First Horizon Corporation (FHN) Q4 2015 Earnings Report, Transcript and Summary

Good day and welcome to the First Horizon National Corporation Fourth Quarter 2015 Conference Call and Webcast. 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, Kate. 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 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 the call and is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call. This morning’s speakers include our CEO, Bryan Jordan and our CFO, BJ Losch. Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions. I will now turn it over to Bryan.

Thanks, Aarti. Good morning, everyone. Thank you for joining us. I am very pleased with our results in the fourth quarter and for the full year 2015. We made good progress working on our Bonefish targets. BJ will walk you through the details and the moving parts in a little bit. Really good progress in our balance sheet in 2015, we saw very good loan growth across our businesses, particularly in those areas that we focused on in Middle Tennessee. Our specialized businesses, our credit quality remained good and you saw that in our credit quality performance not only in the fourth quarter, but for the entire year. We have looked into 2016 and continue to see strong credit quality as we look forward at this point into 2016. We are pleased with the closing of the TrustAtlantic acquisition, which occurred in about the middle of October. Our rate environment, we saw a little bit of improvement at the end of year, with the Fed raising 25 basis points. And as we sit here today, we expect that the Fed could possibly increase its rates another couple of times throughout 2016. We remain focused on improving our productivity and our efficiency in 2015 and we continue that as we move into 2016. We are pleased with the progress we see in controlling expenses and we think we have further opportunities to do that as we move into next year. You have heard us talk a lot over the last several years about our Bonefish targets and the profitability tools, which continue to see good progress in putting those to use day-to-day in our core businesses and particularly our banking business. And we think we have good opportunities to continue to improve our results by focusing on the details of disaggregation of our business and our product lines. FTN Financial finished the year with a strong result. We had average daily revenue in the fourth quarter of $850,000 a day. The first part of 2016 has started off with some volatility, but we are pleased with the results at FTN Financial in the fourth quarter and particularly proud that they were ranked #1 in callable agency issuance in 2015. As we turn into 2016, we think the operating environment will continue to be difficult. It will, in all likelihood, pick you here look like 2013, ‘14, ‘15 ‘16 will be very, very similar. We think that the economy is still reasonably steady. We don’t have any particular concerns about a return or a downturn in the economy. I know the markets have reacted, but it still feels pretty steady. As I mentioned earlier, credit quality continues to be steady and very, very strong. So, we are optimistic that although 2016 will look a lot like the last several years, this economy, which somebody has referred to as a plow horse economy, continues to move forward at a steady pace and we think we will do very well in that. And finally, we will continue our focus in 2016, focusing on our Bonefish tools and improving profitability across all of our businesses, focusing on execution and what BJ has referred to in the past as controlling what we can control. So with that, BJ, I will stop and turn it over to you for your comments.

