First Horizon Corporation (FHN) Q3 2013 Earnings Report, Transcript and Summary

Aarti Bowman D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association William C. Losch - Chief Financial Officer, Executive Vice President, Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association Susan Springfield - Chief Credit Officer, Executive Vice President, Chief Credit Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division Nicholas Karzon - Crédit Suisse AG, Research Division John G. Pancari - Evercore Partners Inc., Research Division Kevin Barker - Compass Point Research & Trading, LLC, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Emlen B. Harmon - Jefferies LLC, Research Division Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division Brian Foran - Autonomous Research LLP Robert Placet - Deutsche Bank AG, Research Division Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division Ken A. Zerbe - Morgan Stanley, Research Division Kevin B. Reynolds - Wunderlich Securities Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Christopher W. Marinac - FIG Partners, LLC, Research Division

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Ms. Aarti Bowman. You may begin, ma'am.

Thank you, operator. Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we use in this call this morning, are posted in 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 outlook materials and our most recent annual and quarterly reports. Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call, and 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 Brian and BJ for questions. I'll now turn it over to Brian.

Thanks, Aarti. Good morning, and thanks for joining our call. We're continuing to achieve positive results from successful execution of our strategic priorities, gaining market share and delivering steady loan growth and solid returns in our core businesses. We also continue to hit legacy issues head-on and added $200 million to our mortgage repurchase reserve, which resulted in a net loss in the third quarter but was an important step as we continue to unwind from the mortgage business we sold more than 5 years ago. We recently received significant new additional information on our outstanding GSE exposures. As a result of that information, we significantly expanded our repurchase reserve for conforming loans sold to the GSE. Also, this week, we reached an agreement in principle to resolve certain rep and warranty repurchase obligations, subject to Fannie Mae's governance and regulatory approval. While we obviously don't like incurring this unexpected charge, we want to continue being consistent and prudent with our repurchase reserve level. BJ will provide more details in a few minutes, but please keep in mind that we're somewhat limited in what we can say while we're working on the definitive legal resolution with Fannie Mae. We're seeing good momentum in our regional bank. The most recent FDIC data showed that we now have the #1 deposit market share in Tennessee. In middle Tennessee, we grew 4x faster than the market. I'm especially pleased with these results since it demonstrates that our bankers have expanded our customer base and prioritized customer service while, at the same time, we've reduced costs and improved efficiency. Year-over-year, for the third quarter, regional bank expenses are down a full 7%. We've grown bank revenues 2% linked quarter. We've kept average loans in the regional bank at the same level year-over-year. Loans to mortgage companies have fallen as the overall mortgage market has softened, and we expect mortgage activity will remain muted in the fourth quarter. Our bankers are continuing to grow profitable high-quality loans with increases in both commercial and consumer lending. Our loan pipeline remains solid, and loan closings were up in the third quarter. Economic, political and interest rate uncertainty will continue to make quality loan growth challenging, but we're seeing results from our strategy to grow our balance sheet with profitable, high-quality loans. We aren't making unprofitable, risky loans just to show quarterly loan growth. Instead, we're positioning for the long term, expanding and deepening customer relationships, providing a full product set that profitably serves our customers' needs. FTN Financial, our fixed-income business, continues to be an important contributor of our business mix with pretax earnings of $10 million in the quarter. Market conditions impact fixed income -- market conditions impacted fixed income average daily revenues, yet with uncertainty around the Fed's policy of quantitative easing. The FTN Financial team generated an average daily revenue of $850,000 in the third quarter. Asset quality trends remained stable, and net charge-offs declined 80% and reserves decreased 9% year-over-year. Overall trends are stable or improving. Our capital ratio remains strong with Tier 1 common at 10.2% for the quarter. We expect to continue to generate excess capital. We remain committed to strategically and prudently getting excess capital back in shareholders' hands, and we'll continue to evaluate capital return opportunities. In the next few quarters, we're going to be cautious about share buybacks with the addition to the repurchase reserve this quarter, the FHA investigation where we have limited visibility into potential losses and the upcoming stress test. Our overall philosophy of returning capital has not changed. Our capital ratios remained strong, as I said, with Tier 1 common at 10.2%, and we expect to generate excess capital. It's easy to get overly focused on mortgage repurchase and litigation issues, but we're focusing on the big picture. I'm pleased with the positive trends in the third quarter, the #1 ranking in deposits in Tennessee, steady loan growth with yields holding up and higher revenues in the bank and good asset quality metrics. With that, I'll now turn the call over to BJ for more financial details about the third quarter, and then I'll be back for some closing comments. BJ?

