First Horizon Corp (FHN) 2015 Q3 法說會逐字稿

Good day and welcome to the First Horizon National Corporation third-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.

Please go ahead.

Thank you, Carrie.

Please note that the earnings release, financial supplement, and 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 report.

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 announcements materials and in the slide presentation for this call and it 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.

Thanks, Aarti.

Good morning, everyone.

Thank you all for joining us.

I'm very pleased with the results in the third quarter.

I think we showed very good momentum.

I'm encouraged by the strong loan growth that we saw in our banking units, especially in our specialty lending area, when you look at year-to-year comparisons and linked-quarter comparisons and adjust for the movement in our mortgage warehouse business.

We saw very, very good trends.

Susan is on the call with us and you'll hear more about credit quality, but I'm pleased in the continued strength in our credit quality and our credit outlook for the remainder of this year and the transition into 2016.

We're pleased that in the first few days of October, we completed the acquisition merger with TrustAtlantic.

We have the conversion scheduled for this weekend and we expect to have everything wrapped up by Monday of this coming week.

So we're excited about the progress we've made there.

As we look out into the next several quarters, it's pretty clear that the Fed has not moved rates at this point.

And we've come to expect that when the Fed does start moving -- whether it's later this year or sometime next year, maybe even 2017 -- that this rate cycle is going to have a much lower peak than we would have previously anticipated.

And that's going to put pressure on revenues, not only for us, but the industry, in our view.

And we look at this as an opportunity to capitalize on the work that we've been doing around one, controlling costs.

And two, to continue to continue to capitalize on the tools that we've put in place around profitability -- economic profitability.

Tools that allow us to analyze lines of business, relationships, and continue to drive value out of the existing business.

So we look at the rate environment as continuing to be challenging and probably going to be structurally lower for an extended period of time, which means that we and others will have to continue to look at how we do business and make adjustments in business models that really reflect a structural change in interest rates.

As a result, too, we probably will reduce some of our asset sensitivity over the next several quarters.

Not take it out completely and probably not more than just a minor reduction, but we'll look at how we put additional fixed rate assets, whether in the lending portfolios or securities portfolio, to bring down some of that rate sensitivity.

We will stay focused on expenses, as I just mentioned.

Our goal for 2016 is to achieve efficiencies and continue to reinvest those in the business with an overall objective of keeping our expense base flat in 2016.

We also expect to begin to reinvest in stock repurchases to distribute capital to our shareholder; repatriate capital to our shareholders through stock repurchases.

We -- in the period leading up to the completion of the TrustAtlantic merger, we were in a position where we couldn't buy any additional shares.

With that wrapped up, we expect to be back in the market opportunistically over the next several quarters and accumulate some additional stock.

So overall, really pleased with the progress that we're seeing in the organization.

Continue to be very pleased with the momentum in the Company.

I'll turn it over to BJ now to walk through some of the financial results.

BJ?

Great.

Thanks, Bryan and good morning, everybody.

I'll start on slide 6, which is a view of our consolidated results.

You'll see for the third quarter, our net income available in common was $67 million or $0.29 a share compared to $0.22 a share in the second quarter.

Our core performance, as Bryan talked about, was strong and we're very pleased with how our businesses are operating.

And we also had a few notable items that helped in the quarter as well.

You would see back on slide 4 pre-tax gain of about $8 million related to an amendment of our retiree medical plans; pre-tax gain of $6 million from the retirement of one of our TruPS this quarter; and we had about $4 million -- $4.5 million or so of discrete tax credits and capital loss carryovers that reduced our effective tax rate in the quarter as well.

So just wanted to note those and make sure you were aware of those.

Slide 7 shows an overview of our segment highlights.

You can take a look at those, but let's go straight to some of the more detail on our core businesses in the next few slides.

I'll start with the regional bank on slide 8.

Linked quarter, our net interest income in the bank was flat, as growth in various specialty lending portfolios was offset by about a $200 million decline in outstandings from our loans to mortgage companies portfolio.

Noninterest income was down about 5% linked quarter, as increases in deposit fees were offset by lower fees in brokerage and trust, as market returns were obviously softer in the quarter.

Expenses were in line with our expectations and decreased 6% linked quarter, largely driven by an item related to the amendment of those employee benefit plans I talked about.

But our expense discipline in the bank remains strong.

Our loan-loss provision in the bank decreased to $7 million from $17 million in the second quarter.

You will remember that second quarter's provision was higher, driven by an increase in reserve or one single credit related to borrower fraud.

Turning to regional bank's balance sheet on slide 9, we are again pleased with the broad-based growth we're seeing across all of our portfolios.

In particular, we're encouraged by our specialty lending areas since they are strong drivers of economic profitability.

Overall, average loans were up 11% year over year.

