First Horizon National Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.18.13 | About: First Horizon (FHN)

First Horizon National (NYSE:FHN)

Q4 2012 Earnings Call

January 18, 2013 9:30 am ET

Executives

Aarti Bowman

D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association

William C. Losch - Chief Financial Officer, Executive Vice President,Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association

Susan Springfield - Chief Credit Officer

Analysts

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Nicholas Karzon

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division

Christopher W. Marinac - FIG Partners, LLC, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions]

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Ms. Aarti Bowman. You may begin.

Aarti Bowman

Thank you, operator.

Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we'll use in this call this morning, are posted on the Investor Relations section of our website at www.fhnc.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 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 material and in the slide presentation for this call, and it is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch. Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions.

I'll now turn it over to Bryan.

D. Bryan Jordan

Thank you, Aarti. Good morning, and thanks for joining our call.

2012 marked another year of progress for First Horizon as we continued to successfully execute on our strategic priorities. We grew regional bank loans and deposits, improving our balance sheet and business mix. We reduced expenses, achieving near-term productivity and efficiency goals. And we made significant progress in winding down the nonstrategic segment, reducing its future earnings drag.

We also stepped up our return of capital to shareholders, repurchasing $131 million of common stock in 2012 versus $44 million in 2011.

I'm pleased with our accomplishments in 2012. Year-over-year, the regional bank's pre-provision net revenue rose about 7%, driven by a 6% increase in net interest income. Our bankers' focus on service resulted in positive balance sheet trend as we deepened customer relationships. Year-over-year, average core deposits were up 11% in the regional bank. The bank increased average loans 10% from 2011 driven by 12% growth in the C&I portfolio.

The regional bank's net interest spread remained relatively stable at 353 basis points in the fourth quarter of 2012, down 3 basis points from the fourth quarter of 2011. Loan growth in the bank offset a 17% decline in the nonstrategic portfolio, resulting in the year-over-year increase of 2% in consolidated period-end loans.

Our other core business, capital markets, also achieved solid performance, continuing to provide a strong source of fee income, producing a higher rate, a high return on capital and a full year 2012 ROA of 2.5%. Full year revenues declined slightly due to lower fixed income activity. Over the past year, we've continued to selectively add to our sales and trading team and to expand our product offerings and are well positioned at FTN Financial.

Turning to consolidated expenses. We focused on improving productivity and efficiency throughout the year. We focused on all aspects of our call space. The regional bank's revenue per FTE increased 9% from 2011's level. We implemented $137 million of our $139 million targeted consolidated efficiency initiatives. We also met our goal of reducing our annual run rate of consolidated expenses to $1 billion by the end of 2012. Fourth quarter expenses were $253 million, excluding approximately $19 million of restructuring charges.

We're putting the legacy issues behind us. As you recall in the second quarter, we took a $250 million charge to cover projected losses for GSE-related repurchase requests. We had no repurchase provision in either the third or the fourth quarter. As BJ will discuss in a couple of minutes, mortgage repurchase trends were positive at year end.

Asset quality trends continued to improve year-over-year as well. Year-over-year nonperforming assets decreased 20%, and net charge-offs declined 43%. Our allowance to loans was at 166 basis points at year end, down 68 basis points from the fourth quarter of 2011, reflecting overall improvement in our loan portfolios.

We are well positioned with our core businesses. We have a strong market share in our regional banking franchise, First Tennessee, and our capital markets business, FTN Financial. The strength of these businesses and the steps that we have taken over the past few years have positioned us well for further improvement in our returns for shareholders.

In summary, 2012 -- in 2012, First Horizon made good headway towards achieving our long-term profitability targets and building a foundation for quality, sustainable long-term performance. BJ will now take you through the financial results for the quarter, and I'll be back for some closing comments. BJ?

William C. Losch

Thanks, Bryan. Good morning, everybody. I'll start on Slide 6. Net income available to common shareholders for the fourth quarter was $41 million compared to $26 million last quarter, which translates to a diluted EPS of $0.17 versus $0.10 in the third quarter.

We do have some significant items I would highlight that largely netted themselves out. As we have previously communicated, we had $19 million of restructuring, repositioning and efficiency charges mostly related to severance from our voluntary separation program. We also had about a $5 million or so write-down of an equity investment in our nonstrategic segment, and we got a loss accrual related to pending litigation matters of about $4 million. We also realized in the quarter about $17 million of tax benefits related to decreases and unrecognized tax benefits and a subsidiary liquidation.

If you look on Slide 7 at our consolidated financial results, linked quarter total revenues, excluding the securities losses, were down about 5%, with regional banking revenues up slightly and capital markets revenues down. Total expenses were down 13% on a linked quarter basis.

Consolidated net interest margin was 3.09% in the fourth quarter compared to 3.15% in the third. Positive impacts to the margin this quarter were higher loan volume, an uptick in loan fees and lower deposit rates, which were offset by lower reinvestment rates in the securities portfolio, higher cash balances, pressure on yields in commercial lending and changes in the mix of inventory on our capital markets business.