Great. Thanks, Brian. Good morning, everybody. I'll start on Slide 7 with our third quarter consolidated financial results. As we mentioned, consolidated net loss available to common this quarter was $107 million or $0.45 a share. The consolidated net loss was driven by the $200 million mortgage repurchase provision in our nonstrategic segment, which had an after-tax impact of $152 million or a per share impact of $0.64. Let's turn to Slide 8, where I'll review with you the factors that led to our change in estimate for our mortgage repurchase exposure. As Brian mentioned at the beginning of the call, we recently entered into discussions with Fannie and reached an agreement in principle just a few days ago. As you've seen with others in the industry that have entered into these settlement agreements with either Fannie or Freddie, the population of loans expanded. Compared with previous information, the additional information encompasses a broader population of loans, including older vintages and expanded selection criteria from the remaining loan populations. The addition to the reserve includes estimates for an expanded scope of selections, estimates for future losses from other populations, as well as vintages prior to 2005. As you will recall, we have used information on our Fannie exposure to extrapolate our estimated exposure to Freddie. Therefore, as we updated our Fannie estimates, we have extrapolated our remaining Freddie exposure using similar assumptions of future loss content. The mortgage repurchase reserve balance is on Slide 9. Second quarter's reserve balance was $123 million. In the quarter, we had $30 million of net realized losses and had a remaining balance of $93 million. The incremental addition to the reserve of $200 million was calculated by incorporating additional factors estimated with the Fannie agreement amount, future MI rescissions related to Fannie loans excluded from the agreement, Fannie bulk servicing sales excluded from the agreement, the extrapolated estimate for Freddie and other mortgage-related impacts. So at the end of the third quarter, our reserve was there for $293 million. Turning to Slide 10. Looking at our segment highlights, our core businesses continue to deliver solid performance with net income of $41 million or $0.17 a share in the quarter. In the regional bank, net income was $48 million, a 13% increase from the second quarter. Linked quarter, our noninterest income in the bank grew 3%, driven by growth in deposit transaction brokerage and other revenues. Expenses in the bank were up 2% due to an uptick in professional fees and advertising costs, and loan loss provision decreased 61% to $5 million, reflecting continued stability in the bank's loan portfolio. In our FTN Financial business, net income was $6 million in the third quarter. Fixed income revenue declined 7% on a linked-quarter basis with expenses declining 3% due to lower variable comp and a reduction in legal and professional fees. We continue to see average daily revenue levels below our normalized expectations as the interest rate environment and uncertainty about Fed policy negatively impacted fixed-income activity across the space. Over the long term, in a more normalized environment, we still believe that fixed income ADR levels in our business will be in the $1 million to $1.5 million range. Again, our net loss in the nonstrategic segment was $148 million. Linked quarter's revenue were up 20% due to the effects of the agreement to sell substantially all our legacy mortgage servicing. Expenses were $222 million, which includes the $200 million of mortgage repurchase provision. Moving on to Slide 11, we'll talk a little bit about regional bank balance sheet trends. Average core deposits decreased slightly to $14.5 billion, primarily due to large commercial and public deposit variability towards the end of the quarter. Average loans were relatively steady at $12.2 billion. On a linked-quarter basis, consumer loans were up 3% and commercial loans, excluding loans to mortgage companies, were up slightly. This solid growth was offset by declines in average loans to mortgage companies, which were down from $1.1 billion in the second quarter to about $950 million, as expected given the recent rise in mortgage rates and the resulting slowdown in industry mortgage refi volume. We expect balances to decline from these levels in the fourth quarter, given both rate uncertainty and seasonal softness in housing demand. New loan growth, combined with asset quality improvement, has been positive, resulting in an increase in pass grade loans, emphasizing our focus on positioning our loan portfolio for returns in profitability. Moving on to the consolidated balance sheet and margin trends on Slide 12. You'll see our consolidated net interest income declined slightly, while our consolidated net interest margin was up slightly, linked quarter. In the third quarter, we saw higher reinvestment rates in the securities portfolio, stable loan yields and modest decline in deposit rates paid and lower capital markets inventory, offset by excess cash balances at the Fed. Linked quarter, our net interest spread improved 2 basis points to 356 basis points, driven by those relatively stable loan yields and a deposit cost decrease of 3 basis points. Sitting here today, we expect a quarterly net interest margin in the range of 2.90 to 2.95 in the fourth quarter of 2013. Currently, our assumptions that would drive that includes: rates staying at current levels or rising modestly over time, continued modest loan yield declines due to competitive pressures, loans to mortgage companies below third quarter levels, modestly improved yields in new investment securities, an uptick in Fed balances going into year end, stable capital markets inventory levels and a flat to modest growth in our loan portfolio. Over the long term, our asset sensitivity has positioned us well for rising rates. Our consolidated loan portfolios comprised about 65% floating rate loans. All else equal, in a rising rate scenario, a 100-basis-point increase would produce a 6% increase in NII, and a few hundred basis point rise would be an 11% increase. We continue to believe that an asset-sensitive balance sheet is key to our ability to generate strong profitability and returns over time. Looking at Slide 13 on expenses, our cost control remains a priority for us. You can see, since 2010, our consolidated run rate excluding the GSE-related expense has declined 19%. We remain on track for our goal of annualized run rate of expenses at the $925 million level by year end. Turning to Slide 14 and the positive story on asset quality. Linked quarter, our loan loss provision declined 33% to $10 million. The decrease was due to improvement in loss rates and grades, as well as lower NPLs. Nonperforming assets declined 5% and net charge-offs decreased 11% linked quarter. We expect asset quality trends to remain stable for the remainder of the year. Wrapping up on Slide 15 with our bonefish view, our core business trends are generally encouraging, with our 12-month trailing core ROA at approximately 100 basis points and our core ROTCE at 11.3, and these solid returns in regional banking and capital markets demonstrate the strength of our core businesses. And with overall Tier 1 common at 10.2%, we continue to have a strong balance sheet to pursue profitable opportunities for growth. We have a core banking and capital markets franchise that we believe, over the long term, will generate significant returns and profitability. As we have done consistently over the last several years, we're controlling what we can control. And when we encounter a challenge in our legacy mortgage business like the one this quarter, we deal with it quickly, prudently and transparently as possible and we move on, and we will continue to maintain that philosophy going forward. We are proud of our franchise, our leading market share positions in banking and fixed income, our outstanding execution on expense reduction, our strong credit quality and risk management culture, our solid balance sheet and capital position and, most importantly, our people. These attributes will continue to enable our long-term success. And with that, I'll turn it back over to Ron.

