First Horizon Corp (FHN) 2015 Q2 法說會逐字稿

Welcome to the First Horizon National Corporation second-quarter 2015 earnings conference call and webcast.

(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, Amy.

Please note that the earnings release, financial supplement, and slide presentation we'll 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 mentioned 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 updated 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 these 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.

I hope you are all doing well.

I'm very pleased with the progress that we saw in the second quarter of this year.

As you know, we've been working for a number of years to reposition the Company, focusing on the bonefish and return on equity.

And we continue to see good progress there.

In the quarter, we saw solid loan growth, which led to solid revenue growth.

We continue to remain focused on expense control and our credit quality continued to look very, very good.

So I'm pleased with the momentum that we have as we start into the second half of 2015.

As you know, interest rates are a big variable for the industry and it looks like we are getting closer to the point where we will see liftoff from the Fed.

BJ, I'm sure, will talk more about expectations around margin.

We did see some improvement in the quarter.

So all in all, I'm pleased with the quarter.

I'm pleased with the progress we see headed into the second half of the third quarter.

And with that, I'll turn it over to BJ to walk through more specifics on the numbers.

Great.

Thanks, Bryan, and good morning, everybody.

I'll start really on slide six.

You can see for the second quarter, our net income available to common shareholders was $51 million or $0.22 a share compared to the loss of $0.33 a share in the first.

You will remember that our first-quarter results included the pre-tax charge related to a resolution of the DOJ HUD matter, so if you adjust 1Q 2015 for that settlement, we were probably in the $0.18 or so range.

In 2Q 2015, we did not have any notable items.

There are a few things that I think you're going to see through the rest of the slides that I think we are pretty proud of.

One is our operating leverage -- our revenue versus expense growth was again positive on a linked-quarter and a year-over-year basis, driven by very strong balance sheet growth and resulting revenue growth.

Our credit quality remains very solid, with loan-loss provision at $2 million and net charge-offs in aggregate of $9 million, or about 21 basis points.

You'll notice while the expenses look relatively higher than expected in the quarter, there were several smaller items that contributed to this.

And we still see expense discipline evident across the Company.

Slide 7 shows an overview of our segment highlights.

Let's just go straight to some more detail on our core businesses over the next few slides.

If you start with the regional bank on slide 8. Our regional bank performance continued this momentum and we are again pleased with the results this quarter.

Pre-provision net revenue was $88 million, up 11% linked quarter and up 7% year over year.

From first to second quarter, net interest income increased 7%, largely driven by higher commercial loan volume and an increase in loan fee collections as well as cash basis income.

Linked quarter, our noninterest income was up 10% in the bank, primarily due to a seasonal rebound in NSF fees.

But all of our regional banks' fee-based business line showed steady to higher results.

For instance, our brokerage fees were up 9% and our trust income grew 11% as we saw improving activity in these areas in the quarter as well.

You'll see in the bank, our loan loss provision increased to $17 million in the second quarter compared to $5 million in the first.

Though net charge-offs remain historically low, at $10 million for the quarter, the provision increase was driven by the strong loan growth that we saw, a continued extension of the loss emergence period assumption on commercial loans, and an increase in the reserve for a single credit related to fraud.

Overall, though, we believe our credit trends in the bank continue to be stable.

Expenses were up in the bank 6% linked quarter from higher personnel costs from investing in our growth markets as well as adjusting incentive compensation to retain talent, along with other various line items.

Despite this increase, linked-quarter overall expense discipline again remains solid in the bank.

Taking a look at the regional bank balance sheet on slide 9, we continue to see broad-based relationship growth across various lines of business and markets, particularly in our more economically profitable areas.

Overall, average loans were up 6% linked quarter and up 16% year over year.

Linked quarter, we had a 55% increase in average loans to mortgage companies, with strong purchase and refi volume flowing through our balance sheet.

Average commercial real estate loans grew 5%, with increases across our markets in multifamily, hospitality, retail, and other property types such as student housing and assisted living facilities.

Additionally, CRE borrowers continue to fund up on prior commitments.

Asset-based lending was up 2% linked quarter, primarily from consumer finance and factoring.

And commercial loans, excluding loans to mortgage companies in aggregate, grew 3% linked quarter and 13% year over year.

We still see pricing and underwriting remaining competitive.

Our net interest spread, though, declined only 2 basis points and 3 basis points in loan yield, which was somewhat mitigated by modestly lower deposit costs.

