused on achieving our bonefish targets.

While the rate rise is the biggest driver of hitting our targets, we are controlling what we can control for now.

That includes cutting costs, managing economic profitability to better capitalize on growth opportunities, and effectively deploying our capital.

Consolidated expenses decreased 8% year over year, excluding the net loss related to legal matters and mortgage repurchase effects.

We believe we have more work to do on becoming more efficient.

We plan on cutting an additional $20 million to $50 million in annual expenses over the next few years through further resolution of legacy issues, process improvement, branch network optimization, and other efficiencies.

At the same time, we will continue to make appropriate investments that will offset some of our efficiencies.

Our economic profit efforts will also be a factor in achieving our bonefish targets.

We're continuing to expand and enhance our economic profitability management tools, which are helping us to successfully execute our business plans and reach our bonefish targets.

Our capital position remains strong, with tier 1 common at 11.3%.

In the third quarter, we bought back 2 million common shares for $24 million, and have $76 million of repurchases remaining in our current authorization.

Since we started our initial buyback program in 2011, we have bought back about 11% of outstanding shares at a $9.42 Volume Weighted Average Price.

We will continue to deploy capital smartly.

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

BJ?

Thanks, Bryan.

Good morning, everybody.

Thanks for joining us.

I'll start on slide 7. In the third quarter, net income available to common shareholders was $45 million or $0.19 a share.

I'm pleased with the core performance we saw in the quarter, like Bryan is.

Overall, earnings were impacted by a few notable items as well, which I will discuss on the next slide.

So, if you turn to slide 8, in the third quarter, we continued our efforts to wind down our non-strategic portfolio with loan sales.

We finalized the sale of about $315 million of UPB held-for-sale loans, and booked approximately $40 million of pre-tax gain on those sales, which will show up in the mortgage banking income line.

As Bryan mentioned, our year-to-date loan sales out of the non-strategic portfolio have resulted in pre-tax gains totaling almost $50 million.

We have been able to manage down this portfolio to our advantage, and will continue to look for opportunities to accelerate the wind down of the non-strategic portfolio in an appropriate fashion.

We also had a $50-million pre-tax expense related to legal matters reflected in the addition to the litigation reserve; and additionally, we booked a $15-million pre-tax gain related to insurance recoveries associated with a previous legal settlement.

These two items had a $35-million net negative impact in our litigation and regulatory matters line in other expense.

Segment highlights are on slide 9, and I will go over the details of the regional banking capital markets businesses on the next few slides.

So, if you turn to slide 10, taking a look at the regional bank: Our regional bank showed particularly strong performance, contributing $51 million in net income in the third quarter, up 9% from the second.

Linked quarter, our net interest income in the Bank was up 3%, driven largely by higher loan balances.

Non-interest income declined 3% linked quarter, but recall that 2Q 2014 included a positive $3-million impact related to some Visa incentives.

Deposit transaction fees were up 2%.

Brokerage and trust fees were down from second quarter's seasonally higher levels.

Expenses were up 2% due to technology investments and an increase in professional fees.

Loan-loss provision was $2 million in 3Q 2014 compared to $8 million in the second.

Annualized charge-offs in the Bank are at 19 basis points -- very strong.

Pre-tax income, again, was up 9% linked quarter.

Turning to regional bank balance sheet trends on slide 11: Linked quarter, our average loan growth was 4% for the second consecutive quarter.

Our focus on specialty lending areas, expansion markets, and our bankers' calling efforts continue to pay off.

Average commercial real estate loans were up 9% linked quarter, driven by customers funding up existing commitments, opportunities in the REIT sector, and growth in our Mid-Atlantic, middle Tennessee, and Southeast markets.

Loans to mortgage companies, one of our most economically profitable businesses, increased nearly 30% linked quarter due to the strong home purchasing we saw in the summer season.

Private client and wealth management loans grew 4% linked quarter, and growth areas in our markets included mid-Atlantic, which was up 16% [linked], and middle Tennessee, where loans increased 3%.

We're booking loans appropriately, and largely within our risk-adjusted return-on-capital guidelines by staying disciplined on pricing and underwriting.

While borrowers' sentiment has improved somewhat, customers do remain cautious, and we're still facing tough competition for loans.

While we generally see a seasonal slowdown in loan bookings in the fourth quarter, our pipelines remain very solid.