Thanks, Bryan. Good morning, everybody. I will start off Slide 5. For the fourth quarter, reported net income available to common was $47 million or $0.20 a share and full year was $80 million or $0.34 per share. As you can see, balance sheet growth was strong for both loans and core deposits, which led to solid growth in net interest income. Fee income growth was healthy as well driven by higher fixed income revenues, which highlights the differentiation of our business model versus other Street competitors in that space. While expenses were impacted by some notable items, underlying trends were solid as we strive to maintain positive operating leverage, where revenues growing faster than expenses. Loan loss provision continues to remain low. Our net charge-offs in the quarter were less than $2 million with net recoveries in the regional bank. As I mentioned, we did have some notable items in both the fourth quarter and the full year. In the fourth quarter, those notable items included a litigation accrual and impairment on a tax credit investment and acquisition-related costs, which were somewhat offset by tax benefits in the quarter. I will go through those a little more on the next slide. So, if we turn to the next slide, Slide 6, this shows adjusted results for 4Q ‘15 and full year 2015. Since we have had some moving parts in our results both in the quarter and over the past year, we thought it would be helpful to show you the quarterly and full year impact of the notable items, which are listed here and detailed out in the appendix for both 2015 and 2014. We believe these adjusted results provide a useful view of our underlying performance in 2015. Looking at the bottom graph shows our momentum as our balance sheet growth is translating into good net interest income growth with improved fee income growth from FTN somewhat offset by variable compensation in that business as well as other investments we have made in our company over the last year, particularly in our frontline compensation structure, new hires in expansion markets and our digital capabilities. Slide 7 shows an overview of our segment highlights and some variance analysis on each. But let’s go straight to some more detail on our core businesses in the next few slides. I will start with the regional bank on Slide 8, which continued its solid performance. Net interest income was up 3% linked quarter primarily due to loan growth in our commercial portfolios. Non-interest income was flat linked quarter as growth in trust and bank card fees offset declines in other areas. Expenses were up from higher personnel expense related to the TrustAtlantic closing as well as compensation enhancements. Recall that 3Q ‘15 expenses in the banking included about $4 million of pre-tax gains related to an employee benefit planned amendment. Credit trends remained stable in the bank. The loan loss provision was $6 million, down from $7 million in the third quarter as asset quality remains strong in the bank and credit trends remains positive. Balance sheet trends, again, were very solid with favorable comparisons to both linked quarter and prior year. Turning to Slide 9 and taking a look at the regional bank balance sheet in a little bit more detail. You can see by the chart on the right, we saw broad-based growth across many of our portfolios. Average loans were up 3% linked quarter and 12% over 4Q ‘14. Average commercial loan growth, excluding loans to mortgage companies, was up 14% year-over-year and 6% linked quarter. As you know, we did close our acquisition of TrustAtlantic in early fourth quarter. As you can see by the bullet on this slide, the addition of those customer loan balances contribute about 2% of the growth both linked quarter and full year. Our strategic focus on our specialty lending businesses is paying off, as we are up in asset-based lending and private clients. Our bankers are having success winning deals through relationships, market knowledge and balance sheet capacity. In addition to our loan and deposit growth, we saw improvements in profitability. Despite ongoing pricing competition, linked quarter net interest spread in the bank was up 3 basis points to 348 basis points. We held deposit costs flat at 12 basis points and loan yields were actually up, driven by higher loans to mortgage companies, accretion from the TrustAtlantic acquisition and an increase in LIBOR that started around mid-November in anticipation of the Fed moves that incurred in December. We also remain highly focused on economic profit, as Bryan talked about. In fact, our regional bank economic profitability improved 18% year-over-year from ‘14 to ‘15, reflecting our emphasis, particularly on specialty lending, deposit growth fees and improving the credit quality of the loans we were servicing and generating for our clients. I will describe the commentary from our customers concerning the economy much like what Bryan said, I would use the term practical in most of our markets. We are continuing to see good opportunities, particularly in our specialty lending areas in growth markets such as Middle Tennessee, Mid-Atlantic and Houston. And since we are relatively new to the Houston market, we don’t have significant exposure to energy lending, which you can see in our pie chart. While we remain disciplined with underwriting, we actually see opportunities for loan growth in Houston, given the market disruption. Let’s look at our fixed income business results on Slide 10. Net income rebounded in the fourth quarter of ‘15 on increased average daily revenues, as Bryan talked about, which rose to $850,000 a day compared with $671,000 in the third quarter. Increased market volatility, slightly higher rates at least through the fourth quarter and more clarity from the Fed around interest rates drove the improvement. Expenses were $55 million compared to $60 million in the third quarter. Recall that our third quarter included about $11.6 million of expense related to litigation. And for the full year, all major debt saw increased revenues with three of the four agencies corporates and municipals each up over 15%. As I mentioned earlier, we believe that FTN’s models differentiated and allows us to quickly take advantage of market activity while efficiently managing our risk exposures and balance sheet usage. Our extensive and stable distribution platform also gives us a strong competitive advantage that serves our customers well and increasingly, it’s also a big advantage in terms of recruiting talent, given the disruption occurring across the fixed income industry. Building on a strong performance and attracting talent in recent years, FTN added ten seasoned fixed income sales professionals during 2015 from various firms across the street as we continue our ongoing focus to growing market shares through strategic hires. Gains are being made in market share as well. As an example, you can see on the right hand side of this slide what Bryan alluded to that our FTN business was ranked as the number one underwriter of callable GSE debt, up against strong competition. We have a total of over $21 billion underwritten. We saw an increase in volume of $10 billion in underwritten volume over their previous year. This resulted in about 817 total deals in 2015 compared to 513 in 2014, which translates into an average of about three new deals underwritten every business day. We are proud of their performance. We also continue to make good progress in the expansion of our municipal products and public finance capability, increasing our standing in municipal underwriting retails ranking in the top five for 2015 in both bank qualified and all competitive new issues. Overall, we are well positioned to continue to achieve strong returns in our fixed income business, take advantage of market activity and opportunities. Let’s turn to consolidated balance sheet, margin trends on Slide 11. We ended the year with total average assets of $26 billion, up 3% linked quarter. Average loans grew 2% and average core deposits were up 3%. Net interest income was up 2% linked quarter and up 5% year-over-year in 4Q ‘15. The NII growth was due to higher loan balances in the bank, somewhat offset by runoff in the non-strategic, but still seeing net gains. Our net interest margin in the fourth quarter was 2.82% compared to 2.85% in the third, with the decrease from lower loans to mortgage companies quarter-to-quarter, a reduction in non-strategic loans and excess cash balances. You may recall that last quarter on this call, we were expecting a much lower net interest margin in the fourth quarter than where we ended up, which was encouraging. We had lower than expected cash levels. Accretion from TrustAtlantic loans helped and increase in LIBOR starting about mid-November helped as well and higher than forecast levels of loan to mortgage companies were the last piece of the puzzle that contributed to more positive results. Our 4Q ‘15 NIM of 2.82% was also just slightly below our 4Q ‘14 NIM of 2.86% with loan pricing competition is strong as it is with limited opportunities to lower our funding costs. I am pleased that our bankers were able to demonstrate this relative stability for our margin. Moving onto expenses on Slide 12, we have made a lot of progress over the last few years on reducing our costs through the wind down of our legacy portfolio, reducing our legal costs, decreasing occupancy and streamlining some processes. For 2016, our goal is to keep our core run rate of expenses at roughly the same levels as 2015. And as you can see on this slide, we have shown you a quarterly breakout of our expenses where we walk you from our reported expense, back out notable items and give you a view of what we believe our ongoing incremental expense is as well. As you know, this expense level could fluctuate depending on fixed income segments, variable compensation levels that are tied to revenue, which is a good expense. And as an example, the 15% linked quarter increase in fixed income revenues resulted in the net increase linked quarter for an FTN variable compensation of about $5 million. And while we continue to look for ways to improve efficiency, we also plan on continuing to invest in our businesses through strategic hires, upgrading technology and building out our growth markets. And while the initial move in short rates by the Fed was helpful, we know we still have work to do on the expense side and we will continue to do so. Turning to asset quality on Slide 13, credit trends remained solid across our portfolios. Net charge-offs were at just $2 million in fourth quarter compared to $12 million in the third quarter. Our fourth quarter included $15 million of recoveries versus $10 million of recoveries in the third quarter. And the fourth quarter benefited from a $6 million recovery on a single credit in the bank. Linked quarter non-performing assets declined 2% and were down 12% year-over-year. The reserves to loans ratio was at 119 basis points in the fourth compared to 126 basis points in the third. For 2016, we expect asset quality trends to continue remaining stable, assuming ongoing economic strength as we have maintained discipline in our underwriting and portfolio management practices. Wrapping up on Slides 14 and 15, we are again pleased with our progress. We are seeing strength in our core businesses with regional banking and fixed income improved results, a solid balance sheet, as evidenced by growth in both loans and core deposits and a stable credit quality environment. We will continue to focus on driving positive operating leverage by growing revenues faster than expenses. Our ongoing efforts to find further efficiencies will continue. Our focus on economic profit and improvement is proving effective and will continue as well. Capital deployment remains a top priority for us, and we were able to deploy capital in 2015 through a dividend increase, share repurchases and the TrustAtlantic acquisition and we anticipate more opportunities to profitably use our capital in the coming year. So thanks for listening and now I will turn it over back over to Bryan.

