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First Horizon National (NYSE:FHN)

Q2 2011 Earnings Call

July 15, 2011 9:30 am ET

Executives

Bryan Jordan - Chief Executive Officer, President, Director, Member of Executive & Risk Committee, Chief Executive Officer of First Tennessee Bank, President of First Tennessee Bank and Director of First Tennessee Bank

William Losch - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Bank and Executive Vice President of Bank

Gregory Jardine - Chief Credit Officer and Chief Credit Officer of the Bank

Aarti Bowman -

Analysts

Todd Hagerman - Sterne Agee & Leach Inc.

Jon Arfstrom - RBC Capital Markets, LLC

Craig Siegenthaler - Crédit Suisse AG

L. Erika Penala

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

Brian Foran - Nomura Securities Co. Ltd.

Paul Miller - FBR Capital Markets & Co.

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

John Pancari - Evercore Partners Inc.

Marty Mosby - Guggenheim Securities, LLC

Robert Patten - Morgan Keegan & Company, Inc.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Steven Alexopoulos - JP Morgan Chase & Co

Kevin Reynolds - Wunderlich Securities Inc.

Operator

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Ms. Aarti Bowman of Investor Relations. Ma'am, please go ahead.

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 statements and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcements 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 materials and in the slide presentation for this call and it is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call.

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

With that, I'll turn it over to Bryan.

Bryan Jordan

Thank you, Aarti. Good morning, and thank you for joining the call. During the second quarter, we continue to successfully execute on our strategic priorities. We made headway in optimizing our business mix for profitability and returns, as the regional bank's pretax income increased 13% linked quarter, and the non-strategic segments drag decreased. We improved productivity and efficiency with overall expenses down 2% linked quarter and 8% year-over-year. Net income rose 6% to $43 million.

We are controlling what we can control in our company and making progress on our strategic priorities. Our bankers are focusing on profitably increasing market share with superior customer service. We have made more than 14,000 customer calls year-to-date, resulting in 3% period-end loan growth in the regional banking.

In our C&I portfolio, growth was encouraging as period-end loans were up 5%. The increase was driven by loans to mortgage companies and our corporate borrowers. Commercial loans, excluding loans to mortgage companies, were up 1%. We are positioning our balance sheet for higher returns by replacing low yielding non-strategic loans with better-priced, more profitable relationship-oriented loans. Our success in expanding and deepening customer relationships benefited revenues in the bank, as net interest income was up 1% and fees increased 2% from last quarter.

Capital markets continues to be a strong contributor to our overall fee income. Capital markets' average daily revenue was $1.1 million, down from last quarter's $1.3 million, but within our normalized range of expected revenues.

We made additional progress towards achieving our productivity and efficiency targets, having identified $110 million in annual cost savings. This $110 million of annualized savings is in our expense based run rate, and we have identified for execution another $60 million to be mostly completed by the end of 2011. BJ will provide more detail in a few minutes, but we took actions to streamline our company as we reorganized our structure, simplified our lines of business and made investments in technology. These actions should result in our becoming more flexible and nimble to serve our customers better.

Our strategic expenses declined 15% linked quarter due to a 34% reduction in mortgage repurchase provision expense. Our goal is to achieve a full year 2013 consolidated expense base that is 20% to 25% less than full year 2010 consolidated expenses of $1.3 billion. Achieving our goal should enable us to reach a 60% to 65% efficiency ratio sometime in 2013. Our efficiency goal also assumes ongoing investments in people, products and technology. From 2009 to the end of this year, we will invest in more than $100 million in system upgrades and technology.

Credit quality trends also improved as nonperformers and net charge-offs declined. Provision expense was unchanged at $1 million in the second quarter. We're seeing continued stabilization in our commercial loan portfolio. Additionally, enhanced collection efforts have helped lower delinquencies in our consumer portfolio.

All in all, I'm pleased with the progress we've made in successfully executing on our strategic priorities. BJ will now take you through the second quarter's financial results, and I'll be back with some closing comments before we take your questions. BJ?

William Losch

Thanks, Bryan. Good morning, everybody. I'll start on Slide 6. Second quarter's net income available to common was $43 million, an increase of 6% from last quarter. Diluted EPS is $0.16 compared to $0.15 in the first quarter and $0.01 a year ago. Significant items totaled $16.6 million and were related to our restructuring, repositioning and efficiency initiatives. Major items include $7.5 million of expense from employee severance costs in that number and a $9 million charge to terminate a technology services contract, which will create efficiencies going forward.