Moving to capital markets on slide 12, pre-tax income was $5 million in the Business in 3Q compared to 2Q 2014's pre-tax income of $50 million, which included a $47-million expense recovery.

Linked quarter, fixed income average daily revenues remained relatively steady, with the second quarter at $644,000, reflecting continued [muted] customer activity due to tough market conditions from low rates and low volatility.

The FTN fixed income business continues to be a strong source of fee income for us, and we see latent opportunity for improved profitability and contribution to achieving our bonefish targets as market conditions improve.

The platform is a highly variable one from an expense and capacity perspective, and we continue to be prepared to take advantage of improved markets once they materialize.

Turning to slide 13, the consolidated balance sheet margin trends: Average total assets remain stable at $24 billion.

Linked quarter, our consolidated net interest margin was flat at 2.97%.

Higher loan balances and lower deposit costs offset the pressure on loan yields.

Looking ahead to the fourth quarter, we expect our consolidated margin to be more towards the 2.90% level, plus or minus a few basis points.

Much of the reason for this anticipated 4Q decline in the margin is a high-class problem to halve: deposit inflows.

Our margin assumptions are based on an anticipated seasonal end-of-year increase in deposit inflows, and the closing of our branch acquisition of 13 branches across Tennessee from BofA, which funded today.

Subsequently, we expect to hold higher levels of cash at the Fed in the fourth quarter, which will impact the margin; and in addition, the loan sales and seasonally lower loans to mortgage companies will impact the NIM as well.

Fundamentally, however, our NIM remains solid in a challenging interest rate environment.

Our balance sheet remains highly asset-sensitive.

In a 200-basis-point rise scenario, our net interest income would increase roughly 10%.

And on the liability side, we expect overall deposit [datage] of about 40% to 45% in an up-200-basis-point scenario.

Moving to expenses on slide 14: Since 3Q 2011, our run rate of consolidated annualized expense, excluding litigation accruals and recoveries, and the GSE repurchase provisions, has declined 20%.

Compared to peers who have seen an uptick in expense, we've decreased our cost base significantly.

We've lowered costs by reducing our branches, streamlining our structure and processes, and winding down our non-strategic portfolio.

At the same time, we've continued to invest in technology, products and people to help us take advantage of growth opportunities, improve our processes to leverage our infrastructure, and serve our customers more effectively and efficiently.

We will continue working to reduce our expense base by further improving process, decreasing legacy-related costs, and reducing our corporate real estate footprint.

Turning to asset quality overview on slide 15: Our charge-offs were down, as we've seen continued stable performance and positive grade migration.

We also had a $3.4-million commercial recovery in the third quarter.

Linked quarter, you see our non-performing assets decreased 24% to $257 million, and commercial non-performing loans were down 11%.

We sold about $60 million of non-performing loans in the third quarter.

Our loan-loss reserve decreased 2% as well.

Wrapping up on slides 16 and 17: Slide 16 shows our current progress towards bonefish targets; and on slide 17, you can see that we have put ranges on the opportunities that we see and the incremental profitability.

We see a lot of growth, economic profit opportunity, and upside to our Business.

We're managing the entire Organization to our bonefish goals, and we believe that continued efficiencies, growth opportunities with new markets and products, economic profit improvement, capital deployment, increased capital markets activity, and a rise in interest rates will get us to our long-term return target of 15% to 20%.

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

Thank you, BJ.

We will continue to work diligently in a disciplined manner to achieve these key priorities, further strengthening our balance sheet, enhancing productivity and efficiency, and winding down our non-strategic businesses.

With our focus on improving economic profit, I'm very confident that we will make progress toward reaching our bonefish targets and further building franchise over the foreseeable future.

Thank you to our First Horizon employees for all that you do to build our Business and serve our customers every day.

With that, Amy, we will now stop and take questions.

Thank you.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Maybe to start, could you guys give some color on the nature of the $50 million add to the litigation reserve in the quarter?

Steve, good morning, this is Bryan.

Unfortunately, we can't go into a whole lot of detail.

It's very clear that we set up $50 million in these legal reserves.

We have a number of things that are active and in progress, and because they are it wouldn't be appropriate for us to go into details regarding them.

Okay, got you.

Bryan, given the recent increase in market volatility, have you guys seen any pickup in ADR so far in the quarter?

I know you said the outlook is flat for the quarter, but wondering why you're not expecting a bit of an increase given what we're seeing just in the markets.

It has been stable with this volatility and rates going down.

