First Horizon Corp (FHN) 2015 Q1 法說會逐字稿

Good morning and welcome to the First Horizon National Corporation first quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead.

Thank you, Gary.

Please note that the earnings release, financial supplement and slide presentation we 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 in our most 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, 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.

Thanks, Aarti.

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

I'm pleased with what we accomplished in the first quarter and feel good about the rest of the year.

Our Regional Bank delivered solid loan and deposit growth.

Our Capital Markets businesses rebounded.

We continued to prudently deploy capital and we made significant progress towards putting legacy mortgage issues behind us.

Our bankers' focus on calling efforts paid off with good growth in our specialty lending areas.

Year over year the Regional Bank grew average loans 14% with commercial loans up 15% and asset-based lending up 13%.

Commercial real estate grew 27% from customer growth and an increase in fundings.

Now the commercial real estate portfolio comprises about 9% of our Regional Bank loans.

Average core deposits in the Bank increased 9%.

We're encouraged by our bankers' success in winning new quality relationships as well as the deepening existing relationships.

At FTN Financial, average daily fixed income revenues were up 8% year over year.

FTN's broad-based delivery system and product capabilities enabled us to capitalize on the first quarter's improved market conditions.

As you saw last week, we resolved a key legacy mortgage issue.

We reached an agreement in principle with the DOJ HUD to settle certain potential claims related to underwriting and origination of FHA-insured mortgage loans.

Although the settlement impacted first quarters' expenses, this marks another major legal resolution.

Consolidated expenses, excluding the litigation charge, were down 2% from a year ago and the Regional Bank's efficiency ratio improved 234 basis points.

We remain committed to further controlling our costs.

Capital remains strong with a first quarter common equity Tier 1 ratio of 10.3%.

During the first quarter we bought back about 1 million common shares.

Recall we are somewhat limited in our share buybacks while we wait for the TrustAtlantic acquisition to close.

Our asset quality trends were favorable.

Nonperforming assets declined 31% year over year and net charge-offs were down 45%.

Overall 2015 is off to a good start.

The economy is steady and we're making good progress on key initiatives to achieve our bonefish targets.

Our balance sheet is strong, we're increasing our customer base and continuing to profitably and prudently grow our specially lending portfolios.

And our expenses are on track.

Improving economic profit remains the top priority.

We're continuing to provide new tools and databases to support our employees' efforts to measure RAROC and economic profit.

We're also beginning to incorporate economic profit into our incentive programs.

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

BJ.

Thanks, Bryan.

Good morning, everybody.

I'll start on slide 6. For the first quarter, as Bryan mentioned, net loss available to common $77 million or $0.33 a share.

Obviously we incurred the significant pretax expense related to the agreement in principle.

And so excluding that litigation charge, our net income available to common was $42 million or about $0.18 a share in the first quarter.

Slide 7 shows you an overview of our segment highlights, but let's go straight to some more detail on our core businesses in next few slides.

So starting with the Regional Bank on slide 8 where we continue to see strong profit and growth momentum.

From a profitability perspective, year-over-year net income was up 31% and pre-provision net revenue was up 13%.

Linked quarter they were down 6% and 7% respectfully -- respectively, excuse me, due to mostly seasonal factors.

From fourth to first quarter net interest income was down 2% due to day count and a decrease in loan fees which was somewhat offset by the increase in commercial loan outstandings.

Non-interest income was down 6%, again from seasonality in deposit fees and a decrease in brokerage and trust revenues largely driven by slower customer activity primarily due to weather.

Expenses declined 1% linked quarter and loan loss provision was $5 million in the first quarter, a decrease from the fourth.

Turning to slide 9 on Regional Bank balance sheet trends.

Average loans were up 3% linked quarter and 14% year over year.

Our specialty lending areas drove the majority of the loan growth.

Linked quarter we had a 5% increase in average loans and asset-based lending and loans to mortgage company increased 12%, reflecting higher refi activity in the quarter.

