First Horizon Corporation (FHN) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the First Horizon National Corp. First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Aarti Bowman, Investor Relations. Please go ahead.

Thank you, Gary. Please note that the earnings release, financial supplement and slide presentation we'll use in this call this morning are posted on the Investor Relations section of our website at www.firsthorizon.com. In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and in our most annual and quarterly reports. Our forward-looking statements reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call, and is reconciled to GAAP information in those materials. Also, please remember that this web cast on our website is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan; our CFO, BJ Losch; additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions. I'll now turn it over to Bryan.

Thanks Aarti. Good morning everyone and thank you for joining the call. I am pleased with what we accomplished in the first quarter, and feel good about the rest of the year. Our regional bank delivered solid loan and deposit growth. Our capital markets businesses rebounded. We continue to prudently deploy capital, and we made significant progress towards putting legacy mortgage issues behind us. Our bankers focus on calling efforts paid off with good growth in our specialty lending areas. Year-over-year, the regional bank grew acreage loans 14%, with commercial loans up 15% and asset base lending up 13%. Commercial real estate grew 27% from customer growth and an increase in fundings. Now, the commercial real estate portfolio comprises about 9% of our regional bank loans. Average core deposits in the bank increased 9%. We are encouraged by our bankers' success in winning new quality relationships, as well as deepening existing relationships. At FTN Financial, average daily fixed income revenues were up 8% year-over-year. FTN's broad based delivery system and product capabilities, enabled us to capitalize on the first quarter's improved market conditions. As you saw last week, we resolved the key legacy mortgage issue. We reached in agreement in principle with the DoJ/HUD to settle certain potential claims related to underwriting and origination of FHA insured mortgage loans. Although the settlement impacted first quarter's expenses, this marked another major legal resolution. Consolidated expenses, excluding the litigation charge were down 2% from a year ago and the regional banks' efficiency ratio improved 234 basis points. We remain committed to further controlling our costs. Capital remains strong, with a first quarter common equity tier-1 ratio of 10.3%. During the first quarter, we bought back about 1 million common shares. Recall, we are somewhat limited in our share buybacks, while we wait for the Trust Atlantic acquisition to close. Our asset quality trends were favorable. Non-performing assets declined 31% year-over-year and net charge-offs were down 45%. Overall, 2015 is off to a good start. The economy is steady, and we are making good progress on key initiatives to achieve our bonefish targets. Our balance sheet is strong, we are increasing our customer base and continuing to profitably and prudently grow our specialty lending portfolios, and our expenses are on track. Improving economic profit remains a top priority. We are continuing to provide new tools and databases to support our employees' efforts to measure RAROC and economic profit. We are also beginning to incorporate economic profit into our incentive programs. I will now turn the call over to BJ for some more financial details about the quarter, and then I will be back for some closing comments. BJ?