For the full year 2012, our net interest margin declined 9 basis points overall to 3.13% compared to 3.22% in 2011. Year-over-year decline was mostly from the lower yields in the securities portfolio, and were somewhat mitigated by higher loan volumes and a decrease in the deposit rates.

We believe that while we may see fluctuations in net interest margin quarter-to-quarter in 2013, based on our current rate outlook, we currently expect margin to close down modestly each quarter through 2013 due to the effect the prolonged low rate environment has on reinvestment rates for longer-term assets.

Slide 8 shows some highlights for the regional bank. Linked quarter, our pretax income was up 7%, revenues rose 1%, driven by a 2% gain in net interest income. Total fees were flat from last quarter, but we did have higher NSF, cash management and bank card and brokerage fees, which offset a decline in mortgage banking, debit card and insurance fees. Expenses were up about $3 million, primarily due to higher advertising expenses from seasonal sponsorships.

Loan loss provision in the fourth quarter was a credit of $1 million compared to $3 million expense in the third quarter.

Turning to balance sheet trends in the regional bank on Slide 9. Linked quarter average loans were up 1% from growth in both commercial and consumer portfolios. We did see some growth in consumer lending through the financial centers, some modest growth in some C&I areas and continued strength in loans to mortgage companies. Our total pipeline remains solid, and we saw an increase in funding in the fourth quarter.

Year-over-year, net commitments for commercial loans in the bank were up 12%. The average credit ratings of our loan portfolio also improved as lower-rated loans paid off and we replaced them with higher-rated ones. We expect that the slow-growth environment will make the lending landscape competitive, but we believe that we should be able to continue to make profitable high-return loans.

Moving to capital markets, where we had another solid quarter. Pretax income was $19 million in the business in the fourth quarter. Fixed income average daily revenue was $1.1 million compared to $1.2 million in the third as customers remained cautious due to market conditions. And as you recall, we lost about 2 days of trading due to Hurricane Sandy. Linked quarter expenses declined 11% from lower variable compensation in the business.

And as Bryan said, over the past year in that business, we've expanded our product offerings with a particular focus on the municipal product sector, where we added sales and trading resources and also launched a public finance initiative. We made other strategic hires in sales and trading as well, further expanding the extent of the distribution platform we have out there in the business.

Turning to expenses on Slide 11. Excluding restructuring charges of $19 million in the fourth quarter, we did reach our year-end 2012 goal of approximately $1 billion of annualized level of consolidated expenses. We've targeted an additional $50 million of efficiency initiatives to be in the run rate by the end of 2013. While our voluntary separation program led to severance-related charges in the fourth quarter, these actions should be a large contributor to our targeted $50 million of efficiencies in 2013.

We are targeting an annual run rate of less than $950 million by the end of 2013 now. And we will continue to look for ways to reduce costs without impacting revenues, especially if macroeconomic factors are worse than currently anticipated.

Turning to mortgage repurchase trends on Slide 12. Our fourth quarter trends were very encouraging here. Mortgage repurchase provision expense was again 0, marking the second consecutive quarter of no provision. And we still expect that any ongoing GSE-related provision should be immaterial. Linked quarter, the repurchase pipeline declined 25% to $334 million. New requests decreased by 36% or $113 million, and resolutions were up 10%. Our success rate in the fourth quarter improved as well to 59%.

We have not experienced a change in the nature of the requests from either GSE, nor have we seen a recycling into older vintages from Freddie in particular. As a reminder, we originated only a modest amount of about $1 billion of loans to Freddie in 2004 and a similar amount in 2005.

We have not been named in any new lawsuits related to our private securitizations since October 2012, but we did receive one small indemnification request during the quarter. We had no loan repurchase requests from our first lien private securitizations. And at this time, based on our private securitizations origination mix, deal size, age and performance, we continue to believe that if any lawsuits do occur, they should be significantly less than the GSE experience.

Moving on to asset quality on Slide 13. Trends continued to remain positive. Our linked quarter provision expense was $15 million compared to the $40 million in the third quarter, and net charge-offs declined 75%. And you'll recall in the third quarter, our provision included $30 million of provision and $40 million of charge-offs related to regulatory guidance on consumer loans and discharged bankruptcies. This quarter, $20 million of charge-offs also reflect lower loss estimates for those discharged bankruptcies based on loan level data obtained from new appraisals in the fourth quarter.

And as you can see on Slide 14, NPAs declined 7% from third to fourth quarter. And for 2013, we expect the credit quality trends to continue to improve, albeit at a slower pace.

Wrapping up on Slide 15 with our bonefish. Our core business trends are good, with our core ROA at 114 basis points and core ROTCE at 13.3% in 4Q '12. We had a lot of significant items that created noise in our consolidated financials in 2012, but the solid returns in our core businesses and our prudent capital management and deployment demonstrate the progress we're making towards our long-term goals.

So with that I'll turn it back over to Bryan.

D. Bryan Jordan

Thank you, BJ. Our employees' hard work resulted in strategic progress in 2012. We successfully executed on our priorities of focusing on our higher-return core businesses, differentiating our customer service and returning capital to our shareholders.