Actually it's somewhat negative and as they come back up, you see a little bit of benefit, there's really been more selling than there has been buying in this environment.

If you go back and you look at the third quarter as a whole, we were very encouraged.

There were a couple weeks in the early part of September where average daily volumes were very, very strong.

The volatility is driving volatility and average daily volumes as you would expect, but given what we think is happening in interest rate markets for the next several quarters, we think it's likely to be in this area and so we're not optimistic that we'll see a significant increase.

We're always hopeful that we will get it but we don't believe at this point that's likely to occur in the fourth quarter or the early part of 2015.

Okay.

And maybe just a final question.

From a high level, if we look at the regional bank pretax pre-provision incomes basically flat year-over-year, capital markets are below the low end of the range; I know you've stepped up buybacks in the quarter, you focus on expenses, but are there any other initiatives you are contemplating to move the needle a bit more, at least over the intermediate term?

This is Bryan.

I've said in my closing comments, I'm very, very confident in our ability to enhance value and improve profitability with the balance sheet that we have today and the opportunities that are in front of us.

We've talked a lot, and you'll recall even in our Investor Day last fall, we were talking about how we were disaggregating the organization and understanding that the drivers of profitability, and we continue to do a lot of work and as we look into the last part of this year and into the next couple of years, we still see a tremendous amount of opportunity for us to capitalize on opportunities in our marketplace, do a better job of winning business, and getting more efficient in the way that we do it, both on a revenue and an expense side of the business.

So we're very, very optimistic that in a sort of a continued sideways interest rate environment for the next several quarters there's still opportunity for us to improve our profitability, just focusing on these opportunities we have in the existing balance sheet.

Ebrahim Poonawala, Merrill Lynch.

So I guess, Bryan, first question just in terms of capital markets being definitely been making on the muni and public finance side, do you need a pick up in ADR for those investments to start paying off or is that somewhat independent where some of those bankers have been on board now, start generating revenue in business even in the absence of a major pick up in ADR?

Those are investments that warrants should have some short-term impact and clearly, the extent that we grow that platform and we grow our ability to participate in deals in the bigger markets, and as well as bring people onto the platform, that will help ADR.

But we also look at those as long-term investments that will allow us to build out the product set, and over the long term, have a more positive impact on ADR by broadening the product suite and broadening the product offering we can bring to our customer base as well as to the issuer community.

So we see it having some modest short-term impact but long-term we see it as a big investment for the future of the business and the product set.

Understood.

And then the second question then, BJ, you talked about looking for strategies to sort of expedite wind-down of the nonstrategic portfolio.

I guess when you look out there, what is the biggest impediment in terms of being able to sort of sell larger chunks over the next few quarters?

Is it just buyer appetite or the cost of funding for the buyer which is still sort of making the economics not that attractive for a buyer given the bank's funding base?

Sure.

No, I think given what we've seen the last two quarters, with the two loan sales that we did make out of the portfolio, that the buyer appetite is pretty strong.

On both of those sales we had dozens, literally dozens of bidders on each, and the bids were obviously very strong.

So, we were pretty pleased with the execution there and that gives us a little bit more confidence that maybe there's some more opportunity to sell down more of the nonstrategic portfolio as appropriate.

Now these two happen to be out of the existing held-for-sale portfolio, so they are currently marked, so it's a little bit more liquid, if you will, and easier to do.

But we continue to look for shareholder-friendly and economically profitable opportunities to manage down the nonstrategic portfolio and I'm pretty optimistic that we might be able to do that.

Paul Miller, FBR.

Good morning, this is actually Tom [Sotrane] on behalf of Paul.

It was nice to see the good growth in Middle Tennessee and in Mid-Atlantic.

Can you sort of remind me how big those areas are currently, and what you want them to become over time?

Sure.

Mid-Atlantic is probably about $700 million or so in loans outstanding.

And maybe $200- $250 million or so in deposits, so we've been in those markets and building up those markets over the last 10 years.

So it's a pretty meaningful booking business today, and as you saw linked quarter growth there was pretty strong.

In terms of our Texas markets, they're still in their infancy stage.

We just stood those up, I believe we have four or five existing employees there and they've been building out more of the infrastructure.

Now we have had really good pipelines and have closed some deals, but those are still very, very small.

But we do expect them to provide meaningful growth opportunities, profitable ones, over the next several years.

That's helpful.