Thanks Brian. Good morning everybody. I will start on slide 6; for the first quarter, Brian mentioned net loss available to common $77 million or $0.33 a share. Obviously, we incurred this significant pre-tax expense related to the agreement in principle, and so, excluding that litigation charge, our net income available to common was $42 million or about $0.18 a share in the first quarter. Slide 7, shows you an overview of our segment highlights, but let's go straight to some more detail on our core businesses in the next few slides. So starting with the regional bank on slide 8, where we continue to see strong profit and growth momentum. From a profitability perspective, year-over-year net income was up 31% and pre-provision net revenue was up 13%. Linked quarter, they were down 6% and 7% respectively due to mostly seasonal factors. From fourth to first quarter, net interest income was down 2% due to day count and a decrease in loan fees, which was somewhat offset by the increase in commercial loan outstandings. Non-interest income was down 6% again from seasonality and deposit fees, and a decrease in brokerage and trust revenues, largely driven by slower customer activity, primarily due to weather. Expenses declined 1% linked quarter, and loan loss provision was $5 million in the first quarter, a decrease from the fourth. Turning to slide 9, on regional bank balance sheet trends. Average loans were up 3% linked quarter, and 14% year-over-year. Our specialty lending areas drove the majority of the loan growth. Linked quarter, we had a 5% increase in average loans in asset based lending, and loans to mortgage company increased 12%, reflecting higher re-fi activity in the quarter. Core commercial loans grew 4%, led by growth in mid-Atlantic and in Chattanooga. We saw encouraging commercial utilization rates from borrowers in the quarter, with the linked quarter increase in utilization of about 300 basis points. Net interest spread in the bank remained steady at 337 basis points in the quarter, versus 336 in the fourth. Our bankers remain disciplined with pricing and underwriting, to ensure their balance sheet demonstrates our commitment to improving economic profit, while delivering strong loan growth. Turning to FTN on slide 10 in the fixed income business; net income was $7 million in the first quarter, up from $4 million in the fourth. Fixed income activity was stronger in the first quarter, with average daily revenues of $877,000 compared to $630,000 in the fourth quarter. Expenses were up, as you would expect, due to higher variable compensation, and the normal seasonal increase in FICA expenses. The higher activity in the first quarter reflected improved market conditions from increased rate volatility, that led to better flows all the desks. Turning to slide 11, and looking at the overall company balance sheet and margin trends, average total assets were $26 billion and were up 4% from fourth quarter to first quarter. Linked quarter average consolidated loans were up 2% and core deposits grew 7%. Average consumer deposits were up 4%, while commercial deposits grew 9%, driven by continued inflow from our customers and a seasonal buildup of cash in the first quarter. As anticipated, our consolidated net interest income declined modestly from fewer days in the quarter, and net interest margin declined 12 basis points to 274. The margin decline was driven largely by our excess liquidity position, due to strong deposit balances and lower loan fees. If we step back and put all of this into perspective by looking at year-over-year results, it is very impressive. Total average loans were up 7% and average core deposits are up 11%. Net interest income is up 3%, with loan interest income up 3%, while interest expense on deposit was down 18%, all while our credit quality remains strong. We are very pleased with how our bankers are managing to generate both strong balance sheet growth, and improve economic profitability. Turning to slide 12, we continue to make meaningful process with our efficiency efforts. Since 1Q 2012, our annualized expenses, excluding mortgage purchase and legal costs have declined 22%, and year-over-year, our consolidated expenses have decreased, while we continue to invest in revenue generating opportunities. In the bank, we are hiring talent in our markets such as Houston, Mid-Atlantic, and in Nashville, and we have seen the good cost of higher variable compensation in capital markets, related to increases in revenues; and excluding litigation charges, we are continuing to see non-strategic costs decline. Turning to asset quality on slide 13, we are seeing continued favorable trends in our asset quality ratios as Brian talked about. Linked quarter, our net chargeoffs declined 25% and our non-performing assets were down 2%. Loan loss reserve decreased modestly, and the allowance to loans ratio stands 136 basis points. New credits are of strong quality, and we are pleased with the risk characteristics and performance of our loan portfolio. Slide 14 shows the transition of our 4Q tier-1 common ratio to this quarter's common equity tier-1. As you can see, our capital ratios remain strong this quarter. Impacts to our capital ratios were driven by the effects of the phase-in of Basel-III which started in the quarter, and the litigation charge, which were somewhat offset by retained earnings. Additionally, we saw a linked quarter increase in risk weighted assets from strong commercial loan growth in the bank, and an increase in trading assets at FTN. With this quarter's legal matter behind us and solid earnings momentum, we believe that we will have further flexibility over time to utilize and deploy our excess capital profitably. Wrapping up on slide 15 and 16, we continue to focus and make progress towards our bonefish targets, as the momentum of our core businesses improves, our non-strategic portfolio runs-off, and we are moving past our legacy mortgage issues, while deploying capital. Our bonefish building blocks on slide 16 show our path to our long term goals. We will continue to control what we can control, as demonstrated through the blocks of achieving efficiencies, profitably growing in our markets, improving economic profit and risk adjusted returns across all our businesses, and deploying capital smartly. Lastly, while we don't control when or at what pace rates will rise, we have remained ready and able to capture significant revenue benefit, once short rates [indiscernible]. With that, I will turn it back over to Brian.