Thank you, BJ. We are very pleased with the results in 2015. As BJ said, year-over-year growth and profitability in all of our businesses, our core businesses, strong balance sheet trends, good growth in loans and deposits, credit quality remained strong. As we look at 2016, as we have said, we continue to see the economy progressing forward and recovering at a modest pace. We are optimistic that the Fed will increase rates. Our forecast is based on a couple of moves over the course of the next year. We think we are building a very strong franchise, the investments that we are making in people and then our market continues to be important and is proving to produce positive results. And we think we are well positioned to continue to add to that. I will add my thanks to our First Tennessee First Horizon employees and thank them for their hard work and all they have done to accomplish the results in 2015 and set us up for a very strong transition into 2016. So with that, Kate, I will open it up for questions.

Thank you. [Operator Instructions] The first question comes from John Pancari of Evercore. Please go ahead.

Good morning.

Good morning, John.

Just wanted to see if you can give little bit more color on the margin outlook I guess, just how you are thinking about that particularly given the better than expected results this quarter? And also given your expectation for the Fed to hike an incremental 2x, it sounds like if that doesn’t happen, where would you expect the margin to go barring that?

Yes, hey, John, it’s BJ. Good morning. Well, kind of as I alluded to in my prior comments to essentially keep our net interest margin relatively stable from 4Q ‘14 to 4Q ‘15 demonstrates I believe our ability to manage through little help from the interest rate environment or the yield curve. And so I am proud of what we have done in the past. Now what we are anticipating now as we sit here today is two moves from the Fed in 2016. So, that’s kind of our base operating assumption. So if that occurs, we should see continued modest increase in our net interest margin due to our asset sensitivity position throughout 2016. Now, there could be quarterly fluctuations with that, but we should see and would expect steady improvement throughout the course of the year if that occurs. If it doesn’t occur, we are again in the same position that we have been in the past where we will be defending margin. But I am pleased with what I am seeing in terms of discipline around loan pricing, where we are growing loans and where we are getting incremental yields. And so I am confident we will be able to defend our margin appropriately if we don’t see much in terms of rates.

Okay. Thanks, BJ. And then separately on the capital markets business obviously a very good quarter on that front and wanted to see if you could just give us some thoughts on how you expect that to trend through the year or if this was any particular strength in this quarter that may not be something that we see again next quarter or if there is anything that could impact the outlook there if you could just provide a little bit color? Thanks.