Loans were flat linked quarter as continued strong specialty lending growth was offset by that decrease in loans to mortgage companies.

From second quarter to third quarter, we saw 4% average growth in both our asset-based lending and corporate portfolios.

The ABL growth was across the mix of industries, such as consumer finance, commercial factory, transportation, manufacturing, and distribution.

Average commercial real estate loans grew 6%, with increases across all markets and product types.

Average commercial loan growth, excluding loans to mortgage companies, was up 2%.

And while pricing and underwriting remain competitive, our bankers are clearly managing to find plenty of opportunities to make economically profitable loans and pass on ones that don't make as much sense for us.

As we sit here today, our loan pipeline continues to look fairly stable.

Our customer sentiment we believe is mixed across our geographies.

Some continue to feel very strong; some were a little more cautious, but we wouldn't necessarily say negative.

We're seeing good opportunities in growth markets, such as middle and southeast Tennessee.

The borrowers seem to be a bit more cautious in Houston.

Turning to FTN and the fixed income business on slide 10, our net income was about $4 million in the third quarter.

Our average daily revenues reflecting continued muted market conditions was about $671,000 a day compared to about $730,000 in the second quarter.

Expenses were down, as you would imagine, primarily reflecting our lower variable comp.

We see trading volumes continuing to remain modest.

But again, we've done a good job of holding share.

And in some cases and some desks gaining share.

We continue to invest in the business and are focused on increasing market share through strategic hires primarily, our municipal product expansion, and developing our public finance capabilities.

Turning to the total Company balance sheet and margin trends on slide 11, net interest income was up 3% year over year and down modestly linked quarter.

As expected, our net interest margin declined 2.85% from 2.92% in the second.

The linked-quarter decline was primarily driven by a reduction in loan fees and cash basis income, which were elevated in the second quarter, as well as the continued effect of nonstrategic loans running off the balance sheet.

The net interest margin in particular was further impacted by higher cash balances on our balance sheet.

Average balances were roughly double in terms of excess cash at the Fed relative to what we had in the second quarter.

For 4Q 2015, we expect the margin to likely decline into the lower 2.70% range as we anticipate a meaningful buildup in cash balances, which we typically see towards the end of the year, which will have a sizable impact on the margin.

A reminder that while NIM may be pressured by the excess cash position, net interest income will largely be unaffected by the larger position in cash.

We do expect, though, that NII should have some more modest downward pressure as further loan growth will be helpful, but will likely be offset by seasonal declines in loans to mortgage companies, more modest loan fees at the end of the year, and continued challenges on holding loan yields steady.

Liability side of the Bank's balance sheet showed good performance as well.

A key factor in improving economic profit is deposit gathering, and average core deposits in the Bank grew 16% year over year and about a percent linked quarter.

And according to the most recent FDIC data, we regained the number one position in deposit market share for the state of Tennessee, growing faster than our footprint market.

So we're certainly proud of our bankers for doing that.

Turning to asset quality on slide 12, linked quarter, our allowance for loan losses declined to about 126 basis points and our NPAs declined 9%.

Net charge-offs increased from $9 million to $12 million in 3Q 2015, which includes an $8 million charge-off related to borrower fraud.

Overall, however, our credit trends continue to remain strong, with consumer trends improving and commercial loan trends remaining stable.

Wrapping up on slides 13 and 14, we feel great about the momentum of the core businesses.

We have good loan growth in the bank and steady performance in the fixed income business.

Our nonstrategic portfolio continues to wind down and now stands at only 13% of our total loans outstanding.

We'll continue to focus on strong economically profitable loan growth, low-cost core deposit gathering, controlling expenses, and looking for ways to put more excess capital to work.

Our bonefish building blocks, as you've seen before on slide 15, continue to show our path that we're following towards our long-term goals.

With a prolonged low rate environment, we'll continue to focus on controlling what we can control: that's improving our profitability with managing expenses tightly, profitably growing and investing on in our expansion markets, improving economic profit with existing books of business, and smartly deploying our excess capital.

With that, I'll turn it back over to Bryan for some closing comments.

Thank you, BJ.

That list you just went through at the end is really emblematic of the long view that we take in the organization in creating long-term shareholder value.

We do recognize that on a quarter-to-quarter basis, particularly with businesses like FTN Financial and Mortgage Warehouse Lending, where you have a little more ebb and flow in revenue sources, it can be hard to forecast.

But we are committed long term to the bonefish, driving higher returns and improving profitability while controlling costs.

And most importantly, continuing to focus on key and core customer relationships and building a high-quality balance sheet and franchise for the long term.

Thank you to the First Tennessee, First Horizon, FTN Financial folks that are on the call for all that you are doing to help us build the business.