Our bankers continue to do a great job of focusing on economically profitable loans.

We're winning relationships with our calling efforts, product capabilities, and our balance sheet capacity.

And even with this impressive growth, we're still being disciplined about our risk and return profiling when we extend credit.

While fundings were again strong in the quarter, we are pleased to see that our pipeline looks to remain solid for the remainder of the year.

Turning to FTN financial and our fixed income business on slide 10, net income in fixed income was $6 million in the second quarter.

Our average daily revenues were $729,000 compared to $877,000 in the first.

Our second-quarter ADR reflected generally lower flows across the various desks, though on a year-over-year basis, all desks have seen increases.

Our expenses decreased 6% linked quarter, reflecting lower variable compensation.

For the first half of the year in aggregate, our fixed income product average daily revenue was about $800,000 and we are currently expecting that the second half of the year will be in a similar range.

Turning to the overall balance sheet margin trends on slide 11, linked quarter, you will see net interest income was up 6% due to the increase in commercial loans, higher loan fees, and cash basis income, as well as more days in the quarter.

These factors were somewhat offset by declining commercial loan yields.

And our net interest margin was 2.92%, up 18 basis points from the first quarter.

As you can see, most of the increase was driven by a lower level of excess cash as we were able to deploy most of our excess liquidity into loan growth.

We feel good about the strength of our balance sheet and believe we are well positioned for an eventual rate rise.

The benefit of our asset sensitivity will depend on the timing and nature of that rate rise.

We've previously given our rate sensitivity analysis in 100 basis point and 200 basis point increases, but we've now added for your convenience and information on the more likely scenarios of a gradual rate rise 25 basis point increase.

You'll see net interest income go up roughly 3% and a 50 basis point rise, about 4%.

Our beta assumptions for deposits remain generally the same as we have discussed previously.

Turning to slide 12, we continue to focus on efficiency efforts to optimize our expense base over the next 18 to 24 months.

We continue to streamline processes and manage our corporate real estate.

In the second quarter, we sold a building associated with our nonstrategic business and we've reduced square footage per FTE by about 24% from last year to this year.

We continue to rightsize our branch network with fewer financial centers with minimal customer attrition.

As we've discussed, we will continue to find efficiencies in appropriate areas, but we are also investing for growth in our digital capabilities, in our growth markets, and in our talent.

In the second quarter, we continue to make strategic hires, particularly in Nashville and Houston.

And we enhanced our compensation plan for some top producers.

Turning to asset quality on slide 13, linked-quarter credit trends remain stable.

Net charge-offs were essentially flat and loan-loss reserve decreased modestly.

The nonstrategic segment had a provision credit of $15 million, reflecting favorable delinquency trends and continued runoff of balances.

We actually saw net recoveries of $1.3 million in nonstrategic in the quarter.

Linked-quarter average loans in the nonstrategic portfolio declined 5%, were down 18% year over year, and represent just less than 14% of our overall loan book now.

Positive economic trends, such as lower unemployment and a rebound in housing, has continued to help performance in the home-equity portfolio, as has our proactive outreach to customers entering repayment phase.

Wrapping up, on Slides 14 and 15, we're making progress towards our bonefish targets as the momentum of core business has improved, with strong loan growth in the bank and steady performance from the fixed income business.

At the same time, our nonstrategic portfolio continues to wind down as expected.

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

Second quarter's return on tangible common equity was at 10.4%.

When we started discussing this building block slide, our ROTCE was about 8%.

So we've already seen some good improvement here.

Though we have significant upside to rising rates, hope is not our strategy for improving our returns.

We have plenty of controllable opportunities to improve our profitability.

We continue to find efficiencies in non-core areas, we're clearly taking advantage of profitable growth opportunities in our specialty businesses and higher growth markets, and our focus on economic profit is having a big impact.

In fact, our economic profit in the regional bank is up nearly 30% since 2013, driven by a much better and more granular understanding of the profitability of our business lines, products, and customers down through the organization and related enhancements to reporting and incentive plans aligned with our economic profit objectives.

We think that our focus here will continue to provide meaningful business performance advantages over the time.

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

Thank you, BJ.

It's still an extraordinarily competitive environment out there.

Our folks are working awful hard to win every deal that we have the opportunity to win.

And as BJ said, we're doing it with a strong focus on improving our returns in the business and a dedication to balancing the risks that we take with the return that we generate for our shareholders and positioning the franchise for long-term improved returns and shareholder stock price performance.