I will start, John. This is Bryan. The fourth quarter had strength, but it was really market-driven strength as the Fed moved towards raising rates in December. BJ mentioned earlier that LIBOR started trending up and as we saw when days when the interest rates moved up, fixed income revenue was very strong. And when it came – when rates came down, it slowed down. So, we don’t think there was anything that was unusually structural that would change. We think we have got the same environmentals that are available in 2016 and beyond. Now, we do think that it’s going to be somewhere less than our 1% to 1.5% range for the next year or so simply because of the level of rates and the expectation that any rate increases are going to be fairly modest. Rates have rarely come in with some of this volatility in the equity markets over the first two, three weeks of 2016. So, given that on days when rates have backed up, we have seen fairly strong days. And when rates have come down, it’s been kind of solved. So, we don’t think anything fundamentally changes. We do think, as BJ and I both tried to note and some on our opening comments, we think we are well positioned in that business, our callable agency business that we have highlighted a couple of times was very positive. We made a number of strategic hires. We do think that as some of the structural changes are made and the bigger bond houses, the Street firms, we think we have the opportunity to continue to pick up, consolidate some market share, given our broad-based calling effort in our long-term history of matching up buyers and sellers to fixed income securities. So, it’s little difficult to predict what rates will do quarter-to-quarter. We think it will be a little bit lower over the course of the next several quarters, but we do think that we are very, very well positioned to – in that business to consolidate, share and to grow profitably over the long term.

Okay, great. Thank you.

Thank you.

The next question comes from Steven Alexopoulos of JPMorgan. Please go ahead.

Hey, good morning everyone.

Good morning, Steve.

I wanted to first follow-up on BJ’s comments on expenses. Is the guidance of old expenses flat in 2016, which I guess is around $870 million, which are showing on Slide 12?

Yes, generally speaking, yes. If you recall last call that we had, that’s what we have discussed and we have said think about $8 million to $10 million of incremental costs from TrustAtlantic. And so that would be probably in the $860million, $870 million range something like that. And so that’s what we are shooting for. It could fluctuate depending on what we just talked about, which is fixed income variable comp. But we think that that’s a good level for us to strive for.

Steve, this is Bryan. As we have demonstrated over the last 6, 7 years, the expense control is clearly one of the most leveragable levers that the industry has and that we have. And we maintain a strong focus on controlling cost. And at the same time, we have continued to make significant investments in our technology. And as BJ noted in his comments, in people and we are very focused on controlling costs. We think that we can maintain cost in a flat sort of range in 2016. And we think in addition to the things that BJ has mentioned this morning, using our profitability tools, looking at what it cost to deliver products and services and the disaggregation of the business, we think that gives a sort of additional avenues or lenders to help us keep those costs under control as we move into 2016 and beyond.

Okay. That’s helpful, Bryan. On the asset sensitivity, it looks like it’s modestly down, given what you guys did in the fourth quarter. Given your outlook for two hikes in 2016, any plans to take similar actions to further trim asset sensitivity in 2016?

We are continually looking at where we want to be in terms of asset sensitivity. We don’t have any specific plans right now besides what we did in the fourth quarter, which was incrementally grow the securities portfolio. We did some bond swaps to extend duration on certain parts of the portfolio, which we think will be helpful and moderated asset sensitivity. But at this point, since we did get in an initial move, we want to wait and see a little bit more about how quickly those moves come and we will adjust accordingly. We had more opportunity to moderate it if we want to, but we are good with our position right now.

Steve, I will just add to that. You may remember from what we said in the third quarter, the context around us reducing that asset sensitivity. We believe that it was entirely appropriate to raise rates in December. And we think it’s entirely appropriate that the Fed continues to increase rates. The context we tried to put around it is our view that interest rates would get above the 200 basis points. So, of move, it was embedded in there. It was fairly unlikely. We see this cycle somewhere in the 1 to 2, maybe at the high end 2.5% at the high end before the next recession or whatever causes rates to trend down. So, we just don’t think that in this cycle, rates are going to go significantly up more than the 2% or so. So we tried to take off some of the excess or the high end of that. We benefit most from the first few moves, as I am sure most in the industry do. So we don’t have a view that rates aren’t going to go up and that rates shouldn’t go up. We firmly believe that rates should go up and we are optimistic that the Fed will continue to move. We just have reduced sensitivity to what we think is sort of the outlier rate moves, which are beyond 2%, 2.5% in this cycle.

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

Good morning guys.

Good morning.

And just a quick question, first Bryan, on capital deployment. We obviously have a ton of excess capital, if you can just remind us in terms of how you are thinking about buybacks and most of organic growth versus potential sort of M&A opportunities?