Core commercial loans grew 4% led by our -- led by growth in mid Atlantic and in Chattanooga.

We saw encouraging commercial utilization rates from borrowers in the quarter with a linked quarter increase in utilization of about 300 basis points.

Net interest spread in the Bank remained steady at 337 basis points in the quarter versus 336 in the fourth.

Our bankers remain disciplined with pricing and underwriting to ensure their balance sheet demonstrates our commitment to improving economic profit while delivering strong loan growth.

Turning to FTN on slide 10 and the fixed income business.

Net income was $7 million in the first quarter, up from $4 million in the fourth.

Fixed income activity was stronger in the first quarter with average daily revenues of $877,000 compared to $630,000 in the fourth quarter.

Expenses were up as you would expect due to higher variable compensation and the normal seasonal increase in FICA expenses.

The higher activity in the first quarter reflected improved market conditions from increased rate volatility that led to better flows across all of the desks.

Turning to slide 11 and looking at the overall Company balance sheet and margin trends.

Average total assets were $26 billion and were up 4% from fourth quarter to first quarter.

Linked quarter average consolidated loans were up 2% and core deposits grew 7%.

Average consumer deposits were up 4% while commercial deposits grew 9% driven by continued inflow from our customers and a seasonal buildup of cash in the first quarter.

As anticipated, our consolidated net interest income declined modestly from fewer days in the quarter and net interest margin declined 12 basis points to 2.74%.

The margin decline was driven largely by our excess liquidity position due to strong deposit balances and lower loan fees.

If we step back and put all of this into perspective by looking at year-over-year results, it is very impressive.

Total average loans are up 7% and average core deposits are up 11%.

Net interest income is up 3% with loan interest income up 3% while interest expense on deposits is down 18%, all while credit quality remains strong.

We're very pleased with how our bankers are managing to generate both strong balance sheet growth and improve economic profitability.

Turning to slide 12.

We continue to make meaningful progress with our efficiency efforts.

Since 1Q 2012, our annualized expenses excluding mortgage purchase and legal costs have declined 22%.

And year over year our consolidated expenses have decreased while we've continued to invest in revenue-generating opportunities.

In the Bank we're hiring talent in our markets such as Houston, Mid Atlantic and in Nashville.

And we've seen the good cost of higher variable compensation in Capital Markets related to increases in revenues.

And excluding litigation charges, we're continuing to see non-strategic costs decline.

Turning to asset quality on slide 13.

We're seeing continued favorable trends in our asset quality ratios, as Bryan talked about.

Linked quarter our net charge-offs declined 25% and our nonperforming assets were down 2%.

Loan-loss reserve decreased modestly and the allowance to loans ratio stands at 136 basis points.

New credits are of strong quality and we're pleased with the risk characteristics and performance of our loan portfolio.

Slide 14 shows the transition of our 4Q Tier 1 common ratio to this quarter's common equity Tier 1. As you can see, our capital ratios remain strong this quarter.

Impacts to our capital ratios were driven by the effects of the phase in of Basel III, which started in the quarter.

And the litigation charge which were somewhat offset by retained earnings.

Additionally we saw a linked quarter increase in risk-weighted assets from strong commercial loan growth in the Bank and an increase in trading assets at FTN.

With this quarter's legal matter behind us and solid earnings momentum, we believe that we will have further flexibility over time to utilize and deploy our excess capital profitably.

Wrapping up on slides 15 and 16.

We continue to focus and make progress towards our bonefish targets as the momentum of our core businesses improves, our non strategic portfolio runs off and we're moving past our legacy mortgage issues while deploying capital.

Our bonefish building blocks on slide 16 show our path to our long-term goals.

We will continue to control what we can control as demonstrated through the blocks of achieving efficiencies, profitably growing in our markets, improving economic profit and risk-adjusted returns across all of our businesses and deploying capital smartly.

Lastly, while we don't control when or at what pace rates will rise, we remain ready and able to capture significant revenue benefits once short rates do start to move.