I'm pleased with what our team is doing.

Our fixed income business has been steady.

We see very good momentum in our pipelines and growth in the banking business while maintaining credit quality.

We're focused on controlling our expenses and improving results and we're looking forward to a solid second half of the year.

Thank you to all of the First Horizon folks that are serving customers every day.

And with that, operator, we'll now open it up for any questions.

(Operator Instructions)

Jefferson Harralson, KBW.

Hi, thanks.

Good morning.

I was going to ask about the -- now with the FHA HUD's case settled, should we see significant increases in expenses in the third quarter?

Or how should we think about the expense savings from that settlement?

Jefferson, good morning.

It's BJ.

Legal costs first half of last year to this I think are down over 25%, so you've seen a little of it.

But as you might imagine, when bills come in and such, it can be a little lumpy quarter to quarter.

And we saw a little bit of an uptick this quarter from the settlement and related bills for that.

So I think you should expect and continue to expect that legal costs will continue to come down from here as we clean up the bills from that.

All right.

And my follow-up is it looks like from your releases that you are equally as asset sensitive as you were before?

But you also had a lot of loan growth.

Can you just -- be it also has some new disclosure.

Can you talk about how your asset sensitivity changed quarter to quarter?

There wasn't a ton of asset sensitivity change, I'd say, in the quarter.

There's not much different that we're doing to manage the asset sensitivity.

We haven't shifted our focus really much at all in terms of fixed versus floating loans or using swaps or building the securities portfolio or anything like that.

So we are anticipating hopefully a start to the rise in rates later this year, and so we're trying to prepare for that.

And as you can see, I think we're well prepared to take advantage of it.

Jefferson, this is Bryan.

I'll add.

I think it's really important to reemphasize what BJ just described.

We are staying focused on managing our asset sensitivity like we have in the past several years.

We are not extending the balance sheet and taking additional interest rate risk or reducing our asset sensitivity by looking for duration and yield as we get closer and closer to rates taking off.

It's not clear that the Fed will do anything this year.

The language seems to indicate that there is a stronger -- or some possibility of that.

So you noted the additional disclosures.

I think what BJ crafted there was a very good attempt to sort of show you some of the interim steps between 0 and a 200 basis point rise.

Because I think everybody's expectation is that if rates do start to go up that those rates are going to be fairly measured and fairly gradual steps over the next several quarters to years in all likelihood.

So we just tried to create some additional information that would give you some interim steps between 0 and a 200 basis point move.

Okay.

Thanks, guys.

Steven Alexopoulos, JPMorgan.

BJ, I'm going to apologize in advance, but I missed your commentary on the margin?

I joined the call a little late.

Can you repeat that -- what your outlook was for the NIM in the back half?

Sorry.

Could you ask that again, Steve?

I apologize.

Could you repeat what the margin outlook was for the second half?

Sure.

Yes.

I don't think I had necessarily talked about it when I was going through the numbers, but clearly, we had a strong quarter on the margin.

We put a significant amount of the excess balances to work, so that was a big part of the lift.

Our bankers did a great job -- continue to do a great job of collecting loan fees; cash basis income coming back into NII as well as the volume.

So we had a lot of things hitting on all cylinders this quarter.

Loans to mortgage companies was certainly a big driver of the increase in loan yields from the commercial loan volume.

I think we were at $1.6 billion or so of average balances for the quarter in that business.

We expect that to seasonally come back to us in the third quarter and then probably more in the fourth as we would expect.

So that's probably 3 basis points or 4 basis points of outperformance that we think will probably come back to us.

Depending on what we see for loan growth the rest of the year, which we would expect based on our pipelines to remain pretty solid and steady, we think the margin is probably more in the mid-2.80%s range, given that come back on loans to mortgage companies and a little bit of fluctuation in excess cash balances.

Okay.

That's very helpful.

Thanks, BJ.

Bryan, on the fixed income business, I know it's early in the quarter, but we've had a good spike in VOL related to Greece.

Have you had many $1 million days in the cap markets business so far?

Or maybe (multiple speakers).

No, we haven't had many $1 million days, but a half a month isn't a trend either.

But given that, the average daily revenue was up slightly in the third quarter from where it was in the second quarter.

But if you look at the second quarter, second quarter started off pretty strong.