And now, Carrie, with that, we'll open the call for questions, please.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Bryan, I wanted to start -- in terms of the commentary around reducing the level of asset sensitivity, could you frame for us the actions that you are contemplating and maybe the timeline that you will move forward with those plans?

Steve, yes.

I didn't probably do a very good job of dimensioning it.

We're probably thinking somewhere between -- we are I think at about $77 million or high -- 11% 200 basis point move.

We'd probably reduce that into the high single digits -- probably the 9% to 10% range.

And so I'm not talking about a significant shift.

But what we would look at doing is putting more fixed-rate assets in either an absolute sense in our securities portfolio or fixed-rate lending.

Or we could use derivatives to take a portion of our floating rate assets and swap them to fix.

But something of that nature, which would put more duration in our balance sheet.

And is that something you expect to start near term, Bryan, or is it a 2016 plan?

I think we'll probably get some signaling in the next week or two out of the Fed statement -- FOMC statement.

But our sense is it's probably something that's going to start here in the fourth quarter.

Okay.

And then in terms of the ADR, in the past, higher levels of vol was a really strong driver of ADR.

Why is this not translating into stronger ADR today?

Well, BJ can add to this as well.

Part of the -- I think if you go back and you look at third quarter year to year to year, third quarter is always slower.

So you have the seasonal effects of July and August, which just tend to be a period of higher vacations and lower activity.

I think the lower volatilities today are -- particularly September -- as much driven based on what the interest rate environment is going to be; what action the FOMC is going to take or not take.

And I think there's been a lot of wait and see.

And as the Fed statement came out, interest rates came in, bond prices rallied.

And so I think that's driven contraction in activity.

So all of the volatility has been uncertainty and then sort of rally in rates.

I think another point I'd mention is roughly 50% of our book is depository institutions, which are mostly buying agency MBS, maybe a little bit of municipals, and then total return, which is more corporate.

And corporate desk has done pretty well.

So when volatility has been in the market, it's mostly been there.

And so we've seen some good days out of that desk.

But on the bank side, even with some of the moves in the 10 year bank, clients are generally still staying pretty short.

There's not a ton of buying.

So we've certainly held our share, as I said, on those desks and maybe even modestly grown it.

But those products certainly haven't been as volatile as some of the others.

Okay.

Great.

Thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Bryan, in your opening comments, I think you mentioned that you wanted to keep the expense base flat in 2016 versus 2015.

But your expenses, plus or minus, have been a little bit volatile.

What -- is there a base number that you had in mind in terms of what you consider the flatness will be off of?

You are going to get me to pin the tail on the donkey.

I'm going to make BJ do that.

I generally think about it in this 850 range.

BJ, you may want to fine tune it from there.

Yes.

So I think Bryan is right.

I would also add about $8 million to $10 million for the TrustAtlantic expense base.

So I kind of peg it at about 860.

And I think to Bryan's point, depending on where FTN revenues go, if they are up, it will be higher than this.

But I think staying largely in that 860 range next year is kind of what we're targeting, which looks probably like anywhere from 210 to 220 of expenses a quarter, depending on the ends and outs of variable cost.

So that's what we're targeting.

Perfect.

Okay.

That helps.

And then another question just in terms of buybacks, now that TrustAtlantic is done.

Bryan, you mentioned that you would be back in the market buying back shares, but how aggressive could you be?

Obviously, from a common equity Tier 1 ratio, you are still well above your long-term targets for bonefish.

Rates aren't moving up anytime soon.

Just wondering if this is going to be more of a drawn-out process or something you could get a little more aggressive near term with?

Well, Ken, we're always going to be opportunistic about it I guess is the best way to describe it.

We're going to be smart in the way that we pick our spots and the way we repatriate capital.

Clearly at lower price to tangible book value, it's an easier decision for us to be more aggressive than it is at higher prices to tangible book values.

But we do think long term, we create value by getting excess capital back into our shareholders' hands and at the same time doing it in ways that allow us to own more of our stock.

So I wouldn't describe it as overly aggressive and I wouldn't describe it as overly passive.

We've not done much for the last six months or so since the proxy was made on TrustAtlantic, but I think we'll find opportunities in the fourth quarter to begin the repurchase program.

Paul Miller, FBR Capital Markets.

This is Jessica Ribner, in for Paul.

Just a quick question on the credit side.

And I know we've talked about this in the past, but how do we think about your exposure to -- primary and secondary exposure to the markets affected by the energy -- the downturn in energy and commodity prices?

Jessica, this is Susan.

We -- as you know, we entered the Houston market just about a year and a half ago.

So we came into that market at a time when -- not long after we entered, the prices started to go down.

So we have a very small direct energy portfolio at this time.

So we're -- in terms of the true energy direct portfolio have very small exposure there and actually see it as an opportunity to get in when prices are lower.