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

Thank you, BJ.

As I said earlier, I'm pleased with the momentum we've seen so far in 2015.

Throughout the year we'll continue to strengthen our balance sheet, prudently manage expenses, wind down the non-strategic business and improve the economic profitability of the Company.

We should make ongoing progress towards achieving these bonefish targets that BJ talked about and building franchise value over the course of the year.

Thanks to all of our First Horizon employees for all that you do.

Now with that, Operator, we'll take questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan

I want to start now that you guys have the HUD settlement essentially behind you, how should we think about a good run rate for legal and professional fees for the rest of 2015 and then beyond that?

Hey, Steve, it's BJ, good morning.

If you look in the financial supplement, don't know if you've had a chance to do that yet, we've a seen a material decline already in our legal fees just with the timing of bills and such.

Clearly the DOJ FHA matter was a big drag.

So we've started to see that decline in a pretty material way, and we should see further declines.

I think we have roughly a run rate now of about $7 million in legal costs.

And so we think that that will continue to come down over the next several quarters.

Okay.

And then shifting gears to the Capital Markets business, saw a good increase obviously in volatility in the quarter and ADR was better but it's still below the low end of the range.

What do you ultimately think it will take to get ADR back into the targeted range?

Yes, so Steve I'll take that one.

We were very pleased with what we saw in our business this quarter.

And it goes to show you how quickly our platform can capture additional market volatility when it's there.

If you actually look daily at all of the trading days and what we saw, 30% of the days in the quarter were above $1 million.

And many of them were well above $1 million.

And so the volume is there.

The $1 million days are certainly there.

And so the more that we can capture that the better we're going to be able to generate revenue.

It's hard as we've talked about previously to predict what's going to go on in the markets.

And so don't know whether it's going go higher or whether it's going to stay where it's at.

But generally speaking we feel good about where it's at right now, has a good run rate for the next few months given that volatility continues to generally be in our favor in the business.

I guess BJ on the flip side of that, volatility is up but only 30% of the days were over $1 million and it's been quite a few quarters since we've actually seen you in the range.

Do you guys have conversations internally that this could potentially be a structural change to the business and not just a cyclical downturn?

Yes, Steve, this is Bryan.

We -- I think it may have been probably been two or three quarters ago, I think on this call we talked about that in all likelihood the business is going to be less than $1 million a day in ADR for the next several quarters and maybe into a couple of years.

So yes, it's entirely possible that we've seen a structural shift.

Especially because it's unclear how the reversal of the interest rate decline that's been going on in a holistic sense for 25, 30 years is going to reverse here in the near term.

So sure we think there's the potential that that has happened and we've put our plans in place around it.

To compensate for that we're clearly looking to expand our product capabilities and move into the municipal finance business and improve our general market municipal finance distribution and trading.

So yes we're not certain that you get back into that range on a consistent basis for a period of time.

But I think we can have as we've demonstrated this quarter, very nice profitability driven by something.

We're profitable last quarter at [$630,000], we're more profitable this quarter at [$875,000] and we're even more profitable at $1 million a day in average daily revenues.

So we think we can manage the business in a broader range of volatility if around average daily revenue.

But we're trying to position the business to grow.

But back to your question, sure we think that we could be under that $1 million ADR for the next several quarters.

And it's just really uncertain where these rates go.

Emlen Harmon, Jefferies.

Going back to the expenses was hoping to hit on comp line as well.

Up $13 million quarter over quarter, presuming a big chunk of the $8 million increase in Capital Market expense hit in that line is obviously some FICA in there as well.

Is there anything else driving that expense line higher and how should we think about the trajectory there going forward?

Yes, hey it's BJ.

Yes virtually all of the increase is from variable comp in Capital Markets plus the FICA reset that happened.

It's nothing that we're seeing.

We talked about that we're making investments in talent in Houston, particularly Nashville and the Mid Atlantic, but they wouldn't have a material impact on what you would see quarter to quarter.