It's tailed off towards the end, as you got some of the discussions around Greece and the uncertainty there.

We're optimistic, Steve, that we're going to be in a range here -- I don't think it's going to fairly widely on the average daily volume of revenue over the quarter very much from where it has been the last couple of quarters.

But we think we are at a range that's probably a little bit better than we were in 2014.

And as rates start to move up, we think that we can continue to be pretty steady in that business, particularly as you get some of this volatility and back-up in the long-term rates that gives buyers an opportunity to come into the market and do some things.

So that's a long way of saying not many $1 million days, but slightly better than where we were in the second quarter.

Okay.

Got you.

And Bryan -- or BJ -- a final question.

When we look at slide 7, that $0.07 quarterly drag coming from the corporate segment?

Is there room to work that drag down or is that basically just what we should consider a normal run rate?

I think -- it's BJ.

I think what's in our corporate is on the revenue side of the securities portfolio.

And if you think about it -- I don't want to get into the mechanics of funds transfer pricing, etc., but if you look in the financial supplement, there's actually negative net interest income as we manage interest rate risk and hold the segments -- the regional bank segment kind of harmless for that interest rate risk.

So that's a large driver.

The rest of it is more corporate overhead type expenses: infrastructure expenses, institutional type expenses.

And on those things, absolutely we continue to work those down.

Those are things that are not as core to producing revenue and profit.

And so that's an area that we continue to look for efficiency in.

Emlen Harmon, Jefferies.

Just wanted to hit on the commercial -- go a little -- dig a little deeper on the commercial loan yields.

Those are up nicely on the quarter: 10 basis points.

It sounds like maybe a portion of that is related to the mortgage warehouse growth on average.

Would just be curious if there's any place else you are finding better yields.

And then just also how much was related to loan fees this quarter?

Yes.

So I think our loans to mortgage company business is clearly our highest-yielding business.

It easily averages anywhere from 4.25%, let's say, up to 4.50% in average loan yield.

So when we have seasonal upticks like we saw here, it has a disproportionate impact.

So we're pleased with that.

Core C&I is pretty tight.

If you've got solid credit, you are going to have a lot of pricing and underwriting competition, as we've talked about previously.

So there's not a ton of room there.

Where we do think that we have a competitive advantage and why we focus on it is some of our specialty businesses.

We think we get pretty good pricing in our asset-based lending business.

We think that we get pretty good pricing in pockets of our commercial real estate business.

We get pretty good pricing in parts of our correspondent lending business.

So those are places where we look for niches, where the risk-adjusted returns on making loans there are favorable to us.

So Susan, would you add anything?

This is Susan, Emlen.

I would echo what BJ said.

We are still seeing a lot of competition on pricing, but our bankers are remaining very disciplined.

And we're seeing the credit quality associated with the new business that we're bringing in has been very good.

Average grades are improving; continue to improve.

So the risk-adjusted return we still believe is very solid.

Emlen, this is Bryan.

I'll pick up on it as well.

We do a lot of work, as you can I guess conclude, focusing on RAROC pricing models.

And Susan referenced probabilities of default and things of that nature.

We also try to gather as much market data as we can from third-party sources and compare what we're doing vis-a-vis our larger competitors in the marketplace as best we can.

We recognize that's a rearview mirror of the world because it's historical -- two, three, six months old.

But we think we're doing a pretty good job on pricing and balancing risk.

And as BJ alluded in his comments earlier, we're seeing improving returns in our lending businesses by the focus that our bankers are putting on it.

Another point that I would make -- and you highlighted the impact of mortgage warehouse financing and the impact on the margin that that has in net interest income based on the yields on that portfolio.

That's a business that we recognize has more inherent volatility in outstandings.

It's driven by refinance activity and purchase activity, which has seasonal nature to it, as well as interest rate nature to it.

So we recognize that there are going to be ups and there are going to be downs and we are in a period where we've had a couple of very good quarters.

But we like the business a lot.

We are willing to accept a little bit of ups and downs because we think it has very attractive profitability and return dynamics to it.

We've got a great group of bankers who do a good job growing that business.

And so as you said, that had some positive impact on loan yields this quarter -- it could be next quarter.

It has -- because it's down a little bit, it brings the average down.

But on the whole, I think our bankers are doing a really good job of trying to manage the returns in the business with the competitive nature of what's going on in the marketplace and balancing risk and returns.

So overall, we're very pleased with what we are seeing.