In the second quarter, we completed the sale of First Horizon Insurance, and we recognized a $4.2 million after-tax gain, which you can see in discontinued operations. Revenues were down primarily due to lower fixed income in capital markets, offsetting bank NII and fee increases, as well as higher mortgage hedging results.

Expenses were down despite $16 million restructuring-related charges. Due to a combination of our efficiency efforts, mortgage repurchase expense declines and lower variable compensation in capital markets.

Turning to Slide 7, look at some segment highlights. In the regional bank, pretax income was $73 million, up 13% linked quarter. Revenues in the bank increased 2%. Expenses were down 3%, and we booked a provision credit in the bank of $13.7 million compared to $12.4 million last quarter. Capital markets' pretax income declined to $17 million from $22 million linked quarter as revenues decreased 13%. Lower variable comp gross expenses down 9%. Fixed income average daily revenues declined to $1.1 million from $1.3 million, as market conditions continue to result in cautious buying activity.

In our corporate segment, we had a pretax loss of $27 million compared to loss of $8 million in the first quarter. Second quarter in the Corporate segment is where we include the $16.6 million of restructuring, repositioning and efficiency charges, as well as a $3.4 million interest related to tax refund which is booked in other income. Remember that the first quarter included $3.1 million of restructuring charges, a $5.8 million gain from the redemption of our TRUPs and a $3.3 million reversal of our Visa contingent liability.

In the non-strategic segment, the pretax loss narrowed to $11 million in the second quarter. Net hedging results were $15.4 million this quarter compared to $12.5 million in the first. Non-strategic expenses decreased as mortgage repurchase provision expense declined, and I'll go into that a little more detail in a few slides.

A note on Durban. We expect that the impact from the final decision should be about a $15 million to $20 million annual hit to our revenue. However, we believe that the impact should substantially be mitigated by the implementation of new sources of revenue. So, for example, we're charging noncustomers to use our delivery systems or increasing existing transactional and product fees, or reducing fee waivers, and we're modifying our checking product suite.

Turning to NIM and balance sheet on Slide 8. The consolidated NIM was relatively stable at 3.20% compared to 3.22% in the first, and our core business NIM was 3.57%. And we expect the NIM to remain relatively stable for the remainder of the year. Linked quarter, total assets remained stable as well at approximately $25 billion. The regional banks' period-end loans, as Bryan talked about, were up 3%, and the non-strategic loans declined 5%, resulting in modest net growth in total loans.

New commercial loan spreads were at 365 basis points, up 19 basis points from last year and were flat linked quarter. As we've emphasized, we are replacing lower-quality, lower-yield loans with higher-quality, higher-spread loans across the bank. In fact, the net growth we saw on the bank versus the runoff in non-strategic should generate 2x the NII annually.

On Slide 9, let's talk a little bit about the successful execution showing up in our loan pipeline trends. Bryan talked about our bankers' successful calling efforts, and that execution is reflected in the year-over-year growth of our commercial loan pipeline and our close-end funded commercial loans. We are seeing demand in the C&I space, especially from our corporate borrowers and asset-based lending borrowers. We've also seen some opportunity in new CRE customers. In our regional bank, commercial-funded loans have increased by 67% since last year at higher spreads. Overall, pricing spreads are favorable, but we do expect continued pricing pressure in the market.

Moving on to productivity and efficiency on Slide 10. The linked quarter consolidated expenses declined 2% to $309 million. As I mentioned earlier, that includes that $16.6 million restructuring. Recent efficiency actions including streamlining the regional bank structure, reducing cost and procurement, reducing cost and technology, as well as numerous other back-office functions.

As Bryan talked about, we've now identified $110 million in annual cost saves, with an annualized $50 million executed already and in our 2Q '11 run rate. The remaining $60 million is expected to be largely executed by the end of '11, and we will continue to execute on getting our cost down to achieve our targeted efficiency ratio.