And one last question, the tax rate sort of jump between 23%, 28% for the last year and a half or so, is 28% sort of the normalized rate we should use for your guys, or how should I think about that?

Yes, I would say assume 28% to 30%.

This quarter was positively impacted by some low income housing partnerships, credits, that we received in the quarter.

So they should smooth out over the next quarter to year, so I would use 28% to 30% as appropriate.

Okay.

Great.

Thank you very much guys.

Christopher Marinac, FIG Partners.

Thanks, good morning.

BJ or Bryan, I was curious on your thought about a flat or flatter yield curve and the impact of that, just kind of looking at slide 13 again.

So it's BJ, Chris.

Certainly, it does not help as much as a steeper curve, but from the banking business perspective and our assets to be on the balance sheet, since a lot of our floating-rate loans are tied to short rates, not longer, we can still get much of that asset sensitivity benefit.

Now, if we are buying in the securities portfolio it's a little bit harder.

A flatter yield curve is certainly not conducive to better FTN business, but on balance and on net for our Company, it's a positive if short rates rise even if the longer end of the curve is flatter.

Okay.

And then I guess just in general, will we see this figure at the 200 basis point kind of creep up further?

It seems like it has in recent quarters just as we've looked at each -- this chart each quarter.

I'd say, Chris, that actually, I think -- I'd have to go back and check but it's been relatively stable in the $63- $64 million NII impact.

A year ago it was actually around $70- $71 million and its come down modestly but it's been in this range for the last couple of quarters.

Okay.

Thanks for clarifying.

I appreciate it.

Sure.

Thanks Chris.

Kevin Fitzsimmons, Hovde Group.

Just a few quick questions.

Can you comment on the outlook for the pace of buybacks and specifically in relation to what happened the past year as you were approaching stress tests?

And I know there was a lot more significant questions on the legacy issues back then, so just looking to clarify, is there any risk of having to dial back those buybacks as you approach the next formal stress test?

Kevin, this is Bryan.

I don't think -- we're going to be opportunistic and we're not locked into any given pattern.

As I mentioned, and I think BJ reiterated, we bought back $24 million this quarter and I would expect that something in that range, maybe a little more, maybe a little less depending on what the opportunities are in the next quarter.

But in all likelihood we expect to see that buyback continue, as one we optimize our capital base, and two as we continue to generate strong earnings we expect to repatriate excess capital to our shareholder base and do it in the shareholder-friendly fashion; so we will be opportunistic.

Okay, thanks, and just one follow-up on your guidance on the margin, BJ.

You specifically addressed this next quarter, but it seems like it's a phenomenon of the deposit inflow that's coming in and a few other issues, but looking further out beyond that, if we're still in this rate environment getting into early 2015, would you guess that the margin would return to where it was in the third quarter or is it going to be somewhere in between?

Thanks.

Sure.

So if we're looking forward to 2015, I think we're going to stay in roughly this range, I would hope between 2.85% and 2.95% that we've bounced around if you look on one of our slides we had in the deck we had the last several quarters of our margin and it's been relatively stable in that range.

So I would expect that to continue even without rate rises.

Now of course, if rates do rise we believe we'll be above that.

But I think that range of 2.85% to 2.95% is appropriate to think about.

But BJ, is there any real important driver that puts you either at the low end or the high end of that range?

Well sure, I think the same impacts that we would have in the fourth quarter are going to impact the margin going into 2015.

I talked about, we do expect pretty strong deposit inflows.

We actually have to wire this morning to close our branch acquisition so that adds excess funds that we will have to put to work.

So those are high-class problems to have; those things are good.

Loans to mortgage companies are going to fluctuate and we have [$475 million] yields in that business.

Any fluctuation there can have an outsized and meaningful impact on the margin.

So that's certainly going to be an impact.

Trading inventories in our capital markets business, higher levels of inventory are going to cause lower margins; doesn't necessarily mean that it's bad business.

We're going to make the income off that dealer inventory, but it can certainly impact the margin.

So, it's the same types of things that we've seen, and again, I think that range should be what we're targeting over the next several quarters.

Kevin, this is Bryan, to piggyback on BJ's comments, we don't manage to a margin number per se, as BJ pointed out.

It's been very stable.

What we're really focused on is acquiring and building long-term profitable relationships.

And if we take on more deposits, that can have an impact but we see that as very value accretive.

If we book additional loans or we see fluctuations in our mortgage warehouse, those are all by-products of it.