Got it.

Thank you.

And then noticed you guys released $15 million of reserves on the nonstrategic book.

Was there a particular portfolio that drove that?

I'm guessing consumer real estate being the largest component is probably the bulk of it.

But is there a particular portfolio that drove the majority of the release?

Just kind of what are you seeing differently about credit performance there or reserves needs that are allowing you to get a little bit more aggressive releasing reserves?

Hi, Emlen; it's Susan.

Yes, we've seen improved performance in the home equity book in nonstrategic.

Even those entering repayments we've continued to see lower delinquency and lower charge-off in that portfolio.

We've also had continued runoff in the home equity portfolio.

With improving home prices and a stable economy, we were able to release those reserves in the nonstrategic book.

Susan, if I remember the numbers rights, I think we actually had a small net recovery in the nonstrategic consumer real estate --

We did.

-- which was a first, as far as I remember.

We did.

Is there an opportunity, I guess, for additional credit leverage there as we think out over the next year or so?

I think there could be if we continue to see the runoff that we've seen, which is -- as you look, we've had really good runoff the last four to six quarters and we expect that to continue.

And we've, again, seen several quarters where both charge-off rate and delinquency on home equity entering repayment has come down.

As BJ pointed out earlier, we're down about 18% year over year.

Credit quality and FICO scores continue to look good.

Performance has been good and we still have pretty healthy reserves allocated against that portfolio.

So as we've seen more of this progression from the revolving period to the amortization phase and get more comfortable, there's an opportunity for better leverage there -- credit leverage.

Ebrahim Poonawala, Merrill Lynch.

BJ, I just had a follow-up question on expenses.

I heard you on the legal expense -- that should go down.

But outside of that, you guys are obviously making a lot of investments from tech and new markets.

How should we be thinking about the excess run rate relative to the $218 million number in the second quarter?

I think I mentioned in some of my opening comments that there were several various items in there, some of which were timing, that kind of hit in the quarter.

I still feel very good about our expense discipline across the Company.

I still feel good about over the next 12 to 24 months taking expenses -- net expenses out of the organization.

But I think probably a good run rate for the second half of the year is probably in the $215 million range for the quarter.

Something like that is what I would expect and that depends on how strong fixed income revenues would be.

That's helpful.

And secondly, I guess, Bryan, if you can sort of remind us about capital deployment priorities.

Obviously, the stocks had a good run year to date.

And I'm just wondering as you sort of look out, both from an organic and inorganic standpoint, do you see potential now that with the legal HUD settlement behind you in terms of looking being more active on the M&A front and being able to pick up a whole Bank deal in some of the newer markets that you had gone into?

Yes.

Capital deployment is still one of our primary focuses.

You focused on returns -- that's one of the key levers to that and so we do focus a lot on it.

Given that we're still in the process of completing the merger with TrustAtlantic and our inability to buy back stock during the period from the mailing of the proxy, essentially, to closing, we've had capital build up just ever so slightly.

Some of that has been offset by what would be our number one priority, which we continue to fund profitable organic growth in our existing franchise and continue to build out our markets here in Tennessee, Mid-Atlantic, and the beginnings of growth we're starting to see in Houston.

So we want to invest organically.

We will continue to opportunistically use the repurchase program once we get the TrustAtlantic merger completed to use that program to continue to redeploy capital by putting it back in shareholders' hands where we can't profitably use it in the business.

And we will continue to look for opportunities to grow by building out our franchise.

Over the course of the last year, in fact -- and it has some impact on your earlier question about expenses -- we acquired the 13 branches from Bank of America.

TrustAtlantic will have some impact on expenses as well.

So we've pulled off two small, but very targeted fill-in acquisitions in markets that we think are important and we'll continue to look for that.

We do think that smartly priced and well-executed M&A is still a great way for us to put capital to work in the organization and do it in a way that allows us to leverage our expense base and does it in a way that allows us to build out our franchise for long-term profitability.

And then the last point I would make is we, like everybody else in the $10 billion to $50 billion range -- less than $50 billion, have sort of completed the DFAST process in the first public cycle and made those disclosures.

And our stress testing you see the results of running the scenarios, in particular the adverse scenario.

We continue to believe that we have a significant amount of capital that can be redeployed in any of these vehicles and that over the long term that we ought to work towards that 8% to 9% -- what do we call it?

Common equity Tier 1 now?

The ratios are changing names too fast for me.