Revenue growth is likely to remain challenging unless economic improvement is stronger than anticipated. We are committed to improving productivity and efficiency to help achieve positive operating leverage. We've already put in motion about a $20 million of the currently planned $50 million of efficiencies for 2013, and we will continue to diligently look for other opportunities to reduce expenses without negatively impacting our revenue-producing capability.

Credit-related costs should remain contained as credit quality gradually improves. We expect a lessening drag in the nonstrategic business, resulting from 2012 actions as well as ongoing rundown in the portfolio.

2013 will be another year where we focus on execution, controlling what we can control and continuing to positively transition our company. Currently, we expect the operating environment to be similar to 2012, with modest economic growth, slow employment growth and low interest rates. We will continue to work towards improving profitability and moving closer to achieving our long-term bonefish targets. Additionally, we expect to continue prudently returning capital to our shareholders in 2013.

Thank you to First Horizon's employees for your commitment and hard work. And with that, operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Steven Alexopoulos of JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I wanted to start on capital. Looking at the slide deck, the slide on the impact of Tier 1 under Basel III that you provided last quarter wasn't in there this quarter. Just wondering, are you rethinking the 250-basis-point hit to Tier 1 common under Basel III or the timing of recapturing that?

D. Bryan Jordan

Steve, this is Bryan, and I'll let BJ get into the specific. We really didn't see a need to put it back in there this quarter. Nothing has changed to common at period ended, and I guess it's under review and advisement with the regulators how it will be impacted. We don't -- there's nothing about our estimates that would've changed during that period of time or our expectations. I think as we said last quarter and would reiterate, we will react accordingly to whatever set of rules come out around capital and Basel III, and we'll manage our balance sheet in accordance with that. So nothing has really changed about our expectations. There's no new information. And so that forecast is largely unchanged from the time we talked about it in the third quarter results.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay, that's helpful. On the security portfolio yields, which have come down around 15 basis point a quarter through 2012, can you help us think about the pace we should expect in 2013 and maybe how much of that's accelerated premium amortization, impacting the decline versus just reinvesting at lower rates?

William C. Losch

Yes. Steve, it's BJ. I'll start with the premium amortization question. We have very modest amount of that, so that's not an issue for us at all. I think we have something like $24 million of premium amortization, so it's a very modest amount. You should expect something probably similar to what you've seen. We are very heavily agency MBS in our securities portfolio, and obviously, the reinvestment rates there are very challenging. So you should expect to see similar declines in 2013.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

And then, following from that, BJ, in terms of your margin outlook, should expect pressure sort of 4 or 5 basis points a quarter rather than 2 to 3? How do you think about that?

William C. Losch

Yes, that's possible. That would fall in my modest category. Based on our rate outlook, and we generally use Blue Chip consensus rate outlook, we expect that our margin will continue to come down modestly because of the dynamics in our book. We have predominantly a floating rate balance sheet. So we've taken a lot of the pain, if you will, already over the last couple of years as assets have repriced downward. So our bankers are doing a really good job as much as we can in the competitive environment to defend yields on commercial loans and get well-priced deals. But with the securities portfolio and other dynamics, it is difficult. We still believe that we have some modest opportunity to bring down deposit rates, not as much as we've had in the past couple of years, but some. And we'll continue to do everything that we can, but a lot of it largely relates to what the spread is going to be between short rates and long rates.

Operator

Our next question is from John Pancari of Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

On the loan front, I wanted to see if you can give us a little more color on what you're seeing in terms of loan demand and what's driving the growth in the C&I book. And then separately, also on the loan front, can you just talk a little bit about the expected pace of the run-off in coming quarters of the nonstrategic book and how you view that changing?

D. Bryan Jordan

John, this is Bryan. I'll start, and then I'll let Susan sort of pick up at a detailed level on what we're seeing. We actually saw a pretty good demand in the fourth quarter. Now we actually were a little pleasantly surprised that in particularly December, it looks like we had less than insignificant amount of loan activities driven by proposed tax law changes. So we have pretty good demand. The pipeline, because we had such good closings in the fourth quarter, is down a little bit in the first quarter of this year or going into the first quarter of this year. It seasonally does that every year, so we're not terribly surprised at that. From an economic perspective, we think the economy continues to move forward at a modest pace. We think our calling efforts have been very successful and are paying off very well with the kinds of opportunities that we're getting. As BJ just said a couple of minutes ago, our bankers have done a fantastic job in competing in a difficult environment, trying to maintain attractive spreads and attractive structures. So I feel good about that. But it is a slow economy. With respect to the wind-down of the nonstrategic portfolio, we -- I don't see anything any different there. I think the CPR on the home equity was about 19% in the fourth quarter. It's been running between 15% and 20%, so I'd expect that, that portfolio will continue to run off in the 15% to 20% range in 2013. I guess one of the mathematical realities of it is, it's a smaller percentage of our loan portfolio today than it was a year ago, so it will have less impact on our loan growth percentages. And as I pointed out earlier, we produced about 2% loan growth even with that in 2012. So I feel good about that momentum. Susan, any comments you want to make about the marketplace?