In terms of other sort of indirect, we've actually -- there's some benefit in some industries to lower fuel prices, energy prices, things like transportation, where we do have some exposure through asset-based lending in our core commercial portfolios.

But it is something that we are continuing to watch and watching how it affects Houston overall, not just the energy-specific sector.

And our bankers in Houston are very focused on that and they've been through these sorts of energy cycles before.

All right; great.

And then just one more on capital deployment.

How do you think about pricing now in terms of M&A in your area?

Are there still really great opportunities or have prices -- are prices just a little bit too high?

Well, I'll start and BJ can put the fine points on it.

I think M&A is very opportunistic and it's hard to generalize about pricing.

As I've articulated in the past in a number of different settings, we think MOE or lower premium type transactions, where both sets of shareholders realize the benefits from synergy, are very important.

And typically, those are larger type transactions.

And from our perspective, focusing on transactions that really move the needle in allowing you to gain leverage on your cost and expense base and deal with some of the structural things that I talked about in my opening comments are probably most impactful.

So it's hard to generalize about pricing-specific -- there are a number of transactions, smaller transactions that get printed.

There was a couple this week, in fact.

But we look at it as most importantly what does it do for our franchise and how does it add to our franchise and how does that deployment of capital play out long term versus alternative uses of that capital?

All right.

Great.

Thank you so much.

John Pancari, Evercore ISI.

This is Rahul Patil on behalf of John.

Just question on your loan yields.

They were down 8 bps and you mentioned on the call earlier that apparently there is a challenge to maintain loan yields at current levels.

Can you discuss where any particular markets that you are seeing an increased loan price competition.

And then just where the new loan yields are coming in and how that compares to your current portfolio yields?

Sure.

It's BJ.

Actually, I think from quarter to quarter, they went down, but year over year, our loan yields are relatively flat -- maybe down a basis point.

So I think our bankers are doing a pretty good job of trying to hold the line as best they can.

But we've got two-thirds of our portfolio that's floating rate.

And so that's staying pretty low and so we're going to be subject to a lower yielding portfolio.

So we think we're holding it pretty well.

But with that said, pricing and competition out there for assets is highly competitive.

I can't be more proud of what our bankers have booked.

Look at our year-over-year loan growth in the banks -- this is several quarters now where we've had double digit year-over-year loan growth.

So obviously, we're doing something right holding yields, and our net interest spread is holding up very well.

So you know, I think Susan can maybe give you a little bit more color on maybe pockets of where we're seeing most of the challenge.

But I would tell you, if I look relative to others, I'm pretty proud of how our yields are holding up.

We do have competition for loan yields, I think like everyone does.

But our bankers, as BJ said, are doing a great job.

As Bryan mentioned, we have a long view of our portfolio.

We're building a high quality portfolio.

We've continued to see positive grade migration both in our high pass grades, mid-pass grades.

And declining balances in low pass and non-pass.

So in terms of building that better quality portfolio.

So we really are focused on the total risk-adjusted return, not just the loan yield in a vacuum.

We see probably more pressure in what I'd just call core commercial, where you have more competitors throughout the market.

You've got large banks, regional banks, as well as community banks.

Specialty areas, it is a little bit easier to have more discipline around pricing.

There are fewer competitors.

But that being said, again, our bankers are doing a great job of focusing on the long term in that risk-adjusted return profile.

Okay.

And then how does that -- you mentioned about adding fixed-rate loans to kind of reduce your asset sensitivity.

So should we expect some relief on the loan yields going forward now that you are going to be adding the longer dated fixed-rate loans?

Well, as Bryan talked about, that will certainly help.

But as Bryan talked about, it's not like we are materially reducing our asset sensitivity profile.

We're moderating it, if you will.

So there will be some help.

Clearly what we're doing by reducing asset sensitivity is looking at the rate environment and saying can we capture more near-term net interest income without jeopardizing or hurting our ability to materially grow net interest income when rates due rise further.

So you should see a benefit from our net interest income in aggregate from some of the asset sensitivity reduction moves we'll make.

But I would make sure that you temper those with what Bryan said at the beginning.

I'm going to add, BJ, just a point on interest rate sensitivity.

I don't want to be -- at the risk of being redundant and in an effort to be clear, we believe that interest rates ought to go up.

We believe that the economy is strong enough and that interest rates ought to be higher.

But what we're talking about is adapting to sort of an interpretation or our view of a practical reality, which is they are not likely to go up very far, if they go up, and it's going to be very, very measured.

So we think it's appropriate in that context to bring that sensitivity down some.

But we think rates ought to go up.

So we're not talking about taking off our interest rate sensitivity or asset sensitivity leaning into higher rates.

We are saying we are going to pull it back a little bit to deal with the practical reality that results in a yield curve that probably doesn't reach above 1%, 1.5% in this cycle.