So in that 8% to 9% ratio, where we are at 10.4% today.

So I think we have all the levers available to us.

We think they are all important and we continue to evaluate them all at various points in times differently based on the opportunities that are in front of us.

That was very helpful and comprehensive.

Thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you, good morning.

I jumped on a few minutes late.

Just curious about the geographic dispersion of your loan growth this quarter?

Hi, Jennifer; it's Bryan.

It was fairly broad-based.

There's a little graphic in there that sort of shows we had very good growth in markets like Nashville and Chattanooga.

We had more modest but very solid growth in Western Tennessee -- Memphis essentially.

Mid-Atlantic continued to be very, very steady and we are starting to get what we think is very good traction on very good opportunities in the Houston marketplace.

So we see it being very broad-based, but clearly, the big driver in the specialty lines of business would have been the growth that we saw in our mortgage warehouse lending.

Susan, anything you can think of that I left out?

No, I think Bryan covered it well.

We are seeing growth in the markets that we are targeting to grow: Nashville, Mid-Atlantic.

Chattanooga had some real business expansion that we're capitalizing on.

And in the mortgage warehouse lending business, the commercial real estate business, and asset-based lending business continue to be strong for us.

What's your stance on lending in the Texas market right now?

Given the uncertainty on what oil prices will do to the economy there.

Do you want an energy team there at some point?

Jennifer, we are being very cautious and the bankers that we've hired there are long-time Houston, Texas, bankers who have been through cycles like this before.

They are also being very prudent and cautious in terms of the types of lending we're doing on size exposures that we're taking.

We do believe there's an opportunity for us to be in the energy sector.

We've got a very small portfolio right now in energy.

With the price correction that's occurred, we actually think it's a good time to be getting with the right borrowers to be getting into that business, but we are proceeding cautiously.

Jennifer, this is Bryan.

I want to echo Susan's comment.

One, we've got a very experienced team of energy bankers.

And two, they have our mindset and they are cautious in what they do.

And the third point is that in some ways, energy lending is a little bit like commercial -- excuse me -- consumer real estate and commercial real estate lending in 2008 and 2009.

If you are not overexposed to it, there are good opportunities in the marketplace to do what Susan said, which is to work with very well-managed organizations and do very thoughtful and very well-structured and collateralized deals.

And so we think it's an opportunity going in with very limited previous exposure in this space and a great team to be opportunistic and build a business in a smart way.

It may be an opportunistic time.

Thanks very much.

Kevin Fitzsimmons, Hovde Group.

Good morning, everyone.

Good morning, Bryan.

Most of my questions have asked already, but just a couple quick follow-ups.

Should we look at the provision -- I mean, it looks on one hand on the core portfolio, it was much higher than it is normally this quarter.

But on the nonstrategic portfolio, you got the big credit coming in.

So it was kind of convenient that the two offset.

But looking out going forward, I wouldn't expect that kind of magnitude on either of those ends.

Should we be looking at the last few quarters as a guide to what you guys might be providing going forward?

Kevin, I'll take that question.

You know, we're very comfortable with our reserves.

We look at reserve adequacy, reserve models every quarter.

We've got a very rigorous process.

Our asset quality remains excellent.

We did -- as we disclosed -- we did have one fraud loss in the C&I book in the regional bank that caused a portion of that increase in the provision in the regional bank, along with loan growth, which was a good reason.

And then also it's a lengthening of the loss emergence period.

But I very, very pleased with the quality of loans that we have on our books and that we continue to put on our books.

And the excellent way our bankers monitor and service those loans after they are booked.

So I believe that our reserve levels are very good and at this point would not expect to see a lot of volatility.

Okay.

And just a quick follow-up on that same topic.

So the big credit taken on the nonstrategic portfolio this quarter was primarily, I would assume, on the HELOC portfolio.

And you guys mentioned how housing prices have improved and the economy is getting better.

But at the same time, we're coming up toward rising rates.

Was that a matter of debate at all or how that factors in the model that how are those HELOC loans going to perform?

They are performing well now, but how are they going to perform if all of a sudden, we wake up and we're seeing rates ratchet higher for those borrowers?

Thanks.

Kevin, as it relates to the nonstrategic book, we do analysis on interest rate shocks, just like we do analysis on shocks that the borrower is exiting the draw period and entering repayment.

And actually, the initial shock of a borrower exiting draw and entering repayment is the biggest shock that they will have.