Susan Springfield

We -- our bankers are saying that they feel like 2013 will feel much like 2012 in terms of competition, in terms of opportunity. We do a great job of bidding business, new opportunities with existing customers and also bringing in new prospects. So the outlook really is that we'll do everything we can to bring in that new business, but we do realize that the competitive environment will continue to be a strong one.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, that's helpful. And then my follow-up on the capital deployment front. Can you just, Bryan, talk a little bit about your thoughts around buybacks? I know you're going through the process now in terms of determining what you're going to do, but can you give us a little color on how you're thinking about the pace of buybacks for '13 and then any other deployment opportunity?

D. Bryan Jordan

Yes. We -- as we've pointed out reasonably, I guess consistently for a while, we feel good about our strong capital position. Our balance sheet is in a $25 billion plus or minus area. We're generating strong returns. We think we're putting the mortgage repurchase behind us with the actions we took in the second quarter. So we still feel good about our ability to return capital to shareholders. We will and have worked with our regulators in the past, and we'll work with them in the future to manage through that. Buyback is one important element of it. The dividend is another element. We think depending on where you are in terms of pricing at any one point in time, stock price at any one point in time, that changes the various elements of buyback versus the dividend. Over the course of the last 15 months, we bought back about $175 million worth of stock. I think the average price was $8.50 something, and that's very attractive to us. We'll continue -- we think it's an attractive price, and we'll continue to buy our stock when we have the opportunity. I think it's appropriate for us in 2013 to evaluate the mix of dividend and buyback. And so it's the long way of saying we ought to look at the rate of dividend that we pay, and I would expect that we would have an eye towards increasing that dividend over time. So we'll continue to make sure we're smart with the way we manage this capital. We'll continue to do it in the context of prudent balance sheet management, prudent risk management, taking all of our various risks and opportunities into context. But we think there's a fair amount of capital that we can return to shareholders in 2013, 2014.

Operator

Our next question is from Jefferson Harralson of KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

I think I may have missed it in the beginning, but how much is left on your current buyback authorization?

William C. Losch

About $25 million.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

All right. And I want to ask you a kind of FASB accounting question on the reserving. And I guess, the head of the FASB said that the new reserve rules could possibly move up reserves by 50%. Have you looked at these rules yet? Do you think the banks in general or you specifically will result in increased provisions up until the adoption of these rules? Or do you think it's kind of a one-time true-up if these rules were to be adopted now?

William C. Losch

You're trying to get me on a technical accounting question. I don't think that it's clear yet how they're going to make it -- make us do it, whether it comes through the P&L as charges, either over time or at one time, or whether it's just a charge through equity. So I don't think that it's clear yet. I do think it's clear that they have a lot of work to do with the industry, with investors to make sure that it's done appropriately because you don't want to have a situation where it's prohibitive for a bank to make a loan because of the reserve you have to set up Day 1. That just doesn't make a lot of sense. So I do think more work needs to be done. I know there's a lot of activity in terms of comments back to them. And I'm sure we'll get to the right decision over time.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

And just one quick one on the mortgage warehouse business. From what you're seeing, the trends that you're seeing, do you think that's a -- that the loan balances there will be stable or up some more for some period of time? Or do you think we've reached the peak?

William C. Losch

I think that, that business has continued to be strong. And we believe that it continued to have strength with mortgage rates as low as they are. About 70% of the business right now is refi. And so if that starts to slow, you could see it start to come down. But on the flip side, there is talk about continued housing recovery, which would help in the purchase money market, which the business is well-positioned for as well. So we like the balance in the business. We love how it's managed. And so, we see continued strength at least in the near term.

Operator

Our next question is from Matt O'Connor of Deutsche Bank.

Unknown Analyst

This is Bob Plausit [ph] from Matt's team. Just given your outlook for the NIM from here, I was just curious if any thoughts on how we should be thinking about how this translates to net interest income dollars. Do you think you could actually grow loans enough to be able to post positive net interest income growth from here or should we kind of expect continued flattish trends?

William C. Losch

That'll be challenging. We're going to try to defend our balance sheet as well as we can, and we see good growth on the loan side as we've talked about in our regional bank. But we do -- it'll be challenging to grow the balance sheet meaningfully with the run-off. Like we talked about, we are defending our yields on our lending as well as we can. And so we'll just have to see. But we -- our people fight for every dollar of net interest income that we should, so -- but it's going to be challenging in this environment to do that, so we'll do the best we can.

D. Bryan Jordan

Bob, this is Bryan. I'll add to BJ. Structurally, the change that our balance sheet goes through we face the same cyclical pressures in NIM by debts [ph] in the securities portfolio, and in the fixed rate loans in the loan portfolios. And then deposit pricing is what it is. We saw a little bit of improvement over the course of the year and we'll continue to manage all of those with an eye towards how we produce the greatest profitability. Structurally speaking though, as we have run-off in the national portfolio, that tends to be lower spread, lower margin on the whole in the loans that we're booking in the loan portfolio. So that should offset some of the cyclical pressure that we have on the balance sheet. And as BJ said, it's hard to sit here today and say what interest rates and what the curve might look like over the course of the next year. But we've been very focused on how we manage that margin, our spread, the new loans that we're putting on the balance sheet, the relationships and how we price those. And we've had some degree of success and we'll continue to focus on how we manage through that in what's an otherwise little bit difficult operating environment for the industry.