Thank you, BJ. As I said earlier, I am pleased with the momentum we have seen so far in 2015. Throughout the year, we will continue to strengthen our balance sheet, prudently manage expenses, wind-down the non-strategic business and improve the economic profitability of the company. We should make ongoing progress towards achieving the bonefish targets that BJ talked about and building franchise value over the course of the year. Thanks to tall of our First Horizon employees for all that you do. Now with that operator, we will take questions.

[Operator Instructions]. Our first question comes from Steven Alexopoulos with JP Morgan. Please go ahead.

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

Hey Steve, its BJ. Good morning. If you look in the financial supplement, don't know if you got a chance to do that yet, we have seen a material decline already in our legal fees, just with the timing of bills and such. Clearly, the DoJ-FHA matter was a big drag. So we started to see that decline in a pretty material way, and we should see further declines. I think we have, roughly a run rate now of about $7 million in legal costs, and so we think that that will continue to come down over the next several quarters.

Okay. And then, shifting gears to the capital markets business. So a good increase, obviously volatility in the quarter, and ADR was better, but its still below the low end of the range. What do you ultimately think it will take to get ADR back into the targeted range?

So Steve, I will take that one. We were very pleased with what we saw in our business this quarter. And it kind of goes to show you how quickly our platform can capture additional market volatility when it's there. If you actually look daily at all the trading days and what we saw, 30% of the days in the quarter were above $1 million, and many of them were well above $1 million. And so, the volume is there, the $1 million days are certainly there, and so, the more that we can capture that, the better we are going to be able to generate revenue. Its hard, as we have talked about previously to predict what's going to go on in the markets. And so, don't know whether its going to go higher, or whether its going to stay where its at. But generally speaking, we feel good about where its at right now, as a good run rate for the next few months, given that volatility continues to generally be in our favor in the business.

And I guess BJ, on the flipside of that, rate volatility is up, but only 30% of the days were over $1 million, and it has been quite a few quarters since we have actually seen you in the range. I mean, do you guys have conversations internally, that this could potentially be a structural change to the business, and not just a cyclical downturn?

Steve, this is Bryan. I think it may have been talked in two or three quarters ago. I think on this call, we talked about -- in all likelihood, the business is going to be less than $1 million a day in ADR for the next several quarters, and maybe into a couple of years. Yes, its entirely possible that we have seen a structural shift, especially, because its unclear how the reversal of the interest rate decline that has been going on in a holistic sense for 25-30 years is going to reverse here in the near term. So, sure we think there is the potential that that has happened, and we have put our plans in place around it. To compensate for that, we are clearly looking to expand our product capabilities and move into the municipal finance business and improve our general market municipal finance distribution and trading. So yes, we are not certain that you get back into that range on a consistent basis for a period of time. But I think we can have, as we demonstrated this quarter, very nice profitability driven by something, and we were profitable last quarter, 6.30, we are more profitable this quarter at 8.75, and we are even more profitable at $1 million a day in average daily revenue. So we think we can manage the business in a broader range of volatility is around [ph] average daily revenue. But we are trying to position the business to grow. But back to your question, sure we think that we could be under that $1 million ADR for the next several quarters and we are just really uncertain where these rates go.

The next question comes from Emlen Harmon with Jefferies. Please go ahead.

Hey, good morning everyone.

Good morning Emlen.

Going back to the expenses, I was hoping to hit on a comp line as well, up $13 million quarter-over-quarter. Presuming a big chunk of the $8 million increase in capital markets expense hitting that line, because obviously some FICA in there as well. Is there anything else driving that expense line higher, and just, how should we think about the trajectory there, going forward?