You can actually see, you look at the supplement our aggregate FTEs in the Company are actually down.

So we're managing all of those expenses including compensation tightly.

I'm sorry, did you mention how much the FICA was on an all-in basis for the Company?

I don't have that -- don't have that with me, we can get back to you on it.

Okay, no problem.

And then obviously -- I want to talk about the NIM a little bit.

Obviously the addition of liquidity is a near-term weight there.

So you have a sense of how quickly you're hoping to deploy some of that liquidity either into the loan book or securities portfolio and what it could mean for a bounce back in the NIM over the next few quarters here?

Sure, so if you actually look our average balances and interest-bearing cash were actually up from the fourth quarter.

So about $1.45 billion versus the $1.1 billion in the first quarter.

So again as I talked about we had much stickier commercial deposits than I would have guessed which is a good thing.

We had a build up of cash that we normally see in the first quarter that added to that which was great.

But if you look at period end interest-bearing cash it's in the $450 million range.

So by the end of the quarter we had actually gotten it down significantly.

And so I see it in the second quarter in the $400 million to $600 million or $400 million to $700 million range.

So we're managing that cash down, but from an average basis you didn't quite see it in the quarter.

So I feel pretty good about that and how we're managing that down and putting it to good use.

In terms of the margin I think it's still stays in the 270s range for now.

And so depending on when rates rise, we think it stays there and then can move into the high 270s or the 280s depending on whether we should see short rates move soon.

Emlen, this is Bryan.

I'll editorialize and Susan may want to jump in as well.

I feel really good about, as BJ said earlier in his prepared comments, about the loan growth opportunities that we're seeing.

I think our structure and our pricing has been very good.

And as I look at loan pipelines as we transition into the second quarter here, our loan pipelines are very, very strong and we feel very, very good about the outlook for continued loan closings in the second quarter.

All of that said, we have seen in the first quarter an acceleration of the weakening of pricing and structure in the marketplace.

I may have commented in the past, we saw it stabilizing a little bit in the second half of 2014.

We've seen a further acceleration of that weakening of pricing and structure in the marketplace.

And so we think we see a lot of good growth opportunities in acquiring customers and building relationships.

And as I commented earlier, filling up these findings that we've got on commercial real estate.

So we think there are opportunities to put this cash to work in customer-oriented ways and feel very, very good about those prospects.

This is Susan.

I would agree with Bryan, we are seeing some excellent opportunities with both growing with existing clients as well as bringing on good prospects that we've been calling on for some time.

And we're seeing that strength across our specially areas which have been a source of strength for some time, but also across our core commercial teams and our markets.

And so it's good to see the strength in the pipeline.

But as Bryan said, we did see some probably some increased pressure in the first quarter on both pricing and structure.

While we remain disciplined, we do look for opportunities and we need to get a little bit competitive to win good business that we believe is good relationship long-term business for us.

We've also continued to see improved grade migration in our portfolios.

So the risk return profile remains very strong.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Bryan so you just mentioned (inaudible) loan pipelines were very strong.

I was wondering if we can elaborate on that a little bit in terms of where loan growth came from this quarter in terms of Tennessee, was it some of the other expansion in the Mid Atlantic markets that you've talked about?

And what's the outlook in terms of a breakdown of how much of that's likely to come from Tennessee versus outside of Tennessee?

Yes we've seen very good trends across all of the markets.

We feel like we're -- we still got very strong traction in West Tennessee and you saw a lot of closings in the western part of the state.

Middle Tennessee is building a tremendous amount of traction there.

And BJ talked earlier about building out the teams and hiring bankers.

We've hired and made a couple very key hires there in the last 90 days or so that will help us continue to build momentum.

We're seeing good opportunities across the state and our pipeline is pretty full.

We're also seeing very good opportunities in Houston.

As you see some of the reset going on in oil prices and energy lending.

We have a very strong the pipeline going into the second quarter there.