Unknown Analyst

Just switching gears a bit, in terms of your capital markets business, what should we expect in terms of revenues from here? Are you guys still in that kind of $1 million to $1.5 million daily revenue range? Or -- and then also, just in 1Q, should we expect a seasonal uptick versus 4Q?

William C. Losch

I think we've said for a couple of months now that we expect the business to remain strong but probably in the lower end of that range. We saw $1.1 million this quarter, $1.2 million last quarter. As you all well know, reinvestment rates as we've just talked about several times for our company, it's the same for any of our community banks or others that we serve through our capital markets business. So it's very challenging. So our business, since it's so diverse and we deal with so many capital relationships, we can continue to do a great job keeping that type of average daily revenue going, and we expect it to do that but probably towards the lower end of that range.

Operator

Our next question is from Ken Zerbe of Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

First question, in terms of mortgage banking, I guess we've had 2 quarters of kind of tough results, part of that looks like it's been driven by the warehouse valuation adjustments. Can you just remind us about how that volatility or those, if the negative item last couple of quarters is calculated? Or where's that driven off of and is there any reason to think that results are more sustainable at this level versus something a little bit higher?

William C. Losch

It's BJ. I'd probably say that closed sustainability is more towards this level. If you look, we do break out in our financial supplement and mortgage valuation line item in our mortgage results. And you'll see, I think this quarter, it was 1.7 or 1.8 adjustment. It can go either way. So that's relatively modest. But what's going on right now is in our net hedging results, related to our MSR book, we've largely tried to make that a neutral hedge, and we're able to make money on the hedging results would really be on CRE. And what's going on right now in this rate environment is that the CRE on those hedge assets is lower and it continued to come in. So I think we're doing a good job managing that MSR asset for low volatility. But you should expect that it will have modest hedge results more in line with what you've seen maybe the last couple of quarters.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, that helps. And then just one final question on -- in terms of the put back provision, or the lack of put back provision, can you just remind us like what are you doing -- are you doing anything differently than some of the larger banks have had that posted put back cost this quarter? Because, I guess, the GSEs are looking at the earlier advantages. Like what do you do differently? Why might your results have been different from theirs?

D. Bryan Jordan

We've been pretty consistent over time trying to have a healthy relationship, I'll call it, with both, where we certainly look at every loan, we push back where we need to and we repurchase where we need to. So I don't think that anything's changed there. I do think in the industry, you've seen a few that I've talked about, Freddie recycling back into '04 and '05 vintages. We haven't seen any of that. And, as I said in my initial comments, we did a very modest amount of business with Freddie in those vintages only about $1 billion or so of originations in each of the years. So we're just not seeing a lot of the dynamics that others are, and we expect that to continue and our trends to continue to be positive.

Operator

Our next question is from Paul Miller of FBR.

Paul J. Miller - FBR Capital Markets & Co., Research Division

I don't know if you addressed this, but we saw some pretty strong growth on the C&I front on a lot of different regional banks, some of them in the Midwest. What did you see there? Are you seeing pipelines starting to open up? Are you seeing a lot more interest on that front in your markets?

D. Bryan Jordan

Go ahead, BJ.

William C. Losch

Yes, I would say -- I would kind of echo what Susan said a couple of questions ago which is the sentiment from our bankers is that 2013 looks much like 2012. There's some demand but not a lot. It's more taking market share than it is purchasing a lot of new equipment or business expansion per se. There's certainly pockets of that in different areas, but I wouldn't say that the loan demand is starting to pick up.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And what about -- and did you address loan pricing? I mean, it's a tough environment for everything, but outside of competitive yields, what about the underwriting? Is the underwriting holding up, in the market?

Susan Springfield

Paul, we're -- this is Susan. We are seeing some underwriting CRE. We're being very selective on the new opportunities that we choose to bring in. But we are seeing it in certain segments, we're seeing some deterioration in the CRE world as it relates to guarantor requirements, debt run equity, et cetera. So we're seeing some of it, and we're just being very selective and prudent in what we choose to bring on the balance sheet.

D. Bryan Jordan

That's a continuation of a trend over a period of time and it doesn't seem to be abating an awful lot right now, still a pretty competitive environment for every deal that's out there. As I said a little bit earlier, Paul, the pipelines were off a little bit seasonally in the first quarter last year. They are again this year but they seem to be pretty steady. We feel good about the trends and call in efforts. We feel good about the relationships that we're calling on and winning. And as I mentioned earlier, fourth quarter closings were pretty good and there's some positive strength in December. Some of it driven by tax transactions by customers. So we feel pretty good about the momentum. But it is an economy that's growing, a GDP growth that seems to still be fairly modest by all the measures and people's expectations for 2013.