Turning to Slide 11, talk a little bit about mortgage repurchase. Linked quarter, our pipeline declined 15% to $451 million, and our repurchase provision expense declined 34% to $24.6 million, marking the fourth consecutive quarter decline. Net realized losses were relatively flat at $38.5 million, and we decreased reserves by $14 million from last quarter. Rescission rates improved but are still within our range of 45% to 55%, and severity remains steady at 50% to 60%. Linked quarter, you see that new requests were down 18%, and resolutions were up 10%. Based on the vintage mix and the fact that we did not originate any new GSE loans after August '08, we believe that GSE mortgage repurchase request volume should continue to decline. And, again, we do not have any private securitization repurchase request to date.

Turning to Slide 12. Let me take a few minutes to discuss private securitizations, as they've recently become a hot topic again, in light of Bank of America's announced settlement. Though comparisons to their settlement have been made regarding our securitizations, we believe there is significant differences that make those comparisons less relevant. Our view of our potential risk here has remained consistent over time.

Looking at the bottom of the slide, there are a few data points which may help you analyze this. We achieved about $33 billion of private securitizations between '04 and '07, of which 40% was jumbo and 60% or so was Alt-A, and we did not have any subprime securitizations.

As I've said before, we have had no repurchase request from these securitizations to date and have 3 previously disclosed lawsuits, one of which has been withdrawn. Our securitizations have generally performed favorably overall to industry cohort benchmarks. Our reps and warranties on private securitizations are generally more limited than for GSEs. And so, as we sit here, of course, we kindle everything, particularly since we've had no private securitization requests. But sitting here today, considering the differences between the private securitization, the $33 billion originated between '04 and '07 and the $70 billion of GSE volume originated between '05 and '08, the more limited nature of the reps and warranties and the procedural differences of initiating repurchased range versus GSEs, the disclosures in the securitization prospectuses, the relative performance versus industry cohorts of our securitizations and the mix of our securitizations versus the industry, we believe it's unlikely that our private securitization risk is greater than our repurchase experience with GSEs, which have been manageable as an earnings headwind.

You can see on Slide 13 our asset quality trends continue to improve. Loan loss provision was flat at $1 million. Linked quarter, net charge-offs declined 14% to $66 million, and we decreased reserve 11% to $524 million. The reserve-to-loan ratio remained strong at 3.26% at the end of the second quarter.

Moving on to Slide 14. Nonperforming assets declined 9% linked quarter. Commercial and closed decreased by 35%, and resolutions were up 40%. Lower inflows were driven by continued credit stabilization in our commercial portfolios.

Wrapping up on Slide 15. We're continuing to make progress towards reaching our long-term bonefish goals. Our core business are away within an annualized 1.06% in the quarter, and our core NIM was at 3.57%. We're taking steps towards achieving higher returns by controlling what we can control, continuing to better position our balance sheet by replacing lower-yielding non-strategic loans with higher-spread loans in the bank. We're improving productivity and efficiency, and we're decreasing our credit environmental cost.

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

Bryan Jordan

Thanks, BJ. I'm proud of the progress made by the First Horizon team. We have a strong core banking and capital markets businesses. We have strengthened these businesses by our team's efforts to win new clients and grow organically by our continued investments in systems and processes to help us provide unparalleled customer service, and by our steps to make us a significantly more efficient company.

We have a strong capital base, and we have made solid progress on credit quality and our pipeline of mortgage repurchase requests. Our bonefish tool is widely used in organization and serves as a constant reminder that we are managing the company for profitability and strong returns to our shareholders.

Our top priority for the remainder of this year and next year is to continue to focus on improving profitability and the long-term earnings power of the core franchise. We are working on our blocking and tackling daily, actively calling on new and existing retail and commercial customers, improving spreads, managing our fee revenue and reducing our cost of doing business.

Our strong capital levels give us a significant level of flexibility. We are committed to investing that capital in a disciplined manner. Our principal goal is to increase value to our shareholders, as we prudently evaluate our options, invest in organic growth, potential mergers and acquisitions and/or increase dividend and stock buybacks, based on which option best meets our goal.

We believe that excess capital should be returned to our shareholders when it cannot be attractively invested in organic growth or well-priced deals. Expanding our business by investing capital in well-priced, value-creating mergers and acquisitions is still a priority, but it does not take precedent over our goal to increase value for our shareholders. We look forward to executing on our strategic priorities and remain committed to producing consistently attractive returns for shareholders.

Thank you, and, now, we'll take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Steven Alexopoulos from JPMorgan.