And then our Mid Atlantic market is also seeing great opportunity.

And it's really across all of the products.

I think we're getting very good traction in our C&I businesses as well as our commercial real estate businesses.

And then non-geographically-oriented the specialty business, mortgage warehouse lending continues to see good opportunities and opportunity to expand lines, pick up customers and our ABL businesses have been strong.

So Susan may want to comment further.

I would just add to what Bryan said we are seeing it across the board.

We do see increased momentum in Houston, as you may recall we opened that office in March of last year.

And so we're seeing a strong pipeline increase C&I and energy out of Houston.

Mid Atlantic remains strong.

And we had particularly good growth in our Southeast Tennessee market this quarter as well.

Understood.

And on a separate topic in terms of the HUD settlement behind you.

Does that make you more active in terms of looking at potential acquisition opportunities from you or how are you thinking about that from a capital deployment perspective?

Well I don't think it really changes our desire to put capital to work.

As we've talked about it and BJ commented earlier, we take a pretty disciplined approach to looking at dividends and buyback and deploying capital in the business.

And as BJ described, the roll forward in the charts of the common equity Tier 1, I got to make a shift in terms.

But you saw a lot of opportunity to put the capital to work in the near term and the balance sheet through loan growth opportunities.

So we're going to be disciplined, we're going to look for continued opportunities to grow.

We're pleased with the pending transaction at TrustAtlantic and we think there'll be other opportunities to grow the franchise.

But I don't think it changes whether we have our foot any more on the accelerator or any less, we're going to continue to be disciplined.

Paul Miller, FBR Capital Markets.

Good morning, guys, this is actually Thomas on behalf of Paul.

As a follow up to Steve's earlier question, I'm going to ask it a different way.

Of the $7 million of legal cost in the quarter, is there any way to get a sense of how much of that was attributed to the settlement that's now behind you?

No, this is Bryan.

I think a little bit of what you see in the first quarter is just some of the lumpiness and the timing of the billings.

There's going to be because of the timing of reaching the agreement on the settlement, there's going to be a little bit of follow on.

But as BJ said earlier, over the course of the year we expect that to trend line down and we think we could have significant savings in the $15 million-plus range over the course of the year having this kind of activity behind us.

Okay, that's great.

And then one quick follow up, you guys have talked about Houston a couple of times during the call.

I know the business is relatively new, where are you guys seeing the most opportunity there and what kind of loans are you looking to make in this sort of environment?

Thomas this is Susan.

As I mentioned before, we've now got bankers in Houston focused on core C&I, commercial real estate and energy.

And in looking at the most recent pipeline, we've got a strong pipeline in all of those categories.

Obviously we are watching energy prices as it relates to how it may effect Houston.

But we feel very confident about our ability to grow a very strong good book of business there with the bankers that we've hired.

Ken Zerbe, Morgan Stanley.

A quick question on the cash balances or the -- and also the commercial deposit growth, I think you heard you say that the average is like $1.45 billion, the end of period was $450 million.

Was any of that related to deposit outflows in the quarter or by at that quarter end?

Because normally first quarter should be seasonally a weaker quarter for commercial deposits but you had very strong growth, so I'm wondering if there was any -- or if you expect any of those commercial deposits to flow out or if they already have?

Yes, hey good morning it's BJ.

Yes, so we certainly expect some to flow out.

And like I said earlier I thought that we would see more outflow honestly from the normal ebb and flow of deposits from fourth to first.

So fourth to first they stay higher than what I would have thought.

We did start to see some of those balances as we would expect, come out towards the end of the quarter.

We would expect some more to come out trending toward tax day in mid-April.

And so we expect some of that to come back.

But with all of that said, the core deposit gathering that we're seeing in commercial deposits is very positive.

We're seeing it from core commercial clients, from business banking clients as well as public funds deposits.

So we feel very good about what the deposit base looks like.

Okay, great.

And then one quick follow up.

On page 7 of the slide deck, technical question, but you mentioned a tax benefit of $12 million in Corporate.