Thanks, BJ. Like BJ, I'm pleased with the progress in our core businesses. We're growing and deepening our customer relationships, as well as gaining market share. We're improving our operating efficiency as we streamline delivery channels and invest in new technology. We're strengthening our balance sheet, focusing on profitable quality loan growth while continuing to derisk. We're going -- we're doing the hard work necessary to unwind from the mortgage business we sold in 2008. In summary, we're building a strong foundation for long-term profitable growth. We're also making great progress in analyzing the economic profitability of our businesses and our products in a much more granular way so that we can better allocate internal capital for higher and more efficient returns. These actions will also help us achieve our bonefish targets in the future. With that, operator, we'll now take questions.

[Operator Instructions] Our first question comes from Steven Alexopoulos with JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: I wanted to start, looking at the 2000 to 2004 vintages underlying the $200 million reserve, what were the loans sold over that period, and do you have the average rescission and severity rates?

Hey, Steve, it's BJ. What I'll do is I'll give you what our total originations were for Fannie and Freddie for 2000 and 2008, and that's about $148 billion. And you'll see that what we had been talking about before, that's in the deck as well, is our '05 and '08, which I think was about 57.6. So obviously, the difference is the other vintages. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Okay. And BJ, anything on the average rescission and severity rates? Are they any different from that vintage?

Not that I can see. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Okay. And how are you guys thinking about the risk of having to provide for pre-year 2000 vintages?

Well, Steve, this is Bryan. With the agreement in principal in place for Fannie, that is all-encompassing, and so we don't expect that to be an issue. We're not at the point of having an agreement with or really any discussions with Freddie at that point. So I guess that's a possibility, but at this point in the cycle, we've not seen any requests from pre-2000, and we saw very few requests previously in the period from 2000 to 2004. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Got you. And just one final one for BJ regarding the sale of the mortgage service or at least what's left. Is there any gain or loss tied to that, maybe timing, and what are the expenses that will go away with that?

Yes. So the write-up in the value -- in the book value that we saw related to the sale agreement is roughly at $11 million or so. And we have a couple of offsets to that of $2 million or so related to liabilities that are associated with the sale. So the net increase would be about $9 million or so on the quarter. In terms of the revenues and expenses that go away, a good ballpark estimate for you would be about $20 million or so of fee income in the nonstrategic segment and about $20 million or so of expenses over time. Now we're -- we wrote up the value. We have not yet transferred the servicing, which will happen largely in the fourth quarter, so you won't see those expenses all go away, nor will you see the revenue go away right now. But going into next year, that's kind of the estimated impact.

The next question comes from Nicholas Karzon with Crédit Suisse. Nicholas Karzon - Crédit Suisse AG, Research Division: I guess, first, just starting on the loan growth side, it looked like the core regional bank loan growth, so excluding the loans to mortgage companies, actually grew a little bit quarter-over-quarter. I'm just kind of wondering if you can give us a little bit of color in terms of what you're seeing on the demand side, and also if kind of mid single-digit growth is a reasonable expectation given what you're seeing over the next couple of quarters.

Nick, this is Bryan. I'll start. I'm very, very encouraged by what I think our bankers have accomplished in the last several quarters. We saw good closings in the third quarter, as you said. We saw very good progress in commercial and consumer. The one exception is we did see the decline in mortgage warehouse lending, which is not unexpected given what's happened in refinance activity. Our pipelines as we start the fourth quarter continue to be very strong. We saw a slight uptick, even, in our -- what we would consider the agreement in principal or high probability of closing loans. Now we've continued to win very attractive long-term relationships that we think will fund up very nicely as the economic recovery continues to pick up over the next several quarters. So I'm very encouraged by -- Susan, if there's anything you want to add from a detail perspective?

Yes, I think I will. We are, as Bryan said, seeing some good relationship opportunities, new relationships as well as deepening relationships with existing customers. We're even proactively going out to some of our best customers and seeing if we can take additional share of loans that they may have with other banks as a way to grow prudently. I'm also pleased to say that we're growing within our risk parameters and getting an appropriate risk return for those new loans that we're booking. Nicholas Karzon - Crédit Suisse AG, Research Division: I guess, as a follow-up, can you give us the level of accretion from the MNB deal that you recorded in the third quarter?

It would be very, very modest, a couple of million dollars.

Our next question comes from John Pancari with Evercore.

Just quickly, on the mortgage warehouse, do you view this current level at around $700 million as a bottom tier for that portfolio?