And so we're trying to adjust the balance sheet to deal with that.

Emlen Harmon, Jefferies.

Bryan, just given your view on the potential for a lessening of, again, rate cycle and you are potentially adding a little bit of duration to the balance sheet, if that were to come to fruition, do you start to think differently just about your longer-term ROTE goals?

Well, I think that's a question that we continue to have to look at and we'll be in the process of -- we're continually in the process of looking at those targets.

It seems unlikely in the near term that we're going to get in the 3.5% to 4% net interest margin range.

And that really raises -- I think it is going to be hard for the industry to push margins significantly and pressure on fee income, etc.

So I used the word structural earlier.

I think there's a structural change going on in banking that's going to really result in us thinking very, very differently over the next several years about how we drive profitability.

And some of the tools that I referenced are an important part of that.

But it's going to put additional pressure on cost structure and efficiency and delivery models.

And I think it's going to be complementary with the trends we're seeing in customer behaviors -- where customers are visiting branches less often.

They are using mobile banking, Internet banking, ATMs, and other technology.

All of those are going to sort of work together to say that we -- and maybe the industry as a whole -- are going to have to have more pressure or focus on how we control costs as we do business to deal with the realities of interest rates and revenue.

We're not going to be a sort of panacea because rates move up very significantly in this rate cycle.

So we think it really puts all of our business model as well as sort of our targeting on the table, but we're committed to driving higher returns.

We still think that we can be a 15%-plus ROE business over time, and we're committed to driving those returns.

Got it.

Thanks.

And then just a question on loan growth.

Looked like strong growth out of middle Tennessee and east Tennessee.

Just be kind of curious if you had an update on trends in other geographies.

Whether it's kind of Mid-Atlantic or Texas?

In terms of Mid-Atlantic, we've seen some growth in the commercial real estate group in Mid-Atlantic -- some good growth there.

We've continued to hire some CARMs in the Mid-Atlantic region that focus on core commercial.

So we're pleased with the outlook there.

In terms of Texas, as I mentioned earlier, we have booked business in Texas.

We've got commercial: commercial real estate and energy.

But we are growing cautiously in Texas; watching the effect of energy on the Houston market.

But our bankers do have -- that we've hired -- they are a great group -- have long-term relationships with key companies who have been in business a long time.

So we do see a good opportunity in the future for continued growth in Texas and Mid-Atlantic.

I'll add to Susan's comment as well.

But we feel good about our growth prospects all across the franchise, and I'll piggyback on the comments about Texas.

Susan and a number of us were in Texas the other night meeting with a group of customers and advisory board members.

And to a person, we came away very, very impressed with the team that's on the ground there.

But the Advisory Board that they put in place; the customers that we're building relationships with.

Jessica asked earlier about exposure to energy lending.

We think we're hitting that market in the right place and we've started to build good relationships with very high energy companies.

And so that's a microcosm of the example that we think there are good opportunities for us to grow this core business in a measured and thoughtful fashion with high quality relationships and do it in a way that builds a balance sheet that we're proud of for the long term.

All right.

Thanks for taking the questions.

Jefferson Harralson, KBW.

Thanks.

This is I guess kind of a follow-up on Emlen's question on the ROTE question.

You guys talk about structural change and the possibility for structural change, but yet you guide to flat expenses.

Are you thinking about -- are you going to be making structural change by reinvesting those into producers or is it the structural change is going to come more years down the road?

I guess how are you thinking about expenses, given that the rate environment may stay low and you may have a slower time getting to your ROTE targets?

Jefferson, this is Bryan.

We can give you a few examples.

One, we are investing in people.

We're hiring good people.

I just talked to and just talked about the buildout and the team we've hired in Houston.

We continue to hire in all of our markets.

Nashville, middle Tennessee, is another great example.

And in this environment, there is more -- although there's not a lot of inflation, labor costs have been trending up and we think that's sort of a reality of the business.

So we're investing in people.

We're investing in technologies that sort of get us to the new environment.

We've got incremental investments going into a new and emerging technology to replace some existing stuff and take us to the next level.

So there's a little bit of a bridge and we think longer term, that will yield greater efficiency.

We think over time that in an effort to control those costs, you will see us have a smaller footprint in terms of absolute number of branches in the franchise and things of that nature.

So it's sort of working both sides of the lever.

We don't want to cut off momentum in the franchise, but we want to be thoughtful about that control -- cost control for the long term.

Jefferson, it's BJ.

I might just add a little bit more.

We've got four major drivers: our margins, our annualized charge-offs, our fee income and total revenue, and our efficiency ratio.

So even though we think there's a lower rate environment, we do think that over the next couple years, there are rate increases.

It's just not as high as what we would have thought for the last several years.