Yeah, hey its BJ. Virtually, all of the increase is from variable comp and capital markets plus the FICA resets that happened. Its nothing that we are seeing. We talked about, that we are making investments in talent, in Houston particularly, Nashville and the Mid-Atlantic, but they wouldn't have a material impact on what you would see quarter-to-quarter. You can actually see -- if you look at the supplement, our aggregate FTEs in the company are actually down. So we are managing all of those expenses, including compensation tightly.

I am sorry, did you mention just how much FICA was on a -- kind of an all-in basis for the company?

I don't have it with me. We can get back to you on it.

Okay. No problem. And then, obviously -- just wanted to talk about NIM a little bit; obviously, the addition of liquidity, its kind of a near term wait there. And do you have a sense of how quickly you're hoping to deploy some of that liquidity, either into the long book or the securities portfolio and just, what it could mean for a bounce back in the NIM over the next few quarters here?

Sure. So if you actually look, our average balances in interest bearing cash were actually up from the fourth quarter. So about $1.450 billion versus $1.1 billion in the fourth quarter. So again, as I talked about, we had much stickier commercial deposits than I would have guessed, which is a good thing. We had a buildup of cash that we normally see in the first quarter, that added to that, which was great. But if you look at period end interest and cash, its in the $450 million range. So by the end of the quarter, we had actually gotten it down significantly, and so, I'd see it in the second quarter in the $400 million to $600 million or the $400 million and $700 million range. So we are managing that cash down, but from an average basis, you didn't quite see it in the quarter. So, I feel pretty good about that and how we are managing that down and putting it to good use. So in terms of the margin, I think it still stays in the 270s range for now, and so, depending on when rates rise, we think it stays there and then can move into the high 270s or the 280s, depending on whether we should see short rates move soon.

Emlen, this is Bryan; I will sort of editorialize and Susan may want to jump in as well. I feel really good about, as BJ said earlier in his prepared comments about the loan growth opportunities that we are seeing. I think our structure and our pricing has been very good; and as I look at loan pipelines, as we transition into the second quarter here, our loan pipelines are very-very strong, and we feel very-very good about the outlook for continued loan closings in the second quarter. All of that said, we have seen in the first quarter, sort of an acceleration of the weakening of pricing and structure in the marketplace. I may have commented in the past, we saw it stabilizing a little bit in the second half of 2014. We have seen a further acceleration of that weakening of pricing structure in the marketplace. And so, we think we can see a lot of good growth opportunities in acquiring customers and building relationships, and as I commented earlier, filling up these fundings that we have got on some commercial real estate. And so, we think there are opportunities to put this cash to work in customer oriented ways and feel very-very good about those prospects.

This is Susan. I would agree with Bryan. We are seeing some excellent opportunities with both -- growing with existing clients, as well as bringing on good prospects that we have been calling on for some time. And we are seeing that strengths across our specialty areas, which have been a source of strength for sometime, but also across our core commercial teams in our markets. And so its good to see the strengths in the pipeline. But as Bryan said, we did see, probably some increased pressure in the first quarter on both pricing and structure. While we remain disciplined, we do look for opportunities, and we need to get a little bit competitive to win good business, that we believe is good relationship long term business for us. We have also continued to see improved grade migration in our portfolio. So the risk-return profile remains very strong.

The next question comes from Ebrahim Poonawala with Bank of America-Merrill Lynch. Please go ahead.

Good morning guys.

Good morning.

I guess, Bryan, so you just mentioned in terms of loan, pipelines were very strong. I was wondering if you can sort of elaborate on that a little bit in terms of where loan growth came from this quarter, in terms of Tennessee versus some of the other expansion and the Mid-Atlantic markets that you have talked about, and what's the outlook in terms of just the breakdown of, how much of that slightly to come from Tennessee versus sort of outside of Tennessee?