John, this is Bryan. Earlier this week, it was a little less than 600 million. So the short answer is no. It's going to ebb and flow based on our borrowers activity. So it's down a little bit even from quarter end through the early part of this week.

Okay, all right. And then on the expense side, as you approach the 9.25 here, can you give us a little more color on where do you see total expense levels going beyond the end of the year? What type of -- are there any additional outright cost-save opportunities that you're going to be prepared to quantify? Or is it just simply going to become blocking and tackling type of approach?

This is Bryan, and maybe you can get me and BJ to disagree on this even here. We go back and forth about whether we ought to have goals or just make it a sort of foundational expectation. We haven't set any goals at this point. We -- I mentioned in the prepared comments the work that we're doing to further disaggregate the business, and I think that is going to be a continued driver of efficiency efforts in the organization. If you think about what we've done over the last couple of years, we have been very proactive in reducing costs. We've reduced them very substantially, and every step that you go, it gets harder and harder, and so you've got to have more and more information to either benchmark against or look at the profitability and to look horizontally across the organization. And I think the disaggregation work that BJ and the finance team have led will be very helpful in allowing business unit managers and leaders to look at their businesses and understand the cost components in a whole and different way. So I think that will be a driver. We're going to continue to focus on the expense levers. We think we have continued opportunity there. We don't think the buckets are huge. We think we've got to continue to disaggregate and go at things and look at processes across the organization, and look at them in terms of line of business and product set. So I'm optimistic that we'll continue to see progress.

Yes. I'd just add to Bryan, a little more empirically, I don't see the 9.25 being -- flattening out through 2014. I think that is a waypost, if you will, for the end of the year. And I think based on how our people are managing expenses and what Bryan just talked about, I would expect us to continue to bring that number below that level going into 2014.

Okay, all right. And then lastly, on the mortgage litigation side. I know you probably can't say much, but I know, Bryan, you indicated that you have limited visibility on the HUD side. Can you give us anything else there in terms of like the duration or how much time we could be sitting here waiting for a potential answer there?

Yes, the short answer is we don't know how much time, and because we're not completely in control of the timeline. I made some comments about 1 month, 1.5 months ago, which are -- really, not anything has changed in that regard since then. You may recall from our second quarter release in Q, we talked about having a very small sample to look at. We did complete the re-underwriting. We had, as you might imagine, a very different view about the level of exceptions or underwriting areas that we're in, in that portfolio. We have submitted that or returned that information and shared that with FHA and HUD, but we've not had any real further discussion on that. In addition, we've done some work about around sampling methodologies and things like that, and we have some very significant questions that -- about how samples were selected, so on and so forth. So we don't have a real timeline. We've got some very substantial differences in our view about how we're viewing the data and how the data was even selected. So we think it's going to take some work and some time to sort of work through that.

Our next question comes from Kevin Barker with Compass Point. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Help us understand some of the capital ratios that you're targeting with return to capital to shareholders given all the litigation that's out there, and just give us a little bit more color around that.

Yes. This is Bryan, Kevin. The -- we've been fairly open about, we think, on a longer-term basis, the organization needs to be in the 8% to 9% Tier 1 common. And as BJ and I both commented earlier, we're a little over 10%, 10.2% at this point. We did take this charge, and we think we're going to continue to generate excess capital as the several -- next several quarters continue to unfold. We're not -- we don't have a short-term target at this point about where we ought to be at December 31 or March 31. We're just looking at all the moving parts. We recognize that we've got a new stress test process that we're going to work through with the regulators over the next several months. And as we look at what's -- where are all the moving parts in the mortgage repurchase charge that we took this quarter and the unknowns around FHA, we're willing to let capital build for the next couple -- few quarters, anyway. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Okay. And then if we were to -- capitals building, and let's just say you did have some settlements come through where it did hit your capital and everything settled out, could you -- to offset some of the capital hit from this litigation, would you consider selling your vis-à-vis shares or -- and do you see maybe the Sentinel insurance ongoing litigation that's occurring there being a source of capital?

Well, there are always a number of different levers that are available to us as an organization, and I wouldn't prejudge what, if anything, we might do if we were to reach a settlement on any matter that's outstanding. I mean, we'll judge that in the context of the timing and the settlement and make those decisions. I feel like we have a very strong capital base. I feel like it's adequate to cover us and to support exposures. As we work through the stress test, we'll have the opportunity to work through that with our regulators again. So I hate -- I would be hesitant or hate to judge or prejudge what we might or might not do, what levers we may or may not pull, at this point.

Our next question comes from Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Yes, my questions have been answered.

Our next question comes from Emlen Harmon with Jefferies.

I was hoping, just on the agreement with Fannie Mae, I was hoping you could talk a little bit more about the decision there to go back to the 2000 vintages. As, Bryan, you indicated earlier, you guys haven't seen much in terms of requests in those vintages before. So just curious if that was a stipulation of the agreement from Fannie's perspective, if you were starting to see more putbacks from that vintage from them. Just some color around that would be helpful.