But it looks like it also happened in fourth quarter, is that a one time item or is that an ongoing benefit you get?

I think it's more -- I think term tax benefit, it's really more related to the Corporate segment has a net loss.

And so tax instead of having income tax expense it's a tax benefit.

That's all it is.

Got it, perfect.

Okay, thank you.

Kevin Fitzsimmons, Hovde Group.

One subject you did touch on it earlier, if you could expand a little bit is on buybacks.

Number one, the stock has done pretty well lately and is higher and you mentioned Bryan I believe that you guys are somewhat limited with the TrustAtlantic deal pending.

So if you could give us a gauge over the next few quarters, should we really expect to dial back or really little buybacks or what to look at from that front?

Thanks.

Yes, we still have, BJ can help me, I think it's in the neighborhood of $45 million or so in the current authorization that we have.

You are correct, I did say earlier that the TrustAtlantic closing is going to have some impact on our ability to buy in the near term.

But longer term we still think that there's value in buying back our own stock.

We're going to look for opportunities to repurchase and to do it in an opportunistic fashion.

As I said to the earlier question, to Ebrahim, that we look at it in a balanced fashion, we look at it in the context of overall capital deployment, et cetera.

But we think there are going to be continued opportunities to use the buyback as a way to get capital back in our shareholders hands and we'll look for opportunities to do that as soon as we can get free of some of these trading restrictions that are impacted by the merger.

Okay, one quick follow up, thanks Bryan, on the TrustAtlantic deal.

I know on one hand months ago we got the news about those commercial lenders that departed but on the other hand you've talked quite a bit today about your hiring efforts.

So where does that net out?

Have you replaced those guys or have you more than replaced them in as you're about to come into the Raleigh market?

Well I want to be really clear because it's real important for them and real important for us.

They're still an independent institution and they're still managing an independent institution and they have done some hiring to do some replacement there.

We think our opportunities to hire and build out once that merger is consummated in Raleigh is going to be really, really strong.

We're pleased with the team that we see there.

And we're hopeful that sometime over the next month or two we can get the final regulatory approvals, a shareholder vote comes up I think the early part of May, May 2 to be exact.

And then once we get the clearance from the OCC and the Fed, we'd like to get that consummated and we think we can continue to build on the momentum that they have in the marketplace and that we separately have in the marketplace.

Jennifer Demba, SunTrust Robinson Humphrey.

Could you guys talk about what your business development staffing looks like in the national market and how you'd like to continue to grow that over the next couple of years?

Yes, Jennifer, good morning, this is Bryan.

I pointed out just in the last 90 days we've made a couple of new hires.

We hired a very strong leader for our commercial banking effort there.

We also hired a new leader for our business banking effort in the marketplace.

We're having a lot of good conversations with bankers to continue to build out that team.

Carol Yochem who leads the market for us has been on board for a little over a year and has created a great deal of momentum.

And in fact, tonight we will open First Tennessee Park, or the National Sounds will open the First Tennessee Park there.

So we see a tremendous amount of initiative, we think our hiring efforts have gone very well over the last couple of months.

We think getting these key leadership positions filled and on the ground is going to create further momentum for us.

And that coupled with the strong customer calls that our team is making and the reception that these bankers are getting I feel very optimistic about our ability to make significant progress there over the next year or two.

Thanks so much.

Eric Wasserstrom, Guggenheim Securities.

A couple of questions, please.

The first is I'm looking at slide 14 which has the reconciliation of the Tier 1 common to the common equity Tier 1. And my question is the 10 basis points of reduction from the phase-in of Basel III, was that just from the exclusion of certain of the preferreds from the capital stack?

That has some impact on it, but then a lot of it is related to increased RWA.

Okay, yes so that was my follow-on question because the -- I'm having difficulty reconciling between the 50 basis points of RWA impact and then the change in GAAP versus RWA assets as disclosed in the supplement in the back pages there.