Yeah. We have seen very good trends across all the markets. We feel like we are -- we still got very strong traction in West Tennessee, and you saw a lot of closings in the Western part of the state. Middle Tennessee is building a tremendous amount of traction there, and BJ talked earlier about building out the teams and hiring bankers. We have hired and made a couple of very key hires there in the last 90 days or so, that will help us continue to build the momentum. We are seeing good opportunities across the state, and our pipeline is pretty full. We are also seeing very good opportunities in Houston, as you see some of the reset going on in oil prices and energy lending. We have a very strong pipeline going into the second quarter there. And then our Mid-Atlantic market is also seeing great opportunity. And its really across all the products, I think we are getting very good traction in our C&I businesses as well as our commercial real estate businesses. And then, sort of non-geographically oriented, the specialty business, mortgage warehouse lending continues to see good opportunities and opportunity to expand lines, pick up customers and our ABL businesses have been strong. Susan, you may want to comment further?

I would just add to what Bryan said; we are seeing across the board. We do see increased momentum in Houston. As you may recall, we opened that office in March of last year, and so we are seeing a strong pipeline in [indiscernible], C&I and energy out of Houston. Mid-Atlantic remains strong, and we had particularly good growth in our Southeast Tennessee market this quarter as well.

Understood. And just on a separate topic, in terms of the HUD settlement behind you. Doe that make you more active in terms of looking at potential acquisition opportunities from here, or how are you thinking about that from a capital deployment perspective?

Well, I don't think it really changes our desire to put capital to work. As we have talked about it and BJ commented earlier, we take a pretty disciplined approach to look into dividends and buyback and deploying capital in the business. And as BJ described, the low forward [ph] in the charts of the common equity tier-1, I guess, make the shifts in terms. You saw a lot of opportunity to put the capital to work in the near term in the balance sheet through loan growth opportunity. So we are going to be disciplined, we are going to look for continued opportunities to grow. We are pleased with the pending transaction at Trust Atlantic, and we think there will be other opportunities to grow the franchise. But I don't think it changes whether we have our foot anymore on the accelerator any less, we are just going to continue to be disciplined.

The next question comes from Paul Miller with FBR Capital Markets. Please go ahead.

Good morning guys. This is actually Thomas on behalf of Paul. Just as a follow-up, I guess to Steve's earlier question, I am going to ask it a different way. Of the 7 million of legal costs in the quarter, is there any way to get a sense of how much of that was attributed to the settlement that's now behind you?

This is Bryan. I think, a little bit of what you see in the first quarter is just some of the lumpiness in the time, the billings; there is going to be -- because of the timing of reaching the agreement on the settlement, there is going to be a little bit of a follow-on. But as BJ said earlier, over the course of the year, we expect that to trend line down and we think we could have significant savings in the $15 million plus range over the course of the year, as having this kind of activity behind us.

Okay. That's great. And then one quick follow-up; you guys have talked about Houston a couple of times during the call; I know the business is relatively new. Where are you guys seeing the most opportunity there and what kind of loans are you looking to make in this sort of environment?

Thomas, this is Susan. As I mentioned before, we have now got bankers in Houston focused on core C&I, commercial real estate and energy; and in looking at the most recent pipeline, we have got a strong pipeline in all of those categories. Obviously we are watching energy prices, as it relates to how it may affect Houston. But we feel very confident about our ability to grow a very strong good book of business there, with the bankers that we have hired.

The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.

Great. Thanks. Just a quick question; on the cash balances and also the commercial deposit growth; I think I heard you say that the average like $1.45 billion in the period was $450 million. Was any of that related to deposit outflows in the quarter or by that quarter end; because normally, first quarter should be a seasonally weaker quarter for commercial deposits, but you had very strong growth. So I am just wondering, if there was any -- or if you expect any of those commercial deposits to flow out or if they already have?

Yeah, hey. Good morning, its BJ. Yes. So we certainly expect some to flow out, and like I said earlier, I thought that we would see more outflow honestly from the normal ebb and flow of deposits from fourth to first. So fourth to first, they stayed higher than what I would have thought. We did start to see some of those balances, as we would expect to come out towards the end of the quarter. We would expect some more to come out, trending towards tax-day, in mid-April, and so we expect some of that to come back. But with all of that said, the core deposit gathering that we are seeing in commercial deposits is very positive. We are seeing it from core commercial clients, from business banking clients, as well as public fronts, deposits. So we feel very good about what the deposit base looks like.