There's about a 250% shock from a minimum payment to going into repayment.

But if we've not -- we've done interest rate shocks with 200 basis point moves and it really is not a big factor in terms of our loss modeling.

Okay.

All right.

Thank you.

Geoffrey Elliott, Autonomous Research.

I've got a quick question on TrustAtlantic.

It seems as if that's taking a little bit longer to close than you originally expected.

Can you discuss why that's taken a bit longer?

Yes.

This is Bryan.

We -- I guess we're nine months or so since we announced it, not quite.

And the process that we are working through is trying to gain the final regulatory approvals.

We've have the shareholder vote.

The process takes a little bit longer in the regulatory process in the event that you have letters or comment letters written from a CRA perspective, so it takes a little bit of time to clear those up.

We expect that we will get that wrapped up here in the third quarter and be in a position to consummate the deal sometime between now and the end of the third quarter.

And does the slightly lengthier timeline kind of influence the way you think about further M&A in the future?

Yes.

It does have some influence and it adds a degree of uncertainty, because the timing is not fixed.

And in an ideal world, when you announced an M&A transaction, you would know exactly that it's going to take you X months to get through the shareholder and regulatory approval process and you plan your conversions and start customer communication.

So it does introduce a degree of uncertainty.

We'll have a better sense when we see the ultimate time and how to think about future opportunities and what that means it terms of how we model and how we think about conversion timelines and customer communication.

But it does add a degree of additional uncertainty that from a preference standpoint wouldn't be there.

It would be a much more defined timeline that you could manage within and execute and communicate with customers and shareholders and do it all in a way that allows the regulatory process and their objectives to be achieved.

And do it in a way that allows you to facilitate M&A in the most efficient manner for shareholders of both organizations.

Thank you.

Christopher Marinac, FIG Partners.

Thanks, good morning.

Susan and BJ alluded to some of the commercial activity in prior questions, but I was just curious on the commercial loan yield increasing this quarter.

Is that something that we may see occur again in the next couple quarters?

Hi.

It's BJ.

I think that's hard in today's environment.

I think that a lot of the increase in the commercial loan yield you saw this quarter was our higher yielding loans to mortgage company business.

So like I think many of us have said before, pricing is pretty tight.

So generally speaking, we're putting loans on the books at close to what is coming off.

So we've been able to in aggregate keep our loan yield pretty steady, but it would be a tall order to try to expand yields at this point.

Okay.

And BJ, would that shift all if we do see one or two Fed rate moves in future quarters?

Sure.

Yes, absolutely.

That's where we'd see improved sensitivity -- or capture --

The benefits of it, yes.

The benefits of it.

Sure.

Okay.

Fantastic.

Thanks very much for the color.

Eric Wasserstrom, Guggenheim Securities.

A couple of quick questions here.

BJ, you've been very clear about the NIM dynamic, but I just want to understand, given where some of the excess NIM in the period came from, how should we consider sort of the base rate of NII dollars?

Should it be running around that $160 million to $161 million level that we've seen prior to now?

Good question.

I think it can be a little bit higher than that.

Again, it is going to fluctuate a little bit based on what we see with loans to mortgage companies.

But I would expect it to be hopefully north of $160 million and closer to the mid-$160s million than the lower side.

Okay.

Great.

And just to circle back on the trading revenues for a moment, I mean, the one area of strength that I think we saw in the period from some of the larger broker-dealers was in the rate product, which is where you are concentrated.

For many of them, that was actually up sequentially.

I'm just curious what you saw that you were down a bit?

BJ may have more detail, Eric.

What we saw -- because we don't have any -- we are not taking a proprietary position in it.

We are just matching up buyers and sellers.

We saw volume tail off a little bit in the quarter.

At this point, I have not had time to study any of what competitors have done, so I don't have anything useful to add in that regard.

Eric, I think generally speaking, what we are seeing is bank buyers are staying very short.

What they buy is typically product from us that has tighter spreads.

And if you look across any of the desks with trace and the transparency across the markets, spreads continued continue to tighten on what we make for each bond that we cross.

So as buyers are getting shorter, we're seeing less of the revenue from that.

So we want to serve customers the way they want.

They are staying short; that makes sense to them.

But we certainly see it in terms of how our revenue shows up.

Great.

That's very helpful.

Thanks very much.

Ken Zerbe, Morgan Stanley.

Thank you.

Good morning.