So can you specify how much of the RWA impact was from Basel III transition versus how much was from simple asset growth?

Yes, sure.

So I'm going to give you round numbers.

But let's say RWA I think was up $1.3 billion.

$400 million of it or so was Basel III impact.

$400 million or so was loans to mortgage companies growth.

$300 million or so was trading assets at FTN.

And the balance was loan growth, the rest of the loan growth that we saw in the Regional Bank.

Great.

And a follow up on the NIM discussion, I'm looking at slide 11.

And the reconciliation that you provide from the fourth to first quarter indicates there that basically half of the compression came from the deposit growth.

And so I'm trying to reconcile that trend with your outlook of remaining here in the low [270] range because I'm wondering if that suggests that to the extent this deposit growth continues, we would see a similar magnitude of NIM decline?

Yes, that's a good question.

Like I said, I think we've managed down our excess cash which is positive.

So I do think that we will see less of a drag on deposit growth and so that'll certainly be a positive.

Our bankers have done a great job holding yields.

But I think as Susan and Bryan both eluded to, it's getting harder to do that.

The competitive pressure that we're seeing there is pretty intense and we would actually say it's probably intensified in the last few quarters.

So we think that there will continue to be pressure on commercial loan yields.

So all of that said, I think I said earlier that we expected in the 270s floating up towards the higher end of that.

And then again if rates do start to rise at some point, we can see high 270s into the 280s.

Jefferson Harralson, KBW.

Hey, guys, I wanted to ask you about GE and how you guys compete with them in some ways?

I think specifically about asset-based lending, you guys had market share statistics where you look at what your market share is in asset-based lending versus theirs.

And do you think that them exiting the business has any impact on what you guys will be doing?

Jefferson, this is Bryan.

I guess our market share is certainly dwarfed by theirs.

Your question is -- requires a little bit of speculation.

But I think directionally there's likely to be as they go through some transition of selling these businesses and these assets there's going to be some dislocation.

And we think in some of these specialized areas there might be some opportunities to pick up some additional customer relationships.

And I think it may also be an opportunity for us to look at some fill-ins in the product set that we might be able to round out.

So we're relatively small in the asset-based lending compared to them.

But we do think that with this transition there could be some very nice opportunities for us to pick up some incremental or additional business and round out the product set.

Would you guys look to possibly buy some of these businesses or are these chunks going to be too big for you guys to look at that or will they be sold in small enough pieces some of these smaller business that it would be appropriate for a bank the size of yours?

Well it's hard, Jefferson, to know completely what their strategy would be.

But my guess is, is they're going to look for bigger transactions rather than smaller transactions for a lot of reasons and probably most importantly it's easier to execute.

So it's unlikely that we would be a participant in that because in terms of significance to those pieces of portfolio are so significant to our balance sheet, I doubt we would be a participant.

And is there any other areas of the Bank that touch GE or compete with them, I'm thinking about maybe the permanent market, maybe the pay down slowdown or pay downs aren't coming at more reasonable prices that slows it down.

Is there other places we should think about that might benefit you besides ABL or is it pretty much ABL where we should focus?

I can't think of anything off the top of my head.

I think it's largely the ABL businesses.

I think another piece of it is, is who acquires it, are they regulated financial institutions, how does it impact their short-term operating model, does it go into the unregulated space.

And none of that is known at this point.

So we think anytime we have transition in any of these markets, it's an opportunity to look for additional customer relationships that we can pick up and we'll certainly do that.

But we don't think there'll be a whole lot of direct impact on our broader balance sheet.

Geoffrey Elliott, Autonomous Research.

I've got two questions, one very specific and then the second much broader.

But the very specific question is the 10.3% common equity Tier 1 on page 14, is that a phased in or fully phased number?

And if it's a phased in number, what is the corresponding fully phased figure?

Sure, so that is the phased in number.

The fully phased in number would be in aggregate 30 basis points.

Okay.

And that'll come in over the next couple of years.