Operator

Our next question is from Kevin Fitzsimmons of Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

A couple of questions, guys. First on the buyback, I know it's been asked a couple of times. In terms of the timing of when you may think we might hear of your next step on that front, are you guys limited or constricted by the timing of the CCAR for the large banks? In other words, does your yield primary regulator maybe want to -- or maybe you guys all feel it's prudent to wait to see how that all flushes out before you put a request in. Just trying to get a timing of -- if that's a big lever that you guys have in your control, trying to gauge when the investment community might hear about it?

D. Bryan Jordan

This is Bryan. The CCAR process -- and I don't know that I even know if this is a basis [ph] generally, this March, April time frame. We're not a participant in that process and it has not been a driver of the decisioning that our regulators that we've had in the past. And so it won't be in 2013 either. We will start the stress testing process later this year in connection with all the banks over greater than $10 billion. I'm not sure what all of that means in terms of decisioning process from late 2013 forward. But any actions in early 2013 on to the end of the year don't seem to be constrained to a calendar in terms of what may be going on with the larger banks.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Just a quick follow-up. I know you've talked about continuing to look to trim expenses and it seems like -- my question is how do you guys feel in 2013 about producing positive operating leverage because it seems like it's pretty tough on the revenue front. We have a lower base in capital markets revenues, whether that bounces back up or not, we'll see; spread revenues seems like it's going to be a challenge, given what BJ said on the margin and loan growth is pretty modest. So even though you're saying you're going to cut the expenses down to $950 million, do you feel -- if we continue in this environment that at some point, do you feel you have to look at trimming it even more just to get that positive operating leverage?

D. Bryan Jordan

Kevin, this is Bryan again. The expense focus that we've had is -- it changes from year to year based on what area we're focused on. The long and short of it is we've got to be focused on all aspects of our business all the time. Customer behaviors are changing, the way customers use branches, the way customers use technology, the amount of paper that we process in the business and our operations function. All of that changes and so we continue to iterate our cost structure, and we'll continue to do that. We think that, rightly or wrongly, that controlling cost for us and for the industry, for that matter, is likely to not be off the radar screen for a long time. We've got to focus on how we get more efficient and produce more revenue by spending less. And so we're going to be focused on that. As BJ said, we feel good about where we got to at the end of the year. We hit the sort of the $1 billion range that we had talked about going into 2013. We feel good about the progress we're making on the $50 million that we've identified and are working on now. A fair amount of that, as I mentioned earlier, is put into place with some of the voluntary separation program. And we'll continue to focus on controlling our cost and being smart with every dollar. So that's a long way of saying yes, I think it's important. I think there will be other opportunities. I can't sit here today and tell you what they are, but I can tell you that we're going to be focused on trying to control our costs and doing it in a way that doesn't impact our ability to serve our customers and produce revenue. We're trying to be very, very thoughtful about it, and do it in a way that doesn't impact our top line business, but allows us to drive greater operating leverage, as you suggested, to our shareholders.

Operator

Our next question is from Craig Siegenthaler of Credit Suisse.

Nicholas Karzon

This is actually Nick Karzon standing in for Craig this morning. I guess, first on the charge-off level, can you give us an idea of the magnitude of the impact from the lower loss estimate from the discharge bankruptcies that -- on the 4Q charge-off level?

Susan Springfield

Yes, Nick, as you know in the third quarter, we took an estimate for that bankruptcy charge-off using the home price indexes. In the fourth quarter, we were able to get actual appraisals loan by loan data, and it's approximately a $7 million to $9 million adjustment over what we did -- had in third quarter positive.

Nicholas Karzon

And then I guess the second question, just on the expense and kind of the $950 million run rate guidance. I guess, previously with I thought of that as kind of the $1 billion less, roughly kind of a $30 million lower pension cost less the $50 million from efficiency savings. Can you kind of give us -- give me a little bit more color on kind of how we should think about that or if the pension savings is still there or included in the $950 million?

D. Bryan Jordan

Nick, this is Bryan. The pension savings will still be there. That plan is now closed. We'll probably -- what I said in the past is with $50 million I hope that we can realize half of that in the run rate for this year, we would target to see our expenses in the $950 million or less range for the year. And as I said to Kevin's question earlier, expense focus is an important part of our business and it's an important part of the industry right now, and we'll continue to work on it. But your math is generally correct in the sense that you've got to factor in the impact of pension cost reduction in addition to any cost-saving initiatives that we put in place.

Operator

Our next question is from Mike Turner of Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Just following up on the comps somewhat, can you remind us or tell us how much sensitivity there is in comp to changes in capital markets revenues?

William C. Losch

Yes, a good rule of thumb is maybe 40%.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, great. And then just confirming earlier comments on the buybacks, it sounds like you're not calendar constrained. So does that mean you can essentially request increases of the buyback or dividend at any time?

D. Bryan Jordan

This is Bryan. That's the way it is operated in the past and I don't expect that to be any different. As I mentioned, the one caveat that to be anything that might change around stress testing as the greater than $10 billion organizations take it out. But as we've done in the past, I would expect that we would continue to work with our regulators in measurable and meaningful -- but meaningful steps to repatriate capital and take this thing in a consistent and steady fashion. And so I don't think that will be driven by the calendar so much.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, great. And then last, what should we assume for a tax rate this year?