But we're very focused on managing the overall profitability and managing it for the long-term and the margin really just sort of falls out.

So, you know, BJ talks about the range.

We're not managing to a certain number in that, we're trying to make the right decisions for the business and build the franchise for the long term and manage that overall level of profitability.

Okay.

Great.

Thank you.

Sure thing.

Jennifer Demba, SunTrust Robinson Humphrey.

Question about the infrastructure investments that you think you're going to be needing to make in the next, call it two or three years.

Could you just give us some more color about what you think you probably still need to do there and specifically what maybe related to cyber security if you can isolate that?

Jennifer, this is Bryan.

Most of the investments that we will make will still be in customer facing systems or close to customer facing systems, for example, our commercial lending platforms, for example.

Our customer facing mobile banking platforms, things of that nature that drive treasury management products, things of that nature.

We are spending marginally more money on cyber security, I would say that has been an investment that we have been ramping up over time.

We spend a lot of time focused on it.

We'll also continue to build out the capabilities around infrastructure in Houston, the Mid-Atlantic franchise, and even our Middle Tennessee franchise.

But in the context of overall numbers, as we commented a couple of different ways, we brought expenses down while making a lot of investments.

We expect to bring expenses down another $20 million to $50 million.

Some of that will be reinvested but we would expect our expense base will continue to decline while we make these investments.

Thank you, that's helpful.

One more follow up on the cyber security issue.

Bryan, do you get the sense that First Horizon is on the front end of that rather than in the middle?

Because it sounds like, just based on some of the calls we've heard so far, that seems to be more of an emerging area of investment.

You know, I don't know how to characterize it vis-a-vis others, so I don't really know how to answer front and middle or back.

It's an issue that Bruce Livesay and our technology team have spent a lot of time on.

Stephen Jones, who manages that for us, we've spent a lot of time working through these issues.

We have made substantial investment in the infrastructure.

But as you can see from the headlines that come up, the threats are coming from a lot of different places, and so we're always cautious that we don't know what we don't know and that we need to remain vigilant.

We stay involved in FS-ISAC and other organizations that help in the sharing of information.

We follow what's going on in the marketplace and then we work with our regulators and governmental agencies to stay on the front end of what's happening in the marketplace.

So although I can't characterize it front, middle, or back, I think we've made a substantial investment and I think we'll continue to invest there but I don't think it will be a huge incremental investment for us.

Emlen Harmon, Jefferies.

I understand you guys don't want to provide too much detail on the litigation reserve.

It would just be helpful to understand if that's for some of the existing issues that you guys have disclosed in your filings or whether that's something new that you're putting up the reserve for.

Emlen, this is Bryan.

You're right, we don't want to go into the details, but it's safe to assume that it's related to existing matters that we have disclosed in previous Qs and Ks.

Got it, okay, thank you.

And then just one other, going back to nonstrategic asset sales, could you help us, BJ, you noted already that the held-for-sale portfolio was obviously marked, would just be kind of curious in terms of differences between what was in that held-for-sale book and sold, and kind of what's in your nonstrategic consumer real estate book and how those assets comp?

Sure, so, what we sold out of the held-for-sale were largely loans that we had repurchased when we were doing the Fannie, Freddie mortgage repurchases so if there was a loan to be repurchased, we bought it back, we marked it, and then we managed it.

And so those were mostly -- they were all first mix of performing modified and re-performing and nonperforming.

So, you know, that is going to be a little bit different from what we have remaining in the nonstrategic portfolio, which consists of home equity lines of credit, some installment loans that are still outstanding, TRUPS, of which we have a portfolio.

So, they are going to be a little bit different and certainly those are held to maturity versus these being held-for-sale hence being more liquid.

But to the extent that we can find opportunities to make economically attractive deals on those, we will certainly look at that.

Got it.

Thanks a lot.

Sure.

John Pancari, Evercore.

Good morning guys, it's actually Steve Moss here for John.

Circling back to the nonstrategic loan sales here in this quarter, was the marked balance around $200 million for the loans you sold this quarter?

Let's see.

Trying to do it in my head.

Yes, about $200 million.

Okay.

And judging by what I see on the balance sheet it's probably about $120 million left in terms of nonstrategic loans held-for-sale?

Yes, there's about $150 million, I believe, $120 million of it is student loans that the government guaranteed, so basically net par; they're not going to fluctuate much on a marked basis and the other $30 million will fluctuate.

Okay.