Yes, yes. This is a discussion that really unfolded pretty rapidly in the last 2 to 3 weeks. And as we analyzed the data, from our perspective, 2005, 2008 was a much more appropriate timeframe, but they have a template in the way they work through these things, and I think it's a reasonably generic template from what we can tell across other settlements that have been reached. And in 2002 -- excuse me, 2000 to 2004 needed to be considered in that. So as we worked through it and all the moving parts, and we think we've reached a reasonable number to settle this. As BJ and I both indicated, it's an agreement in principal at this point. They've got to get approval from their governance processes, but we have moved the ball down the field, and I think it's important that we get that part of the GSE repurchase exposure ring-fenced and done.

Got you. Okay, thanks. And then if I look at just -- if I look at kind of the repurchased reserve, what was -- charge-off this quarter was $30 million, and it sounds like you've got about $80 million of kind of expectations for Fannie left. And so a big chunk of that new provision went against some of the other potential rep and warranty counterparties, I guess. Did you -- I mean, are you seeing a -- are you expecting settlements from any of those guys in the near future? Are you seeing kind of a pickup in requests from those other bodies?

Yes, this is Bryan again, and the Freddie Mac is the other big piece that is out there in terms of a potential settlement. As I mentioned earlier, we really haven't had any active dialogue at this point. Our sense is that Fannie Mae may have been a little bit ahead in terms of submitting requests, but we expect that over the next couple of quarters, we will see -- excuse me, see substantially all or most of the Freddie Mac requests. We sense that they're making a significant effort to get this wrapped up over the next quarter or 2 or 3. We have seen a pickup in their request to date, and as BJ described, we're in a process where we don't have as much information, and we haven't had as much information around Freddie Mac as we've had Fannie Mae. So we have done some extrapolation, and we basically use this -- or in this process, reserve to a level that we think gets into a similar level as Fannie Mae.

I'd just add as well and remind you that we were largely a planning shop up until 2008, and so most of our Freddie originations were during 2008. So that could also be a big part of the lag, if you will, but that is contributing to it.

Our next question comes from Jefferson Harralson with KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: A follow-up on that. So you're saying that Freddie was basically only 2008 or mostly 2008?

It was most of our 2008 originations, yes. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And so the extrapolation that you were talking about for Freddie isn't so much that '00 to '04 time frame, but the aligning of the scope?

Good question. As Bryan kind of talked about, we've always had much more limited visibility from Freddie against Fannie. So with that, even though we understand where we did the originations, what the vintages were and what our actual claim requests are coming in from Freddie, the reality of estimating future exposure is reliant on our history, largely with Fannie. So when we entered into these discussions with Fannie and they indicated that they were going back in vintages and we recognized that there was an expanded scope of selections as we're doing our loss content estimates for Freddie, we have to take that into account, that they may or may not behave the same. But the way that we are trying to allocate our reserves, we had to take that into account.

Our next question comes from Brian Foran with Autonomous.

I was wondering, on the warehouse banking business, if you could talk about the profitability of that business now versus history. It seems like it's been high. But I also don't know how much of that is just changes in market structure and competition. I guess, overall, can -- the balances are clearly resetting. Do we have to reset the ROA on that business lower too, or can it stay where it's been?

Yes, Bryan, it's BJ. As we talked about before, we really like the profitability and structure of that business model. So it's actually very much like our FTN Financial business. It's going to be extremely profitable, and at some point, it's just have very good profitability and good returns on equity and good returns on assets. So what we have seen over the prior year was maybe abnormally high profitability from it as we saw good volume there. But even as the volumes come down, our expenses are very efficient and low. We have not seen a significant deterioration in our yields in that business. It certainly has gotten more competitive, but we have not lost a -- any primary relationships that I'm aware of. And again, our pricing has held up well. So the business is very well managed. We like the returns on it, and we're very pleased with what they're doing in this environment.

And then, I guess, coming back to the $925 million target and the expectation that it goes lower in 2014, any sense of how much lower it can go?

Go ahead. Bryan? You wanted to give [indiscernible] a number there.

I have to try.

Yes, this is the debate where we set the -- whether we set goals around it. The long run -- BJ and I laugh about it because we've had this long-running debate about whether we set goals, and I don't want there to be a stopping point and he said, "Well, if you don't set a goal, there -- it's easy to get to a stopping point." So we still are at target. We haven't set a goal internally. I think we could be under $900 million. I expect that we will be for next year. I don't think I have a number in mind as a goal at this point.

If I could sneak one last one in, if you look back over time at the FTN capital markets business, is there any kind of consistency around, when you do have these kind of funks, where you dip below the normal fixed income average daily revenue? Does it tend to stay there for a while and remain cyclically depressed, or does it bounce back? And I guess if you could just link it to the broader backdrop of interest rates? It's -- I guess the concern would be maybe 1 to 1.5 is still a good normalized range, but for the next year, we're below that level?

Yes. There are some historical patterns that I would -- I'll let BJ refer to, but I would preface it by saying, I'm not sure how good historical patterns will actually be when you have the Fed and its involvement in quantitative easing and the impact of is the Fed going to taper its quantitative easing or not, what's going on in Washington over the last month or so around the size of the federal government, particularly as the government opened, and what does the debt limit look like. So that may take some of these historical patterns and disqualify them as something for predicting for the future.