So margins, we believe on the bonefish, are going to go up.

We are going to grow loans.

We're going to control deposit costs.

Our margin's going to expand.

On charge-offs, as far as the eye can see, we think that the credit environment is benign.

And looking at our balance sheet, consumer and commercial, we think the lower end of our current targets -- and maybe even lower than our lower end of the current targets -- are there.

So from a risk-adjusted margin basis, we think that we can continue to grow.

Expenses -- as we talked about, being flat in 2016 doesn't mean that they are not levered.

Meaning over the next couple years, I want us to target anywhere from 2 to 4 times operating leverage -- revenue growth over expense growth.

That's going to help our efficiency ratio.

So we have plenty of opportunities to do that.

And the last driver of returns is on the denominator, which is capital.

And Bryan talked a lot about us being able to get back into the buyback arena and we'll look for opportunities opportunistic ways to do that.

But we also think that we've got compelling opportunities over time to put that capital to work via acquisition, which will incrementally improve our ROEs on an acquired business and drive higher returns.

So we're constantly, again, looking at controlling what we can control.

The drivers are shifting, but we still feel confident that our path to get into those types of returns that Bryan talked about are achievable for our business.

Okay.

Great.

Thanks a lot, guys.

Ebrahim Poonawala, Merrill Lynch.

I just had one follow-up question, Bryan.

I think just listening to your answers, if rates don't really go meaningfully anywhere over the next year or two, I think you and the rest of the industry is stuck in a tough spot.

Going back to your comments around sort of looking at MOEs, do you see discussions increasing as you sort of look through all banks are probably going through the budgeting process for next year.

And outside of big improvement in the macro, they are going to be facing the same challenges that you are.

I'm just wondering what's the likelihood of a lot of banks reaching that same conclusion over the next 3, 6 months.

Maybe see a more meaningful pickup in, as you said, low premium deal activity, which makes a lot of sense strategically?

I'll speak for us; I won't presume to speak for the industry.

But I think if rates don't go up, I think it's a tough revenue picture.

And in all likelihood, that may be true for the industry as well.

I think from a rational or an intuitive perspective, I think that if we're right in our thoughts about sort of a structural change, I think that's a logical conclusion that I think people have to be thinking about how we see some consolidation.

Because greater assets on your existing cost base and taking out efficiencies is the way to improve returns and to drive profitability.

So I don't know that the budgeting cycle drives that.

I think there are always a number of drivers in management teams, and Boards all think about things very, very differently.

But I think if we are right about lower interest rates over an extended period of time and the cost structure that you need for investment in technology and changing business models is right, you are likely to see an environment where there are greater opportunities for M&A.

And back to my hope or expectation is it makes sense for the industry to think about how we do lower premium value of creating transactions for shareholders over the next year or two.

That's helpful.

And just a quick one on credit, BJ.

You mentioned about the provisioning impact this quarter.

It looks like [oil reserves at least] also picked up a little bit versus the prior quarter.

How much more room we have either from a dollar standpoint or the reserve ratio standpoint before we see any leveling off?

I think we've got -- we look at this in detail every quarter, as you might imagine.

So things could change, but the way that we've been seeing the performance of the portfolios over time -- particularly our nonstrategic portfolio, where balances are running off and credit is performing pretty well -- we see continued reserve release over time in our consumer portfolios and nonstrategic.

So we would expect that to continue.

If you actually look at the regional bank business, our reserve coverage has stayed largely steady.

And so we would expect that to continue and maybe even grow modestly as we continue to grow loans.

But you should net-net see a continued bias towards reserve releases due to the runoff nonstrategic portfolio.

Jennifer Demba, SunTrust.

I'm just curious on your perspective on the Nashville economy.

There was a New York Times article, I think this week, on the building boom there.

Bryan, do you think it's starting to get overheated in any way?

How do you feel about it?

It doesn't feel like it's overheating.

When you look at what's going on in Nashville, there is a great deal of momentum.

It is drawing people from all over the world.

Tourism is fantastic.

There is a lot of growth -- there's a lot of corporate growth there.

You can find data points here and there about a piece of real estate sold for a lot here and there.

But it doesn't on the whole feel like it's overheating to us.

We see Nashville being a very long-term sustainable driver of growth throughout the state and the middle part of Tennessee.

They just have a pretty good wind at its back right now and I think it's important for our business, but it's also important for our state.

We're not overly concerned about it at this point.

Okay.

Thank you very much.

Kevin Fitzsimmons, Hovde Group.

Bryan, there's been a lot of questions this morning on asset sensitivity and the margin.

But I'm going to throw one more in there and it's just more to look at it from a bigger picture.

You guys tend to always be listed as one of the top banks when people rank asset sensitivity.