Yes. Ebrahim thank you. The – I guess first and foremost, you saw our preferred use of capital in 2015, which is to grow the balance sheet and to grow it organically. And I have said a couple of times in different settings over the last several quarters, I feel really, really good about the loan production that our bankers were able to produce. And I think as BJ highlighted, it was done in a market where rates and structure were under a fair amount of pressure. And as I have said, our bankers were going after a part of the market and winning long-term relationship opportunities that we feel very good about. So first and foremost, we want to put capital to work organically. As BJ noted, we completed the TrustAtlantic acquisition. We bought back a little bit of stock in the fourth quarter. We were out for extended portion of 2015 because of the proxy solicitation in connection with the TrustAtlantic acquisition. I haven’t looked at stocks this morning, but my sense is nothing has changed a whole lot since Friday and our stock is going on sale since Friday. So given where we bought in the fourth quarter, we think it’s an attractive opportunity to put some capital into deployment in a market where the stock is going on sale relative to what we think the long-term value of the organization is. So we will continue to use our buyback. As I have said in the past, we will be opportunistic and we feel like this is an opportunity. Now you mentioned M&A. We still think that it makes sense for smartly priced, thoughtful, lower premium type transactions to be – to put capital to work in an M&A context. I don’t know that the environment has changed all that significantly over the last several months. In some sense, maybe the backup in stock prices makes it more probable in some maybe and makes it less more probable. But we are going to look at all three levers. We think we have got continued opportunities to invest organically in the business. We think our buyback is used opportunistically as a great way to get capital back in our shareholders hands. And if we have the right deal opportunities, we certainly will consider those and look for opportunities to grow through acquisition.

Very helpful. Thank you. And just in terms of to tag along something you mentioned in terms of your competitive pressures, both on rates and structure, I was wondering if you can sort of give some color around where it does stands today relative to 6 months or 12 months ago and is that becoming a factor as you try to retain talent within the banks who are being far more easier underwriting standards and making harder for you to retain talent and relationships?

Yes. I will start and I will let Susan and I am probably going to make one point that’s maybe not as credit oriented in response to your question, Ebrahim. It seems to me that the structure side of it had deteriorated so much previously to the last several quarters that there is not as much deterioration in the structure side of things. It tends to be more on the pricing. And the pricing, what I observe is long-term fixed rate lending as opposed – there is some of which is absolutely low spreads. We feel good about our employee retention. And the point I want to make that was sort of non-credit related. I have talked about this some in the past. We think that in this environment, where pricing and structure has largely run its course, you are seeing an effort by competitors and the industry. And to us and by us to some extent, to grow through acquisition of talented RMs and bankers, portfolio managers, etcetera, financial center managers. And we have extraordinarily talented group of bankers. And so we think that itself and has put some pressure on compensation across the franchise and the industry. And we think that’s likely to be something we see more of in 2016 not less. Let me stop with that and turn it over to Susan to talk about the credit environment.

I would confirm what Bryan said that over the last quarter or two you have actually seen structural competitiveness fully stabilized, pricing is still under pressure. Our bankers, both the long-tenured bankers that have been with our company for years as well as the great new hires that we have made over the last several years are able to go out and talk to our customers about the fact that really get into businesses, both relationship by relationship, but also by line of business. We stick with customers and we stick with the line of business. So we are consistent throughout various cycles. In talking with some of our bankers, who do frequently go against competition from a pricing perspective, we are able to talk to them about that value proposition where the fact that high level of service longer tenured banking team and the fact that we stay in lines of business through various cycles. So we believe that the environment has not affected our ability to retain talent and relationship.

The next question comes from Matt O’Connor of Deutsche Bank. Please go ahead.

Hi, good morning. This is Rob Placet from Matt’s team. First, I was just wondering if you could help to frame your expectations around achieving positive operating leverages here and how much of that will be dependent on additional rate hikes from here?

Sure. Yes. It’s BJ. Certainly, some of it is, for sure. But if you look back on, I think it’s Slide 6, where we kind of gave you a view kind of addressing out notable items to the pretax income walk-forward, you will see net interest income was up $26 million over ‘14. And that had no hikes in it. That is net growth on our balance sheet from strong growth in the regional bank, offsetting anything that’s happened in the non-strategic. So our bankers have demonstrated the ability to net grow. Now, rates would certainly help, but we are not necessarily waiting for that. And the reason that we you have heard us using the term positive operating leverage is we think that aligns with our philosophy around the bonefish that we are going to pull levers that we can as the opportunity arises and control what we can control. So if we do see a better rate environment for us and that translates into higher revenues, we will still remain disciplined on expenses, but we will be able to invest and have expenses grow less than revenues, but still be able to net grow the business. If those rate increases don’t materialize, kind of like what we talked about earlier on an earlier question around expenses, flattish expense levels to 2015, I believe it’s pretty good performance, given wage pressures that we have seen particularly for our frontline talent, regulatory costs, etcetera. So I feel pretty good about our ability to do that and manage through that in the right way.

Okay. And then just separately, what tax rates should we assume for this year?