Yes. And what I'd add is the way Mike Kisber, our head of FTN, would describe it as spotty. If you look at our average daily revenues of $850,000, it's extremely sensitive day by day to what the news flow is and where rates are moving. So in the quarter, we had days that were as low as a couple of hundred thousand and there were days that were well over 1 million, to average to 850,000. Now that would tell you that if there is a better stream, or at least a more consistent stream of news that calms markets and makes rates a little more stable, that could certainly help us, and we could go back up towards the million. But based on the uncertainty that we're seeing right now, as Mike said, it's spotty. And so we see it maybe for at least another quarter or 2 in a less than normal range.

Your next question comes from Matt O'Connor with Deutsche Bank.

This is Rob Placet for Matt's team. Just a quick question on loan spreads. Slide 12 shows that loan spreads actually ticked higher this quarter. I was just curious if there was any noise in there, or is that indicative of what core loan spreads did this quarter? And then can you just talk about the level of kind of lending competition currently?

Okay, yes. Well, I think part of what we saw in terms of increasing loan spreads, which related to consumer lending growth that we saw in the bank, I talked about 3% growth linked quarter, a lot of that is actually installment lending, real estate installment lending, where we've seen pretty good opportunity to lend to higher-quality borrowers more on towards the jumbo side, and we've been able to get attractive yields there. So it's really a little bit of a mix issue on new originations for commercial lending. We've seen yields staying very stable. And our bankers, I think, have done a good job on both new originations and renewals even as pricing pressure has continued to come off quite a bit.

Yes, I mean, we expect to see some continued pricing pressure, but again, I think we're doing a great job of talking to clients about the value added that we have. As I mentioned earlier, we do have a focus on increasing to very highly-rated borrowers, and so those obviously come at slightly lower spread. But again, I think our risk-reward profile is where we want it.

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: I know we've hit a lot on this, this morning, the topic of the mortgage repurchase. But just extending it over to the private label side, the fact that Fannie has chosen to broaden the scope of the loans that its looking at in terms of time frame back to 2000, does this change the risk profile of what's out there on private label? I know in the slide, you've always talked about 2005 through 2007, you originated and securitized $27 billion. But do we have to think of that time frame as expanding, and do you feel better or worse about that risk today versus last quarter?

Kevin, this is Bryan. This doesn't really change how we're thinking about the private label securitizations. The last securitization we did was in the fall, roughly about 6 years ago. By the end of this year, all of them will be at least 6 years old. I think, in the slides, I think 99% of them already are. And those securitizations have continued to pay down, pay off. At this point, we have not received any requests for loan repurchases. If you -- it's detailed out in the slides pretty well. I think it's something like 75% or 77% of those securitizations are outperforming cohorts. We didn't have the -- excuse me, the subprime securitizations. Ours were principally jumbo and Alt-A. We've seen better performance, as I noted. So our thinking really hasn't changed. We don't think that the scope changes there. We think the reps and warranties are very different. We think the timelines for making rep and warranty requests are potentially different. There's a whole different environment around it. So our view really hasn't changed, at this point, about exposure on the private label securitizations. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: But the big risk remain -- on the private label side, then, remains litigation and FHFA being the bigger one, correct?

I think that's right. I think there is -- there are always risks around it, but it seems to us that the biggest risk is the FHFA litigation. But we've detailed the performance in the slides again. We've continued to see well over 50% of that paid down. A very substantial portion of those loans are current at this point. Aggregate losses or cumulative losses are a reasonably small percentage, but that's on a drawn-out litigation process, where I think they're 9 or 10, the, I guess, folks still involved in that litigation. I think we're in the third tranche to be litigated, maybe the second of 2 at this point, but that's just going to take some time to resolve, but that is the 1 litigation point that we see to be larger risk. There are a few smaller ones that are noted in the slides, and you can see the performance on those securitizations and cum loss, et cetera, but by far the largest is FHFA.

Our next question comes from Ken Zerby with Morgan Stanley.

Two broad questions for you. I guess, just on -- in terms of the settlement, can you just help us or be clear in terms of what exactly is that covering? And the reason I ask is because there was some statements in your press release saying it excludes all the loans that you've sold, right, through bulk sales that you no longer service. And I look at your reserve, and it seems that the Fannie reserve, the $80 million or so, I mean, it's a very small piece of the total reserve that you've built. So just trying to get a handle on, when we're talking about the settlement, are we really talking about a much smaller piece than the total amount of originations at risk?

Yes. I'll answer that. And again, as Bryan said at the beginning, we've got to be careful because we don't have the final agreement in principal. But what I would say is the settlement agreement will cover probably 60 to -- probably 70% of the loans, and what would not be included would be about 30% of the loans that were ultimately sold to Fannie. So again, we'll use the same methodology, the same views, the same information to build our estimate, both related to the settlement and what those loans look like as well as what our future exposures would look like that were excluded from the settlement.

Okay, all right, that helps. And then the other question I had, just in terms of the mortgage banking line or the sale of the mortgage servicing, you mentioned a number of $20 million earlier in the call. But I'm looking at your sort of net servicing line, it's clearly the hedging and the runoff, but it's running somewhere in the range of, I don't know, $8 million to $9 million per quarter. So how should we think about the $20 million versus sort of the current run rate of servicing income?