Okay, great. And then just one quick follow-up; on page 7 of the slide deck, technical question. You mentioned a tax benefit of $12 million in corporate. But it looks like it also happened in the fourth quarter; is that a onetime item, or is that just sort of an ongoing benefit that you get?

I think its more -- I think the term tax benefit, its really more related to -- the corporate segment has a net loss and so tax -- instead of having income tax expense, it’s a tax benefit. That's all it is.

Got it. Perfect. Okay. Thank you.

The next question comes from Kevin Fitzsimmons with Hovde Group. Please go ahead.

Good morning everyone.

Good morning Kev.

One subject you did touch on it earlier, if you could just expand a little is on buybacks. Number one, the stock has done pretty well lately and is higher and you mentioned Bryan I believe that, you guys are somewhat limited with the Trust Atlantic deal pending. So if you can just give us a gauge over the next few quarters, should we really expect to dial back or really little buybacks, or what to look at from that front? Thanks.

Yeah we still have -- BJ can help me, I think in the neighborhood of $45 million or so in the current authorization that we have. You are correct, I did say earlier that the Trust Atlantic closing is going to have some impact on our ability to buy in the near term. But longer term, we still think that there is value in buying back our own stock. We are going to look for opportunities to repurchase and do it in an opportunistic fashion. And as I said to the earlier question to Ebrahim, we look at it in a balanced fashion, we look at it in a context of overall deployment etcetera, but we think there are going to be continued opportunities to use the buyback, as a way to get capital back in our shareholder's hands, and we will look for opportunities to do that, as soon as we get free of some these trading restrictions that are impacted by the merger.

One quick follow-up; thanks Bryan; on the Trust Atlantic deal. I know on one hand, months ago, we got the news about those commercial lenders that departed. But on the other hand, you've talked quite a bit today about your hiring efforts. So where is that going to net out? Have you replaced those guys, or have you more than replaced them, as you are about to come into the Raleigh market? Thanks.

I want to be really clear, because it is real important for them and real important for us. There is still an independent institution and they are still managing an independent institution and they have done some hiring, to do some replacement there. We think our opportunities to hire and build out, once that merger is consummated and Raleigh is going to be really-really strong. We are pleased with the team that we see there, and we are hopeful that sometime over the next month or two, we can get the final regulatory approvals, as shareholder vote comes up, I think in the early part of May, May 2nd to be exact. And then, once we get the clearance from the OCC and the Fed. We'd like to get that consummated, and we think we can continue to build on the momentum that they have in the marketplace, and that we separately have in the marketplace.

The next question comes from Jennifer Demba with SunTrust Robinson Humphrey. Please go ahead.

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

Yeah Jennifer good morning, this is Bryan. I have pointed out, just in the last nine days, we have made a couple of new hires. We hired a very strong leader for our commercial banking effort there. We also hired a new leader for our business banking effort in the marketplace. We are having a lot of good conversations with bankers to continue to build out that team. Carol Yochem, who leads the market for us, has been on board for a little over a year, and has created a great deal of momentum. And in fact, tonight, we will open First Tennessee Park or the National sales [0:36:42] will open First Tennessee Park there. So we see a tremendous part of initiative. We think our hiring efforts have gone very well over the last couple of months. We are getting these key leadership positions filled, and on the ground is going to create further momentum for us. And that, coupled with the strong customer calls that our team is making, and the reception that these bankers are getting, I feel very optimistic about our ability to make significant progress there over the next year or two.

Thanks so much.

You're welcome.

The next question comes from Eric Wasserstrom with Guggenheim Securities. Please go ahead.

Thanks very much. Just a couple of questions please; the first I, I am just looking at slide 14, which has the reconciliation of the tier-1 comment to the common equity tier-1. And my question is, the 10 basis points of reduction from the phasing of Basel-III, was that just from the exclusion of certain of the preferreds from the capital stack?