And then the broader question is on deployment of capital following the HUD DOJ settlement.

And I know you've talked some most in some of the other [conferences] but can you walk through how you think about where you should be in terms of capital ratios longer term?

And then how you would decide between M&A, buybacks, increased dividend, organic growth, what kind of ranking you put on those different alternatives?

Jeffrey, this is Bryan.

The -- if you go back to the slide following the slides you just referred to on 14, is our bonefish methodology.

And we still have eight to nine common equity Tier 1 or using the same numbers in Tier 1.

I think in broad numbers we still feel very comfortable with that being an appropriate range of capital through the cycle.

And as the economy continues to recover, as credit quality continues to recover and as we have made resolution of some of the significant mortgage overhangs like we talked about earlier in the call, it gives us flexibility to move in that direction over time.

In terms of thinking about how we prioritize capital, number one is always can we put the capital to work in the existing franchise by growing our business organically, can we grow customer relationships, loan balances, et cetera, and do it that way.

And then I would say two, and it's a tie, is do we use dividend and buyback policy or M&A to put that capital to work.

And that's really going to change based on, as you might expect, the variables in the marketplace.

What the stock price is at any one given point in time versus what potential we have to doing M&A transactions.

So we weight those consistently and we look at it back and forth.

As I said over a long period of time, we don't think that we have to warehouse capital to do potential M&A transactions.

We think that good transactions if you need to raise capital you can raise the capital for them.

And so we intend to be disciplined and look to put it in the highest and best use.

So it's really a tie for dividend buyback and M&A and we clearly want to look for organic growth opportunities.

And we continue to reevaluate it quarter to quarter and we'll be continually disciplined about it.

Thank you.

Christopher Marinac, FIG Partners.

BJ, another follow-up question on slide 11.

The interest rate sensitivity information that we've been seeing for awhile, how does it play out with a flatter or even just a negative yield curve if that were to occur?

Yes, so it -- to state the obvious, the flatter yield curve certainly hurts.

Particularly if it's flattening in the three to five year part of the curve let's say, and we've actually seen that.

If you look over the last three or four months, the curve has materially flattened there.

So that's certainly a negative.

But I think as I've said before, in aggregate looking at our balance sheet we have much more of a positive impact from short rates rising because 65% of our loans are floating rate assets that are repriced immediately and, we have a $3 billion or so repricing gap within 12 months between our asset repricings and our liabilities.

So we're going to do very well with whatever the yield curve looks like.

Clearly we'd want it more steep.

But if it flattens, we'll still get material benefit from the latent income that's in our balance sheet.

Okay, great, that's helpful.

And Bryan, a separate follow up for you.

We've seen two banks get sold in Chattanooga in the last month.

Just using that market as an example where you've got long-term market share history there, do you have to do anything different in a market like Chattanooga just to either play defense or to continue to be in the offense there?

Chris, I tell you we've got a really, really good team over in Chattanooga and they are doing a fantastic job.

Susan commented earlier about the strong growth that we've seen there.

And our team over there is doing a great job acquiring new relationships, building deeper and broader relationships and doing it in high-quality fashion.

As you probably know being close to Chattanooga, there's a lot of growth going on over there and you see a lot of industry coming in.

You see a continued build out around the VW plant that was built there a few years ago, Amazon's build out.

So we're optimistic about the prospects there.

I would say if we're going to do anything different, we're going to get more front footed with institutions going through transition.

We're not going to be more defensive, we're going to be more aggressive in the marketplace.

And I'm repeating myself a little bit, but with the team we've got over there, I'm very confident that we'll continue to grow share in the marketplace.

Great, Bryan, thanks for the color there.

This concludes our answer-and-question session.

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

Thank you, Operator.

Thank you, everyone, for joining the call this morning and thank you as well for your interest in our Company.

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

Thank you again to our team for all that you're doing to take care of our customer relationships.

I hope you all have a great weekend.

Thank you very much.

The conference has now concluded.

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