Yes. So there's a couple of different pieces to it. The major components are the servicing income and the ancillary fees that come off of servicing. You've got hedge results, which essentially look at the value fluctuation of the MSR asset itself, as well as the offsetting hedge assets. And so the net gain there, you've got carry income related to the hedge assets as well. So when we sell the servicing, the MSR gain or losses kind of go away. The hedge assets are going to go away. The carry income from the hedge assets are going to go away. The servicing income is going to go away, and the servicing -- the subservicing expense is going to go away. So I tried to simplify it already and I can -- would be happy to give anybody more detail on it, but all in, it adds up to about $20 million a year of revenue and expense that would really go away.

So right -- and so it's fair to assume that right now, this is actually -- you're not making any money on this business?

The carry income from the hedge assets is essentially where we would be making money from it, but we think that we can reinvest that into something else that largely offsets it. It wouldn't be very material to be able to offset that carry.

Yes, we don't have to be in the servicing business to do that. We can do that in the securities portfolio.

Right.

Our next question comes from Kevin Reynolds with Wunderlich Securities.

A couple of quick questions. One is, I guess, more housekeeping. When you estimate the impact of that, the repurchase-rebuild quarter, and what was the tax rate that you used on that? Was it somewhere at 24%, 25%?

Yes, we've been using our year-end effective tax rate, which essentially, you take your forecasted earnings for the year, you take an incremental tax rate on that, and then you back out your permanent tax differences to come up with an effective tax rate, and so that's about 24%, and that's what was used here.

Okay. And then, I guess, sort of bigger-picture question, as I look through -- I know you all have been pretty consistent in addressing the bonefish as kind of the driver of your strategy and where you're taking this over the long term. But when I look at Slide 15 at the bonefish, a couple of things that sort of jump out at me is that, right now, it appears that net charge-offs or credit costs are below the range that you talk about for normalized, and fee income's at the high end of the range. So the last 2 pieces that could move there would be your margin and your efficiency ratio, and I suspect that the margin would drive the -- the margin higher would drive the efficiency ratio down if the others are sort of all else equal at the top end of the range and kind of topping out there. So the question I've got is, how much of that efficiency ratio moved from the mid-70s in the core businesses down to the low- to mid-60s? It would be directly related to a margin increase in a different interest rate environment because it seems that just moving each of those numbers to the midpoints of the range, you're talking about a 15%, 16% increase in the margin that would drive a 20% increase in the -- or improvement in the efficiency ratio. So that's one conceptual question. And then beyond that, what has to happen for us to get to the bonefish profitability targets and how long might that take? Are we talking sort of 18 months or are we talking maybe 3 years, assuming Fed policy doesn't change much?

Kevin, it's BJ. I'll start. If you actually slip -- if you flip to Slide 5, where we talk about our core business positioning, we do have some commentary in the bullets around efficiency ratio and NIM about what that does with certain interest rate increases. So on the efficiency ratio, you'll see at the bottom that a few hundred basis point rise in rates would essentially improve efficiency ratio about 400 bps, and our margin would rise $70 million annually. If you translate that into basis points, it's roughly 40 basis points. So going back to your comment, for our core businesses, they're at 321 today, whereas consolidated, it's 299. As nonstrategic rolls off, what we're going to have left is roughly that core business number. You add on a 200-basis-point increase in rates and we're pretty close to -- in the range of our long-term targets. On the efficiency ratio side, the nonstrategic portfolio is obviously not helpful to our efficiency ratio. So if you're combining increasing rates with the continued runoff of those expenses, we would project that, on a 200 basis point rise or more, that we would be able to be getting into our efficiency ratio targets. So as you alluded to, we constantly recalibrate our ability to get to these bonefish targets. Right now, it's largely predicated on rates rising, and so we are trying to manage our asset sensitivity for the long term to be able to do that, while also being prudent in trying to manage as well for the short term in controlling what we can control. So I feel comfortable that, over time, that we can get there. I'm not sure I can take a time frame, unless you can tell me when rates are going to rise, but we're going to continue to do everything that we can do to tighten up these numbers as we wait for rate changes.

Kevin, this is Bryan. I'll pick up on BJ's comments. I think one of the more difficult questions that we're keeping an eye on in the short run is what our interest rates are going to do and when are they going to move. And as we've talked about and as evidenced in the capital markets business, the long-term point of the curve has gone up very substantially since May of this year. It's come back down on the talk of whether the Fed tapers its quantitative easing or not, but we're going to pay a lot of attention to expectations of rates. And I think that if it looks like everything is getting pushed out, I think you referenced 3 years -- 18 months to 3 years, where we think rates are going in that period will maybe cause us to rethink what our interest rate sensitivity positioning ought to be, and whether we need to be as asset-sensitive or whether we can use some of this time to do some fixed-rate customer lending that allows us to build relationships. So it's hard to answer in the context of market expectations today because they have been so volatile over the last several months as talk about what the Fed may or may not do has driven the long end of the curve. But we're keeping an eye on it, we're paying a lot of attention to it and we're making evaluations or decisions around how we position our balance sheet in the context of where and when we think rates will actually trend down.

Our next question comes from Marty Mosby with Guggenheim.

I wanted to ask you about the servicing. You had about $15 billion. Is all of that going away? And what portions -- can you give us a little feel? Maybe I just missed it, but is it a complete sale or is it the sale of everything that doesn't have some kind of -- still kind of overhang issue tied to it? Or kind of what's the magnitude of that?