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

Okay. So that was my follow-on question, because the -- I am just having difficulty reconciling between the 50 basis points of RWA impact, and then the change in GAAP versus RWA assets as disclosed in the supplement in the back pages there. So can you just specify, how much of the RWA impact was from Basel-III transition versus how much was from simple asset growth?

Yeah sure so -- I am going to give you round numbers. But let's say, RWA, I think was up $1.3 billion; $400 million of it or so was Basel-III impact. $400 million or so was loans to mortgage companies growth. $300 million or so was trading assets at FTN, and the balance was loan growth -- the rest of the loan growth that we saw in the regional bank.

Great. And just a follow-up on the NIM discussion; I am just looking at slide 11, and the reconciliation that you provide from the fourth to first quarter, it indicates there that, basically half of the compression came from the deposit growth? And so, I am just trying to reconcile that trend with your outlook of remaining here in the low 270 range, because I am wondering if that suggests that to the extent this deposit growth continues, we would see a similar magnitude of NIM decline?

That's a good question. Like I said, I think we have managed down our excess cash, which is positive. So I do think, that we will see less of a drag on deposit growth. And so that will certainly be a positive. Our bankers have done a great job holding yields, but I think as Susan and Bryan both alluded to, its getting harder to do that. The competitive pressure that we are seeing there is pretty intense, and we would actually say its probably intensified in the last few quarters. So we think there will continue to be pressure on commercial loan yields. So all of that said, I think I said earlier, that we expected in the 270s, flowing up towards the higher end of that, and then again, if rates do start to rise at some point, we can see high 270s into the 280s.

The next question comes from Jefferson Harralson with KBW. Please go ahead.

Hey guys, I wanted to ask you about GE and how you guys compete with them in some ways? I think specifically about asset-based lending. Do you guys have market share statistics, or you look at what your market share is at the base lending versus theirs, and you think that, axing the business has any impact on what you guys will be doing?

Jefferson, this is Bryan. I guess our market share is certainly dwarfed by theirs. Your question is -- requires a little bit of speculation, but I think directionally, its likely to be, as they go through some transition of selling these businesses and these assets, there is going to be some dislocation. And we think in some of these specialized areas, there might be some opportunities to pick up some additional customer relationships, and I think it may also be an opportunity for us to look at some fill-ins and products that we might be able to round out. So we are relatively small in the asset based lending compared to them, but we think that with this transition, there could be some very nice opportunities for us to pick up some incremental or additional business, and round out the products there.

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

Well, its hard, Jefferson, to know completely what their strategy would be. But my guess is, they are going to look for bigger transactions, rather than smaller transactions for a lot of reasons, and probably more importantly, its easier to execute. So its unlikely that we would be a participant in that, because in terms of significant of those, those features of portfolio are so significant to our balance sheet, at that we would be a participant.

And is there any other areas where the banks have touched GE or [indiscernible] with them, I am thinking about maybe the permanent market, maybe paydown, slowdown, or paydowns that are coming at more reasonable prices that slows it down. Are there other places we should think about, that might benefit you besides ABL, or is it pretty much ABL is what we should focus?

I can't think of anything off the top of my head. I think its largely the ABL businesses. I think another piece of it is, who acquires it or the regulated financial institutions, how does it impact their short term operating model, does it go into the unregulated space, and none of that is known at this point. But we think anytime, you have transitioned in any of these markets, its an opportunity to look for additional customer relationships that we can pick up, and we will certainly do that. But we don't think there will be a whole lot of direct impact on our broader balance sheet.

The next question comes from Geoffrey Elliott with Autonomous Research. Please go ahead.

Hello there. I have got two questions, one very specific and the second, much broader. The very specific question is, the 10.3% common equity tier-1 on page 15, is that a phased in or a fully phased number, and if it’s a phased-in number, what is the corresponding fully phased figure?

Sure. So that is the phased-in number. The fully phased in number, would be, in aggregate, 30 basis points. And that will come in over the next couple of years.