You always have that slide that lists that latent income in the asset sensitive balance sheet and have always dealt with questions by saying you want to keep that asset sensitivity for when rates rise.

But now with where we're -- if I'm hearing your tone right here -- and coupled with the fact that you guys always talk about controlling what you are controlling -- how much of that margin disparity is really your control and your conscious choice on keeping that asset sensitive position because you guys thought rates were rising versus a more permanent just structural difference in your balance sheet?

In other words, if you wanted to, could you really peel back the asset sensitivity more aggressively and get your margin closer to a pure margin?

Because it seems like when you look at the bonefish metrics, that's the one that is the farthest off from where you want to be.

And it seems like -- we're hearing both that -- we're hearing two things.

We're hearing when rates rise, there's going to definitely be that benefit.

But you are also acknowledging that may be quite some time.

So --.

I'll start and then I'll let BJ sort of pick it up.

It's probably a little more in our control.

There is -- we believe that it's easier to manage a balance sheet that is asset sensitive or has asset sensitivity in it for a number of reasons.

There is a decision to be more or less asset sensitive that we can manage fairly easily.

I said a year or two ago, we're in our sixth year of rates going up in two years.

So now we're in our seventh or eighth year of it and in all likelihood, we've concluded that rates are just not going to go up as fast or as far as we think.

So we're likely to, as I said, pull that sensitivity back.

There is a benefit to pulling that back.

As you said, it does improve margins in the short run because you put on higher yields when you take more duration risk.

You have less benefit that you capture when rates go up.

So essentially you are just pulling that benefit forward.

So it is more manageable.

I don't think you'd ever see us go away from a position where we're less than asset sensitive.

We would always try to be asset sensitive.

We will manage that up or down depending on where we are in terms of Fed funds at any one given point in time or interest rates at any one given point in time.

But we do have some flexibility by how we manage.

It's not structural to the balance sheet.

Yes.

And I'd also add that we have strategically thought about which businesses we want to be in and which businesses we want to grow, which leads us towards a more commercially-oriented, more specialty lending-oriented balance sheet that's going to, in this environment, be inherently more short-term floating rate based or indexed.

So that's going to probably, relative to others and their business mix, take 15 basis points or so off of our net interest margin just by the way that we've chosen to do business.

Now the other thing that I think we talked about is net interest margin is important, but we also look at risk-adjusted margin.

And that takes into account the risks we are taking.

We have a very high quality portfolio consumer and commercial, we believe.

And quite frankly in today's benign credit environment, everybody looks good.

So if credit stays good then yes.

Our risk-adjusted margin is going to look modestly worse because of how we've positioned the balance sheet for customer accommodation.

But I have a high degree of confidence that when there is a credit crisis, we perform much better.

We do get more yield.

Our risk-adjusted margin gets a lot better relative to peers.

And we're very pleased that we kept the balance sheet is clean and as well priced as we have.

So there are certain trade-offs and like Bryan said, we'll take some of it off and we'll see more near-term income.

But it won't hurt us as much for the future.

Geoffrey Elliott, Autonomous Research.

Hello there.

Thanks for taking the question.

I wondered if you could discuss slide 14, the walk-through on how you get to the bonefish ROTCE.

And in particular, the changes you made to that slide at one of the recent investor conferences?

Geoffrey, it's BJ.

I'm sorry; I missed the last part of your question.

So slide 14, which is the walk-through from the current ROTCE to the target bonefish ROTCE.

You updated some of the moving parts in that at one of the conferences last month and I wondered if you could walk through it or kind of talk us through how your thinking has been changing on the different components?

Geoffrey, this is Bryan.

You are going to get me in trouble because you are essentially saying I didn't do a good job with it.

(laughter)

We'll talk after this phone call.

So what we tried to do is make this dynamic as we executed on certain things.

So really what changed that you would've seen it at Bryan's conference last month was we captured more efficiencies in our infrastructure, which is that first block.

We are capturing opportunities for growth in Houston, middle Tennessee, Mid-Atlantic, and other specialty lending businesses.

So as we look at it relative to our current ROTCE to where we are going over the next couple years, that shifts the opportunities for that block.

We're improving economic profit.

Bryan showed a slide, I believe, that showed you our economic profit up 30%-plus year over year.

And so that's -- we're moving the needle on that.

All of those things are controllable.

The other three are less controllable.

And you'll probably see as we update this that that top block going down based on the conversation that we've had.

But quite frankly, I think that optimized redeploy capital goes up, kind of like what I was talking about before: what we can control, we'll try to control.

So if rates aren't there, that's not a lever we can pull.

But we'll look to deploy our capital in ways that will help us continue towards our target.

But I guess on the specifics of what's changed between this quarter's presentation and the 2Q presentation, it looks like that optimize/deploy capital component has come down from a 1% to 2.5% benefit to a 40 to 90 bp benefit.