Good question. I would assume a tax rate probably in the 30% to 34% range. I won’t get into all the mechanics unless you want to call offline about how do you calculate effective tax rates. But clearly, when you have larger one-time items, it really kind of distorts that rate, but 30% to 34% is really what we should be thinking for ‘16.

The next question comes from Marty Mosby of Vining Sparks. Please go ahead.

Thanks. BJ, I wanted to follow up on the earlier question about rate sensitivity. You increased the securities portfolio period end to period end by $250 million, but yet cash still increased because deposit inflows continue. Is the stability of the deposit base given any more confidence to push some of that duration out and take advantage of the yield curve at this point?

Yes, Marty. Part of the reason that we saw a little bit better net interest margin in the fourth quarter was actually that we did have strong – continued strong commercial deposit inflows. They actually weren’t as strong seasonally as what we had anticipated. And so the net result was while we did added securities portfolio knowing that we had excess cash balances that we were confident in, we actually didn’t add to the securities portfolio as much as we would have thought. So right now, what we are looking at is making sure that we understand the core deposit trends, particularly on the commercial side, which can go in and out a little bit more before we extend our sales any further from a securities perspective.

Marty, this is Bryan. I will add to it. We are very comfortable with our sensitivity position as we have described it. And I guess, structurally speaking, we don’t believe in the carriage rate, you make some money at it, but it doesn’t always end well. And we think using that portfolio to manage our interest sensitivity and to manage our liquidity in our collateral needs is our primary objective. So, it’s unlikely that given levels of deposits or otherwise that we would look to put more duration on through the securities portfolio. I am very comfortable with our sensitivity position the way it’s structured today and we may change that over time. But today, we are very comfortable with it.

And then two just kind of questions, mortgage loans to mortgage companies were stronger I didn’t think to drop off as much. I was wondering if that had what your thoughts were about maybe the strength in the mortgage market right now? And then also the continued expansion in Houston given the pressures of energy, it seems like you are pretty comfortable with the overall market down there. So I just thought you could have some insights into two things impacting the industry on what you are seeing in those two businesses right now? Thanks.

Yes. This is Bryan again, Marty. Thank you. The loans to mortgage companies did remain strong and they started off 2016 strong. So, I think that indicates that the mortgage market is still pretty steady. And we as we have talked in the past have worked to consolidate some market share and increase utilization with our customers and we are seeing the progress on that. Susan can sort of get into the details if she would like on the exposures in Houston. We feel very, very good about our opportunities in Houston. We have got a very strong team of bankers with an outstanding group of relationships. We think we are positioned in a very advantageous way given that we do not have outsized exposure to energy. We think that this $29 a barrel oil or wherever it bottoms out is going to create some dislocation in the market and similar to not having a lot of commercial real estate in 2009, 2010, we think we are appropriately positioned to step in, to build some customer relationships and to capitalize on what our team of bankers can bring to the table there. So, we think the Houston opportunity is going to be a very good one for us. It’s going to rise through some volatility in the oil markets and it’s going to impact the Houston economy, but we think our exposure there places us very well for the future.

Marty, we do believe that Houston will be a good opportunity for us and that our timing there will serve us well. As Bryan mentioned, not only have our bankers been in that market a long time and been through cycles, but the clients that we are selecting in our portfolios and the prospects that we are calling on are also companies that have been through cycles and know how to mitigate risk associated with various price differentials. And so we are going very cautiously. Today, we have got about $165 million outstanding in Houston portfolio, a little over $100 million of that is energy-related. Much of that was brought on as after prices were declining. So, our position there is good. Commercial real estate outstandings are about $20 million, $25 million. So again, kind of a going slowly there, but we do believe there are opportunities that we are watching out the Houston market overall response to these declining energy prices and look forward to seeing where they stabilize ultimately.

The next question is from Emlen Harmon of Jefferies. Please go ahead.

Hey, good morning. Susan, just on that last point, about kind of Houston growth and the competitive environment, you are actually starting to see any of your competitors stepping away from that market and effectively making some more attractive credits available to you guys?

Emlen, absolutely all, not only attractive credits, but also potentially employees as well. Some of the banks are getting out of energy completely. Some are choosing certain segments getting out of middle-market, focusing just on large corporate. So, we do believe its early stages, but we do believe there will be opportunities for us to selectively get into some very good relationships as a result of some of this dislocation in the energy lending business.

Got it. Thank you. And then BJ, it’s a couple for you on the NIM. You had mentioned LIBOR is being a benefit for the NIM this quarter. Could you just quantify the benefits of the move on the short end on the fourth quarter? And then I would also just be curious to hear your thoughts on deposit competition and if anything 25 basis points was enough to generate anything there this quarter?

Yes, sure. So yes, let’s call it 1 to 2 basis points on the move in the LIBOR for this quarter. It’s probably the best guess. And then deposit competition, I would say is still rather benign. We hear across our markets some community banks, some credit unions that are doing certain things. They were doing them even before the Fed raised rates. So, we haven’t seen a lot of movement at all in our markets, particularly from the larger competitors that can really move some balances around. So, that’s been a positive for us. And so hopefully that will continue, but we have got ample plans to be able to react to competition as appropriate.