I guess when we look at loan growth, obviously mortgage was a huge positive this quarter.

But if we back out the -- I think it was $600 million increase in average mortgage warehouse loans, total loan growth -- I'm going to ballpark around a half a percent growth.

When you look out over the next several quarters into 2016, is there anything that meaningfully changes that?

Just given the runoff portfolio versus the growth in the regional bank -- X mortgage, of course.

No.

I think like I talked about before, we've been very pleased with the replenishment of the pipeline as we've seen strong fundings.

And that's not just in loans to mortgage companies -- that's been fairly broad-based.

And so again, we saw pretty strong fundings and the pipelines have remained steady.

So we think we can see good solid growth in the aggregate portfolio, not just loans to mortgage companies for the rest of the year.

So we're pleased with what we're seeing.

I think comps get a little tougher the longer you go, because we've had such outsized growth -- double-digit growth now for three quarters at least.

So it gets tough to keep that momentum, but we certainly believe that loan growth is going to remain solid for the next several quarters.

Ken, this is Bryan.

Depending on whether you are using averages or period end, you are likely to get different percentages.

But when we look at commercial loan growth in the banking franchise year over year X mortgage warehouse lending, it was up north of 10%.

So we think there's been very good momentum there.

And as we look at pipelines, as BJ said, we're optimistic about the progress or the prospects for pretty steady growth during the second half of this year.

Got it.

Understood.

I guess I was thinking more like total, not just C&I.

But I understand -- your point is taken.

So thank you very much.

John Pancari, Evercore ISI.

I just have a couple quick questions here.

Bryan, you were alluding to the profitability a little while ago about the -- of the mortgage warehouse business and everything.

And it's still very attractive business for you.

Can you update us: what is the current ROE for that business for you guys?

The ROE on that business is going to be right now in the 35%, 40% range.

It will ebb and flow, but even when you have loan balances like we are certain to have that are half of what they are today, the business still returns us about 20% on a risk-adjusted return basis.

So very efficient business, large average loan sizes, negligible losses, high yields.

So as Bryan said, we're very willing to put up with the variability of that when we see the profitability coming out of that business.

Because there's a lot of expense to leverage in the business, it is going to ebb and flow, depending on what volumes do.

And that's one of the reasons we like it.

It's got very good attractive returns at low volumes and they get really good in periods where average warehouse line size goes up significantly, because it doesn't require us to put any additional cost into the business -- or very minimal additional cost into the business.

So it's got very attractive returns and that's one of the reasons we are willing to accept some of the volatility it creates.

Okay.

All right.

And then secondly, on the HELOC nonstrategic book, what percentage of your 2005 and 2006 vintages of the HELOCs have been refied or paid down or reworked in some fashion to address the expiration of the withdrawal period?

We've had a number of them, but we would have to get back to you on the specifics, John, on that particular vintage.

That's where a lot of the CPR is coming from.

But essentially, you may remember from previous discussions on this.

This portfolio that we have in nonstrategic had the following basic characteristics.

It tended to be a lower yielding portfolio.

It was prime minus, typically speaking, and it had very high credit quality scores.

And what we did in the business pre-2007 was when we originate it, we would securitize ourself the higher spread product.

We kept what was the greater credit quality stuff.

Because of the yields on it, it didn't have a propensity to prepay early because it was hard to match that rate in the marketplace somewhere.

So as you've gotten to the period of amortization or repayment, that's when you start to see prepayments start to accelerate.

So a lot of the runoff that we've seen over the last couple of years is those borrowers either have a transaction on their home or they get to the point where they get into the amortization phase and we see it pick up.

And with the low interest rates available for permanent refinance, we've seen a number of borrowers chose that option as they are entering or are about to enter repayment.

Okay.

All right, that's it for me.

Thank you.

At this time, I'd like to turn the conference back over to Bryan Jordan for closing remarks.

Thank you.

Thanks, everyone, for joining this us this morning.

We appreciate your interest in the Company.

As we've said a number of different times, we continue to be very focused on the long-term objectives that we've laid out in the bonefish targets.

We continue to stay focused on that in what is sort of an interesting and competitive operating environment.

We continue to see good progress in the business and look forward to the second half of this year.

If you have requests for additional information, please don't hesitate to contact us, any of us, or let Aarti know and we will be happy to try to get you that information.

Thank you again to all our folks and thank you all for joining us.

Hope you all have a great weekend.

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