William C. Losch

I don't know, that's a tough one to model. What I would just assume is take our pretax income, whatever you have for that, multiplied by 38% or so, and then we normally have about $7 million to $8 million of permanent tax credits every quarter. And so I would just kind of put those 2 numbers together.

Operator

Our next question is from Emlen Harmon of Jefferies.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Just moving back to the capital markets business. I guess there's a couple of questions about the outlook there I know it's been sounded a little bit, just the backup with rates that we've seen through the first part of this year, has that been a benefit to the business and started to drive pickup in activity at all? And then the follow on to that would be, if we think about the longer-term picture from that business, you have some strategists this year talking about starting to see rotation from fixed income into equities and is that a potential catalyst as well, as some of your clients start to get a little bit more proactive with their portfolios?

William C. Losch

Hey, it's BJ. You'll see different types of activities in the business literally everyday depending on were the rates backed up that day or what the news flow is, et cetera. So if we average $1.1 million sometimes, we'll have days that are more -- that are closer to $2 million, and sometimes days that are closer to $500,000 or $600,000 a day. So it really depends on day to day. But we do think that it's largely on average in that lower end of that $1.2 million, $1.5 million range. The dynamics that you're talking about could, particularly backup and rates, could help. But a lot of community banks, as well as the larger banks, frankly, are still dealing with Dodd-Frank and what's going to happen with OTTI and what's going to happen with how you account for your securities portfolio in terms of which buckets you put it in. So there's still a lot of uncertainty out there. And combined with low rates and not wanting to extend too much on the curve, it makes for very cautious buying across all of our depositories in particular.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you. And I know historically, you guys have said depositories are about 60% of the fixed income business. Is that -- does that continue to hold true?

William C. Losch

Yes.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you. And then what -- just one quick one on the legal reserve of this quarter, the $4 million, $5 million, was that for an existing litigation or was that for something new this quarter?

William C. Losch

It's existing litigation.

Operator

Our next question is from Marty Mosby of Guggenheim.

Marty Mosby - Guggenheim Securities, LLC, Research Division

So a set of questions. One is the pension benefit that you get going into 2013, does it all come in the first quarter, or does it kind of stair step its way? Can you kind of quantify that for us?

William C. Losch

No, it pretty much happens in the first quarter. So if you're looking at year-over-year comps, it'll come in starting in the first quarter because what's happening is when the pension plan closes, essentially the amortization, if you will, goes from being average service life to average natural life of the participant. So it just lengthens out the amortization. So you should see an immediate drop in the first quarter and then stay at those types of levels over the next several quarters.

Marty Mosby - Guggenheim Securities, LLC, Research Division

And can you size that up for us? Was it in the $13 million kind of range, am I remembering that right?

William C. Losch

I think, we expect $30 million to $35 million year-to-year. So roughly equal amounts over the 4 quarters.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Okay, so $8 million to $9 million per quarter, so I was a little bit higher than the $10 million. Okay. And then as you looked at this adjustment on the bankruptcies that we talked about being $7 million to $9 million, and I look at graph on Page 13, you would then expect to see the $20 million worth of net charge-offs next quarter move higher with some, I guess, netting if there's further improvement. But this $7 million to $9 million adjustment would be temporary, not permanent, right?

Susan Springfield

That's correct, Marty.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Okay. So that's kind of where you have that kind of box, the 40 leg that you kind of shaded there that it can almost be like $7 million to $9 million positive that pushed the number down this quarter.

Susan Springfield

Yes.

Marty Mosby - Guggenheim Securities, LLC, Research Division

And then, as you see that kind of moving forward, what kind of progression or improvement are we seeing in that net charge-off rate, have you been going through the year. It's been going down a couple of million per quarter, is that still kind of progressing at the same rate or there's still some pockets where you're seeing some incremental improvement?

Susan Springfield

So Marty, really in terms of general direction on charge-offs, probably flat in the regional bank and some decline in the nonstrategic.

Operator

Our next question is from Christopher Marinac of FIG Partners.

Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division

I wanted to follow back up on the comment earlier about reserves and allowances going forward. To the extent that now your charge offs are on a different plane and hopefully continue, does that free up just because your coverage is now stronger on a historical loss basis?

William C. Losch

Sorry, Chris, could you say that again?

Christopher W. Marinac - FIG Partners, LLC, Research Division

If you look at the allowance relative to historical losses just for perhaps the last 4 quarters, that coverage is getting stronger each quarter. So is that something that does permit you to rethink of your allowance provisions in future quarters?

William C. Losch

We haven't -- we look at reserve coverage the same way every quarter. So it doesn't necessarily change the way that we're looking at it. We're looking at trends in our portfolios in terms of grade migration on the commercial side, and we're looking at lower rates on the consumer side, as well as taking into account what we think the future holds for that. So I would say that the group is using sound judgment and I don't think that it's varying materially from what we've seen in the past. Susan would you...

Susan Springfield

I would agree.