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

Hi, good morning.

Good morning, Ken.

Two questions for you. First one really quick one, on the tax rate, just want to make sure I understand this, so I calculate 2015 on an FTE basis tax rate around, call it, 23%, 24%. I heard your guidance is 30% to 34% in 2016. Seems like a really big increase. I just want to make sure that we are actually talking about the same numbers here?

Yes. So, embedded in all of our notable items impacts for you – in all the detail here essentially what we did is we backed out all of the notable items. We look at what our pre-tax income would have been. We taxed that at the incremental tax rate less our permanent tax credits that we always had year in and year out plus what we call discrete tax benefits, 1048 reversals and some of that technical stuff, capital loss carryovers, et cetera. And if you get to what our effective tax rate essentially would have been without any of these notable one-time items, it would have been about 29% for 2015. The reason it goes up to 30% to 34% this year is because some of the “one-time” types tax benefits are uncertain. You can’t project them, whether you are going to see those things reoccur. And so we assume a 30% to 34% allowing for a little bit of wiggle room for some of those things to occur.

Got it. But we should include, I think you did mention like permanent tax benefits, I mean there seems to be – if you were in my position, it sounds like there might be a little bias towards the lower end of the 30%, is that fair way that should we understand you?

Yes. I mean just the real high level, our incremental tax rate is in the 38%, 39% range. And so look at whatever you think our pretax income is, tax it at that level and then we usually have, let’s call it 4% to 8% of “permanent tax credits” that reduce that rate down into the levels that I talked about.

Okay. So anything lower would be just much more unusual one-time items. Okay.

Correct.

That makes sense. And then just other quick question, on the capital markets ADR I think you have mentioned it might a little bit lower going forward. But when we think about rate hikes, we do get – if the Fed does raise rates a couple of times whatever it is two, three, four times in 2016, does those events drive higher ADR by themselves or I am just trying to get a sense of what could actually drive the ADR more towards the higher end? Thanks.

Sure. So as we have talked about in the past, probably the number one driver of the boil it down is market volatility. We can represent buyers or sellers and so whenever there is increased volume and volatility, we can do well, whether it’s good volatility or bad volatility, so to speak in the market. So that’s probably the main driver. The second is clarity around rates and we alluded to it in our opening comments. But since people felt more and more confident as we got to mid-December that the Fed was actually going to raise rates, that actually helped people understand where they wanted to be invested and how long. And so we saw a little bit of a pickup in activity from people feeling a little bit more certain at least in the short-term about how they wanted to position their portfolios. What’s happened is this year, so far with the flattening of the longer end of the curve is certainly not helpful. So that’s probably a headwind to any activity. But then again, that’s offset by whatever volatility we will see and with the markets doing what they have done, you can imagine that there has been more volatility. So I go back to what Bryan said is we were at 8.50 for the quarter, good increase year-over-year, probably not back to the $1 million to $1.5 million range yet. But the range that we saw in the fourth quarter plus or minus a little bit is kind of our operating assumption at this point.

The next question comes from Jennifer Demba of SunTrust. Please go ahead.

Thank you. Good morning.

Good morning Jennifer.

Bryan, can you just give us a little more color on your M&A appetite and your interest levels in terms of what size banks you are most interested in and think realistically if you get some transactions done?

Yes. Well, you complicated it by saying realistically getting deals done. We are looking at a number of different things at various points in time. And we have come to the conclusion that it probably makes more sense to look for what I would describe as larger transactions, where if you are going to go through the regulatory approval process and it’s going to take 8 months, 10 months, 11 months, then taking time to do that on smaller transactions is more difficult that you need to think about larger transactions. In the past, I have talked about the likelihood and really the need in my view and the industry to see merger of equal type transactions, lower premium transactions and transactions that create value for shareholders in both organizations. So as we think about it, we think that those transactions, if they can be identified and structured or particularly helpful to shareholders, but also allow organizations to leverage the increasing costs of technology and the need to compete with the non-traditional financial services companies and to make their investments in regulatory infrastructure, etcetera. Back to your comment or suggestion about practicality, I think a couple of things impacting, I think one is – and with some disappointment, I am disappointed that the significantly – excuse me, the SIFI designation was not raised in the last session of Congress. I think that is a boundary that you don’t breach lightly. But – so I think that needs to grow up over time. So today we would be trying to think about transactions that would keep us in the range of below that specific designation and been systemically unimportant in some ways is a good thing. So we think doing and looking for opportunities that create value that allows to leverage our cost infrastructure, that have business models that look and feel and can be put together in a rational fashion with ours, make all the sense in the world. And I don’t think you do multiple of those transactions in the next year or 2 years, but I think it’s something that we will continue to work on and try to identify.