And then, the broader question is on deployment of capital following the HUD/DoJ settlements. I know you have touched on this in some of the other answers, but can you walk through how you think about where you should be in terms of capital ratios longer term, then how you would kind of decide between M&A, buybacks, increased dividend, organic growth, what kind of ranking you put on those different alternatives?

Geoffrey, this is Bryan. If you go back to -- I think it’s a slide following to a slide you just referred to on 14 is sort of our bonefish methodology, and we still have eight to nine common equity tier-1 or using the same numbers in tier-1. I think in broad measures, we still feel very comfortable with that being an appropriate range of capital through the cycle. And as the economy continues to recover, as credit quality continues to recover, and as we have made resolution of some of these significant mortgage overhangs like we talked about earlier in the call, it gives us flexibility to move in that direction over time. In terms of thinking about how we prioritize capital; number one is always, can we put the capital to work in the existing franchise by growing our business organically, can we grow customer relationships, loan balances, etcetera, and do it that way. And then I would say to and the tie is [ph], do we use dividend and buyback policy or M&A to put that capital to work. And that's really going to change based on -- as you might expect, the variables in the marketplace. What the stock price is, at any one given point in time, versus what potential we have to do an M&A transaction. So we weight those consistently and we look at it back and forth. As I said over a long period of time, we don't think that we have to warehouse capital to do potential M&A transactions. We think that good transactions, if you need to raise capital, you can raise the capital for them. and so we intend to be disciplined and look to put it in the highest and best use. So its really a time for dividend buyback and M&A, and we clearly want to look for organic growth opportunities. And we continue to -- we evaluate it quarter-to-quarter and we will be continually disciplined about it.

Thank you.

You're welcome.

The next question comes from Christopher Marinac with FIG Partners. Please go ahead.

Thanks. BJ, just another follow-up question on slide 11. The interest rate sensitivity information that we have been seeing for a while. How does it play out, that it would be flatter or even just a negative yield curve, if that were to occur?

Yeah, so to state the obvious, a flatter yield curve certainly hurts, particularly if its flattening in the three to five year part of the curve, let's say, and we are actually seeing that. If you look over the last three or four months, the curve has materially flattened there. So that's certainly a negative. But I think, as I have said before, in aggregate, looking at our balance sheet. We have much more of a positive impact from short rates rising, because 65% of our loans are floating rate assets that are repriced immediately. We have about $3 billion or so repricing gap within 12 months, between our assets repricing and the liability. So we are going to be very well with whatever the yield looks like. Clearly, we'd want more speed. But if it flattens, we will still get material benefit from the late NIM coming [ph] in our balance sheet.

Okay, great. That's helpful. And Bryan, just a separate follow-up for you. We have seen two banks get sold in Chattanooga in the last month. Just using that market as an example, where you got long time market share history there. Did you have to do anything different in a market like Chattanooga? Just that, you'd play defense, or just will it continue to be in the offense there?

Yeah Chris, I will tell you, we got a really-really good team over in Chattanooga, and they are doing a fantastic job. Susan commented earlier about the strong growth that we have seen there. And our team over there is doing a great job, acquiring new relationships, building deeper and broader relationships, and doing it in high quality fashion. As you probably know, being close to Chattanooga, there is a lot of growth going on over there, and you see a lot of the industry coming in, you see it continue to build out around the BW plant that was build there a few years ago, Amazon's buildout. So we are optimistic about the prospects there. I would say, if we are going to do anything different, we are going to get more front-footed with institutions going through transition. We are not going to be more defensive, we are going to be more aggressive in the marketplace, and I'm repeating myself a little bit, bit with the team we have got over there, I am very confident that we will continue to grow share in that marketplace.

Great Bryan. Thanks for the color there.

Sure thing.

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, operator. Thank you everyone for joining the call this morning, and thank you as well for your interest in our company. Please let us know if you need any additional information or have further questions. Thank you again to our team, for all that you're doing to take care of our customer relationships. I hope you all have a great weekend. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.