Yes, it's substantially all of our servicing. We'll still do a modest amount of -- we'll ask for a modest amount of subservicing from that provider related to permanent mortgage loans that we still have on our balance sheet. But by and large, that $15 billion would go away.

So just going back to the discussion about revenues, it really is whatever revenue is in the nonstrategic, hedging-wise, everything, and that all pretty much just goes away?

That's right. There'd be maybe $3 million or $4 million a year of subservicing expense that would hang around related to the permanent mortgage loans that we're still keeping on balance sheet, but everything else from an expense side related to subservicing would go away.

And then when we say down in the repurchase part, bulk servicing sales as a part of the -- what's left over, as you sold these, you haven't really sold -- they haven't purchased the liability. So that kind of has still remained. Even though you've kind of, over time, pushed the -- been able to sell servicing, the liability from repurchase still has stayed with the company, I think, right?

Yes, with the previous bulk servicing sales, that is true. That is true. But as I think you're alluding to, with agreement in principal with Fannie Mae, that issue was resolved. And then any liability with the Freddie Mac or other loans would still reside with us, and that's encompassed in the reserve that we've talked about this morning.

Okay. That's what I was thinking. And then, Bryan, as you're going into -- it's kind of what I was lastly want to think about, was if you put the mortgage repurchase issue into 4 buckets, Fannie, Freddie, HUD, FHA, private label, and kind of just walk through it, the reserving you took this quarter, in my mind, what we have heard from Fannie and Freddie represents this year, and wanting to kind of wrap this up and agree. In a sense, as you're doing that, you would expand the scope to kind of include anything that you might think of. Is that kind of the process that you feel like you just went through with them as you're entering this settlement in general, not specifically, but just in general? This is kind of a -- okay, if we can imagine what this is ever going to turn out to be, if you're going to be in their shoes, you want to kind of put a final number on it, is that kind of what we've gotten to here?

Yes, there's no doubt that we're frustrated that this issue is -- we're still dealing with it, and we're frustrated and don't like making the additional charge. But as we have done over the last 5, 6 years, to the extent that we see a problem, we try to size it up and we try to aggressively deal with it. And as we got into this process, we saw a different look at the information. We saw vintages included that we didn't expect to be included, et cetera, which we've been through before, and we wanted to proactively deal with it in the same way we've dealt with so many issues in the past. And as BJ and I have tried to describe, with Freddie Mac, there are substantial differences in vintages and vintage years, and ultimately, there will be differences in performance. But we felt like, given what's encompassed here, it was appropriate for us to have similar levels of reserves in terms of losses as we've seen in Fannie Mae, given that we have better transparency of the information at Fannie Mae. So as BJ described it, we've basically taken Fannie Mae and tried to extrapolate those results to Freddie Mac, recognizing there will be some differences, but we only have the information we have.

Our last question comes from Christopher Marinac with FIG Partners.

A question about share purchases on the equity side. Is there a percentage of income that you have to or that you need to manage to within your regulatory relationships?

Chris, this is Bryan. No. We've been, over the last year or so, returning substantially all of our net income. And given the dynamics of our balance sheet, where we have 18%, 20% runoff in the nonstrategic portfolio that frees up the pro rata basis, 10.2% Tier 1 common using the September 30 numbers, we accrete at common that's going to free up there that supports growth in the balance sheet. So historically, we've had a view that returning a fair amount of our earnings, substantially all, is appropriate, and we think that's not likely to change over the long term. We think, as I mentioned earlier, given the new information around the GSE repurchases that we got in the settlement of this -- reaching this agreement in principal, to be a little more cautious over the next couple of quarters as we deal with that, as we try to gain additional information with respect to the FHA investigation. It's ongoing and as we work through the stress test. But there are no bright lines that I'm aware of from a regulatory perspective, other than sort of the mix. And it's what we've talked about in the past. There seems to be a -- what I think is a reasonable desire to have a threshold about how much is in dividend and how much is in buyback. I may argue that the dividend could be a little bit higher, but I think there are some bright lines around mix, but I don't think there are any bright lines about how much of earnings in that regard.

Okay, great. That's very helpful. And then just the last question on the whole mortgage repurchase stuff today. On Slide 22, you mentioned within the pipeline request that there's $97 million of nonrepurchase request. But could you just remind us or refresh our memory from the past what covers this sort of nonrepurchase types of requests?

Nonrepurchase-type requests, those are things like documentation requests. So they may or may not be related to a repurchase or link-all request and may simply be, hey, there's an appraisal missing or a verification of income missing or a spousal signature missing, that kind of thing.

Okay, so would there be less loss content on that particular tranche?

Yes, on those type of things, yes, absolutely.

I'm not showing any further questions at this time. I'd like to turn the conference over to Bryan for closing remarks.

Okay, thank you, operator. We appreciate your interest in First Horizon and look forward to seeing you in Memphis on November 21 at our Investor Day. We'll focus on the progress we've made and how we are positioning ourselves to continue to move forward as we transition into 2014. Thanks again for participating on the call this morning, and please reach out to any of us if you have any follow-up questions or additional information that we could help gather for you. Thank you again. Hope you all have a great weekend.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.