And then the fixed-income benefit has gone from 1% to 2.5% down to 0.7% to 2.2%.

So I just wondered if there's anything that you've seen, either in terms of your ability to deploy capital or in terms of the opportunity in that fixed-income business that makes you think the opportunity is smaller?

Good question.

Fixed income -- that's probably going to be the block that moves the most, just based on what we see in the current environment.

And trying to project that out a couple years in terms of what we think we can make is very difficult.

It's very hard to see past 90 to 180 days in that business.

So I wouldn't spend a ton of time, honestly, on the movement in that particular block.

But it sounds like we've got to do a better job of thinking about how to update this slide for you.

So we'll think through better ways to make it clear.

Jared Shaw, Wells Fargo Securities.

Just to circle back or close the circle maybe on the transition to more of an asset neutral position -- or interest rate neutral position, looking at the duration of the securities portfolio this quarter, it came down, became more asset sensitive, the cash went up.

How should we be looking at sort of the pacing of maybe looking at an extension of the securities portfolio duration or the paydown of cash, whether that's into more purchases or more buybacks over the next few quarters?

I think we've got -- I think you could expect that our securities portfolio would get larger.

So just buying additional securities would be one way that will dampen that sensitivity relatively quickly.

The second is we've got about roughly $50 million of gains, so we could do things like bond swaps.

We could extend the duration that we're looking at, which is all the things that we're considering to dampen that sensitivity and bring more near-term income.

So those are the what I'd call relatively easy ones.

The ones that take a little bit more time are customer-related: fixed to float or float to fixed swaps.

And those types of things, as opportunities arise, we'll start to do those over time.

But those first two I mentioned are things that we're thinking about right now.

As we look at that excess cash over the next few quarters, should we be thinking that that's more the -- more into buybacks or more into just getting the balance sheet a little bit bigger?

And maybe supplementing that with some more borrowings for buybacks?

So the excess cash we expect in the fourth quarter is really mostly related to what we normally see as seasonal buildup at year end from commercial clients as well as other balance sheet positioning type things that we'll do as we go through our ALCO planning in the fourth quarter.

So you know, some of it, like I said, will likely be deployed into incremental securities buying.

But even with that contemplated, we still see a hefty build up in excess cash.

I wouldn't necessarily tie it to buybacks.

That's not really what we're building the cash for.

But as Bryan said, we'll be looking at buybacks to execute as well.

David Darst, Guggenheim Securities.

Good morning.

Commenting on your regaining the number one market share in Tennessee, looking at the data, the FDIC class does most of that in Memphis.

But could you maybe reallocate that across the state or other types of businesses where you've been successful in growing relationships?

Yes.

I think, David, if you actually looked back in the slide presentation, you can see a breakdown by west Tennessee, middle Tennessee, and east Tennessee.

And so you can see where we saw good performance.

Again, we're -- page 18; thank you, Susan.

Again, we're focused on middle Tennessee and growing that and so you can see that we outgrew the market.

I may have this wrong, but it's generally correct that I think over the last four years, we have outpaced the market in terms of growth.

So we're pleased that we are gaining share there.

Underneath east Tennessee, I believe that Chattanooga was again a strong performer.

So we're seeing good solid growth.

As I talked about before, from an economic profit perspective, we think deposit gathering is highly critical.

And so even though deposits aren't worth nearly as much as they usually are, our bankers have done a good job understanding the impact of that and so capturing that has been a heavy focus in addition to the great loan growth that we've seen.

Okay.

And then -- but the magnitude of growth and in dollars did occur in west Tennessee.

Is that corporate relationships across the franchise or is that success in the Memphis and west Tennessee market?

Yes, no.

Thanks, David.

Good point.

We had back on slide 11 a bullet point that we really didn't hit that we should highlight.

We moved about $0.5 billion of correspondent banking client balances from Fed funds purchased category to a commercial deposit category.

So that was about $0.5 billion of growth and that was all in west Tennessee.

There was a little bit of buildup from our insured network deposits that we used as a wholesale funding vehicle.

So that was part of it.

But with that said, we still saw very solid growth in west Tennessee as well because of the emphasis that we have on economic profit and deposit gathering.

This concludes our question-and-answer session.

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

Thank you, Carrie.

Again, very pleased with the results we saw in the third quarter.

We're pleased with the momentum that we see in the business.

As you've heard from us a number of times today, we're committed to driving long-term value in this franchise, doing it in a high quality way.

And see good momentum as we move into the fourth quarter and look at the opportunities.

And it's still a relatively difficult operating environment for financial services in 2016.

Thank you for joining us this morning.

If you have any follow-up questions or need additional information, feel free to reach out to Aarti or any of us.

I hope everyone has a great weekend and again thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.

Have a great day.