D. Bryan Jordan

There's a lot of moving parts when it comes, Chris, to looking at those levels of reserves and we've released reserves in diminishing amounts over the last couple of years, and there's no expectation that we wouldn't continue to see some reserves free up as credit quality continues to improve going into this year, 2013. We saw very good performance, as I mentioned earlier, in terms of declining nonperforming loans, nonperforming assets, credit quality migration was very good across the course of the year. And so that by, in and of itself, will drive lower absolute levels of reserve. You also have to balance that with the accounting requirements and sort of balance with a regulatory view of reserving and then you couple all of that with the question that BJ got earlier with what do reserves look like in a new model -- as the FASBs [ph] laid it out, it's sort of hard to say, "This is where it will end up," but I think on the whole, we should continue to see some degree of reserve release over the course of 2013.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Okay, that's helpful color. And just a quick follow up on the capital markets area, do you get any more efficiencies there from rethinking overhead or it's purely back in the operating leverage model when revenues come back?

D. Bryan Jordan

This is Bryan, again. That's a business that has very scalable cost for the most part. There's data information services and some fixed cost that we have. But that's a business that has been managed historically for very limited fixed cost, very strong control of fixed costs. And so you tend to get the operating leverage on the revenues increasing and you see costs come down when not so it's largely a variable cost delta that you're going to see in that business depending on what that AVR that BJ was talking about earlier does.

Operator

Our next question is from Todd Hagerman of Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

A couple of questions. Just Bryan, first off, just in terms of the underlying profitability of the company. Obviously, you made a lot of progress this year on the expense side, in particular, you hit your $1 billion goal and reiterated kind of the expectations for '13. I'm just wondering as I look back at the company, what you've done over the last 1 or 2 years, in particular, the efficiency ratio has moved a couple of percentage points this year, obviously the reps and warranties influence the number this year. But as I look at your bonefish targets and so forth, what would be your expectations in terms of as we move past the reps and warranties issue, kind of what your targets or kind of what your scorecard looks like potentially in 2013, as I really focus on the ROTCE and efficiency at this point?

D. Bryan Jordan

Yes. We -- one of the things -- I'm not looking at the slides, I can't call a number but there's a chart, it's our last or next to last slide in there that talks about our return on tangible common equity in the core businesses. I think it's important to sort of separate out what's going on in the non-strategics from what's going on in the core. I feel really, really good about the progress that we've made in winding down the non-strategic. I feel even better about the progress that we've made in our core businesses return, and just an equal allocation of our Tier 1 common across these businesses producing a little over 13% ROE in the fourth quarter, ROAs are strong and moving towards our bonefish goal. We have, as you suggested, done a lot to control expenses and our overhead efficiency ratio improvement in the bank has been good. Capital market, as I said earlier, is largely a variable cost base. All of that said, I think we'll make further progress in 2013. The biggest driver of benefit to us is the lightened asset sensitivity in our balance sheet. We benefit very significantly from a rising rate environment at the time -- maybe that's a time all was based on the forecasting that the Fed and others have put out there. But given that, we feel good about what we're doing in terms of making incremental progress quarter-to-quarter. I would say our operating sentiment is, let's continue to control what we can control. Let's do it in a way that doesn't take misappropriated risk on our balance sheet, it takes the long view of the cycle that we're in. Let's do it in a way that we put strong quality relationships on our balance sheet, let's take risk that makes sense for the long haul. And if we do those things, we'll make our bonefish targets work and we feel very good about our ability to do that. So we've taken a very deliberate and thoughtful approach, I hope, to the way we book business and drive towards our bonefish goals. And I think we'll continue to make significant progress this year.

Operator

Our final question is from Dave Bishop of Stifel, Nicolaus.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Question for you, in the slide deck in relation to the margin on the regional bank side, you mentioned an increase in loan fees during the quarter on the regional bank side. Is that -- I think you discussed that before, sort of maybe one of the fallouts from Basel III due to the capital requirements on unused lines. Is that -- are those being more well received on the client front, what do you see in there in terms of that?

William C. Losch

Yes. It's -- this is BJ. We've started to do that. But it's still in the early stages. Once these commitments are coming up for renewal, we're having conversations with our clients and as we talked about when we did show the Basel III slides and impacts, we're going to have to do that. I suspect that we won't be the only one in the industry to do it. I think everybody else would kind of have to do it. But we're just starting that process.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

And then just a modest increase in short-term liquidity in cash this quarter in terms of the balance sheet, any sort of impact there from the expiration of the TAG program or is that any sort of positioning in anticipation of that?

William C. Losch

Yes. I think we suspect that there was probably maybe $200 million of balances that were impacted by the TAG. Much of that actually went to repo. So it didn't necessarily leave the company. And it's kind of hard to quantify exactly what came into us because of TAG expiration from other banks. But the gross amount, we think is something like $200 million on our balance sheet impact.

Operator

Thank you. I'd like to turn the call back to Mr. Bryan Jordan.

D. Bryan Jordan

Thank you, operator. Thank you all for joining our call this morning. Please let us know if you have any follow-up questions that we can help you with during the course of the day or early next week. I hope you all have a great weekend. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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