And then one more thing with regard to loan yields this quarter, commercial loan yields came down 8 basis points quarter over quarter, perhaps a bit more than I would have expected given the increase in average balances for mortgage warehouse.

Just kind of wondering where you're seeing the competition and where the new money yields are coming in?

I'd be glad to take that.

This is Susan.

We are -- obviously competition is fierce for new loans.

We have seen positive grade migration, both in terms of existing clients as well as new business that we're bringing on, we're bringing on very high quality business, and so from a risk adjusted return often the spread on those loans obviously is lower.

But we remain disciplined in terms of the pricing and underwriting.

Steve, this is Bryan.

We talked a lot about competition for a while, and I think just reading what I have read over the last few days, I think people are still talking about it.

It's still a very competitive environment out there.

And I continue to be extraordinarily pleased with the work that our bankers are doing day in, day out, to maintain discipline in terms of pricing, to grow relationships, to make strong calling efforts, and to build the overall franchise value of the organization for the long term.

So, it is a competitive environment and it is one that you're going to see spreads of these moved up or down by a number of different factors, whether it's higher, lower risk borrowers and by necessity, lower spreads or various things of that nature.

But I'm very, very pleased with the work that our bankers are doing.

And it's not something that I think that we've commented on before, but the other thing that I'm kind of excited about is, the fourth quarter tends to be a little seasonally slower in a lot of ways in terms of lending volume.

Our pipelines going into the fourth quarter continue to be very strong so we're optimistic about the fruits of their effort as we move into the last part of this year.

All right.

Thank you very much.

You're welcome.

Kevin Barker, Compass Point.

Good morning.

Could you talk about the HELOC bids that you're seeing out there, given that remains the biggest portion of your nonstrategic portfolio?

And what are efforts you can look at in selling parts of your HELOC portfolio given there are quite a bit of payment shocks that are occurring over the next couple of years?

This is Bryan.

We haven't had any significant or any real effort to market the HELOC portfolio.

We are not emotionally attached so in the event that we find the right kind of opportunity we would certainly pursue it.

We've been dealing with the credit aspects of payment shock or folks going into repayment and Susan can pick up on this.

This is an aged portfolio.

We basically wrote a 515 or a 1010 contract, and I think the last loans that went into it basically were in 2007, so we've seen, and we've got a lot of experience of managing the transition from the revolving period to the payment period, and we've had reasonably good success in terms of our proactive efforts.

So I don't -- and one last point.

The credit quality updated in the appendix in the supplemental slides is the updated credit quality we refreshed FICO scores and we report the trends on credit quality and credit quality continues to remain very high, so it's been a good performing portfolio.

We don't see the transition from revolving to payment to be a huge issue.

Susan?

I will add to that.

We've actually seen the last five quarters where the annualized charge-off rate on HELOCs that have entered the repayment period come down, so we're very pleased with that.

I believe that's due to a couple of factors.

One, we do have a more proactive approach that we put in place about a year ago, a more proactive, where we talk to borrowers via online statements, messaging, that they have an upcoming pending their draw period we'll be entering new payment.

And we now reach out into the nine months in advance and text them several times as they are nearing the end of draw.

So we believe that more proactive approach is improving the charge-off rate there as families have an opportunity to adjust their budget.

The other thing, and we've done a lot of analysis on the payment shock, the average payment shock in our HELOC portfolio is about $470 and they go from drawing to repayment, and if you just look at the minimum payment compared to what the new payment would be, for [under oath], once they go into repayment, it's about 250%, but based on what borrowers are paying during the draw period they are paying more than that minimum payment and that reduces that shock to about 150%.

So we do, as Bryan mentioned, a lot of analysis here and we're very pleased the FICA scores continue to remain very, very strong.

So when I compare a second quarter to a third quarter, the increase in delinquencies and from -- on the 30 day delinquency level for the HELOC portfolio, would you consider that more seasonal or is that just a temporary blip that you are seeing, not something related to the payment shocks?

You know, we will see some seasonality in terms of HELOC delinquency, and occasionally you can have some larger loans that will cause an increase and it's not representative of, really, a portfolio change.

Okay.

Thank you for your time.

Thank you.

At this time we show no further questions.

Would you like to make any closing comments?

Yes, thank you, Amy.

Thank you all for joining the call this morning.

Please let Aarti or any of us know if you further questions.

We appreciate your interest and I hope you all have a great weekend.

Thank you.

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