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

Thanks. Good morning. Hi Bryan, I just wanted to ask you and BJ about the level of reserves and I guess also about providing for loan growth, is – are we at a point where you would provide for loan growth incrementally or will you simply look at the reserve relative to your expected charge-offs?

Hey, it’s BJ, I will start. If you actually look at the regional bank dollar amount in reserves, it’s gone up. And so our coverage has stayed relatively steady in the regional bank. And so while we have continued to see positive great migration in the bank, while we have continued to see loan growth, we try to realistically look at our reserve levels there and maintain those, accounting for the increment loan growth, but also seeing opportunities to moderate that reserve as well. But we feel comfortable about where we are there. If you look under the covers of where the reserve coverage has been coming down, it’s in the non-strategic portfolios that’s had less than $5 million of charge-offs, and even a quarter or two quarters of recoveries in a portfolio that’s running off. And so that’s where we are getting the net benefit of a reduction in reserves. But we had active dialogue about maintaining healthy reserves, particularly as we are growing loans in the regional bank and we feel comfortable where we stand today.

Thanks BJ. That’s helpful. I mean does this also reflect that the level of charge-offs is simply just not that great for this next few quarters?

Not that great in meaning...

In terms of being low, sorry, very low levels.

Low numbers are great and insignificant.

Yes. I mean it’s an interesting problem to have and a discussion have as your net charge-offs are so low. You understand that they can’t be that low forever, but you have also got to make sure that your compliant with GAAP and compliant with auditors and regulators, etcetera. And it’s a balancing act, but the bottom line that we always look at is we want to be comfortable with our safety and soundness. We come to the right number. We document that number. And then we explain it appropriately to all interested parties. And again, we will continue to do that and feel very comfortable about where we sit.

Chris, this is Bryan. The accounting around loan loss reserves has become very mechanical over the last several years, in my view, to a fault. And so it’s almost of an implied degree of precision that doesn’t exist in reality. And I think we try to balance that out with what is sort of a practical view where credit trends are headed. And then the second point, we have talked in a number of different ways about the economy continuing to move forward. And as we look at emerging problems in credit portfolios, we just really don’t see that many. We think that the economy continues to move forward, the credit quality is strong and clearly at 4 basis points of losses with – a lot of that driven by one net recovery. That is pretty great. But we would – really do think that credit trends continue to be strong into 2016 as the economy continues to move forward. And that coupled with what we are hearing from our customers that they are optimistic and they are borrowing money and they are still looking to invest, that although we have seen a dislocation in the oil markets, commodity markets and we are seeing some dislocation in China and internationally. We think the economy can continue to be pretty steady and as a result, credit quality will be as well.

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

Hi. Thank you. I want to ask you first about your first quarter margin, I know you have had some – I think you have had some debt maturities in the fourth quarter, how much help does that give you?

Hey Jefferson, it’s BJ. I want to make sure I understood, were you asking about first quarter margin?

Yes.

Okay. Yes. I think what I expect sitting here today is our first quarter margin to be relatively steady to where we were in the fourth, maybe modestly up, that’s what we currently have forecasted for the quarter.

First quarter net interest income and margin Jefferson, is always impacted by day counts and the contract billings on loans and etcetera. And so first quarter is always a little squarely. But you ought to see some continued benefit of the Fed increase that we had in the fourth quarter. BJ highlighted a basis point or 2 basis points that we saw because LIBOR ramping up with the resets on LIBOR being 30 and 90, it takes a little while to work through the balance sheet, so all of that sort of fits in to what BJ just described.

Yes. The other thing I would mention is first quarter, if you look back and see the big changes Bryan mentioned day count, the other is excess balance is that the Fed. And so it will be dependent on what kind of deposit flows that we get. But again, I think hopefully we can keep it relatively steady.

Right. And I will ask you a question on your mortgage warehouse business and TRID, I know TRID has been or I have been reading anyway that’s been slowing down, closing times and does that help your mortgage warehouse business, is that why loans to mortgage companies are up in a quarter that’s seasonally slow?

Jefferson, we have talked a lot of our customers as well as with our mortgage warehouse lending team. All of the mortgage warehouse customers who are ready for TRID, the TRID issue could have accounted for a small part of the increase in mortgage warehouse. But we did saw additional usage as Bryan mentioned, we have really worked with our clients to increase the utilization and selectively increase some of the line limits for some of our mortgage warehouse lending customers. In the fourth quarter, you actually saw 53% was purchased, which is high for the fourth quarter. So we are pleased by that. And so in doing some deep dives with customers, the TRID issue really didn’t contribute very much to that increase.

Okay, alright. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for closing remarks.

Okay. Thank you, Kate. Thank you all for joining the call this morning. We are very excited about our 2015 results and encouraged about our opportunities in 2016. Thanks again to our colleagues. If you have any questions or need additional follow-up, please reach out to any of us. Aarti will be available throughout the day as well. Thank you all again. Hope you have a great day.

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