Steven Alexopoulos - JP Morgan Chase & Co

Bryan, just a follow-up first on your comments on capital. It doesn't look like you bought back any stock again this quarter. Now that earnings are up significantly, what's the holdup in buying back stock? And do you expect to get more active here over the next few quarters?

Bryan Jordan

Yes, Steve. We did not buy back other than just a few shares associated with benefit plan. We have, as I said, a strong capital base. And as you probably glean from what the largest institutions went through with the capital stress testing and dividend processes, there is regulatory involvement in that. And so our plan is to work with our regulators at the appropriate time, work through stress testing, the adequacy of our capital, and develop a plan in conjunction with our regulators and execute it accordingly.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Got you. Maybe just one other one on capital. With the economy seeming to slow a bit, Bryan, can you talk about how this might be impacting seller expectations? And do you find current expectations on a more reasonable side compared to comments from the last quarter?

Bryan Jordan

I don't know that I have any fresh data, Steve, that would indicate one way or the other. I think our point of view has been that the building pressure with the slower growth rate in the economy, coupled with increased cost of operation and regulation and pressure on these and spreads would contribute to that, but I don't know that there's been a significant shift in seller expectations during the last 90 days.

Operator

Our next question comes from the line of Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

First, just maybe on the mortgage putbacks and repurchase trends, and please reference Slide 11 or the other ones if it helps. But in your view, should we see the decline in reserves this quarter really as a signal that both reserve levels have likely already peaked and should probably trend downward, and maybe we're probably pretty close to a peak in net charge-offs?

William Losch

Craig, it's BJ. What we saw, and you can see it in some of the major drivers here, is positive trends across-the-board, so I talked about fourth consecutive decline in the provision. If you look at, again, on Slide 11, new requests down 18% linked quarter, 28% since the peak in the quarter, as well as our folks are doing a great job resolving these and reducing the pipeline. So, again, as we've seen for quite some time that we believe the momentum is certainly shifting more towards the end of this than the beginning, and I would expect that we would continue to see positive trends here over the next several quarters.

Craig Siegenthaler - Crédit Suisse AG

And what should we roughly assume about prospects for a settlement on the GSE or private label side? Previously, you've talked that there was a prospect in the GSI, has that prospect actually dimmed now that you recognized more loss in the last few quarters?

William Losch

Yes, I think we've always -- it's BJ again. We've always looked at it as an option, and we're going to do what we think is the most economically attractive for the company and shareholders. And so it if that means continuing to work through it like we're doing now, we'll do that. And if something else comes up that works, we'll look at that as well. But, again, going back to controlling what we can control, we can't control what happens working on things like a settlement, but we can control how we improve resolutions and work through our pipeline. And I think our folks are doing a fantastic job doing that.

Operator

Our next question comes from the line of Paul Miller of FBR Capital Markets.

Paul Miller - FBR Capital Markets & Co.

And just to follow up on that last question. On the particular lawsuits you said, you've said you have 3 lawsuits out there on your private label, and one has been dismissed. Is the reserve for those lawsuits in on Page 11, that $169 million? Or is that a different litigation reserve?

William Losch

No. Those 3 lawsuits, if they were estimable and probable, would be in our litigation reserves. So you can refer to our Q on that. But as I said, one of them was just recently withdrawn. So now, we have 2 outstanding.

Bryan Jordan

Paul, this is Bryan. All those suits were very early stages, in the very early stages. They've been out there for, I guess, 6 to 9 months. And as BJ said, we've been informed that one of them is being dismissed or in the process of being dismissed.

Paul Miller - FBR Capital Markets & Co.

Has your outlook changed on those suits relative to the Bank of America settlement with the -- with their private label guys?

Bryan Jordan

No. Paul, it's Bryan again. No. As we've said on this call even, we don't have any request on these private label securities. And as BJ said, our performance has been good, vis-à-vis cohorts and industry performance, and we think the structure of those deals is solid. The quality and the performances has been better than the industry. So our outlook really hasn't changed. It's been consistent over time. We think -- BJ sort of walked through the way to think about it, but we think that it's something that we'll work through over time but is likely to be manageable as an earnings headwind.

Paul Miller - FBR Capital Markets & Co.

Okay. And to change direction a little bit on the capital markets side. We -- I mean, listen, we all know that on the trading side, it was very tough this quarter on a macro sense across all companies. But can you just address, I mean, this is one of the lowest revenues that you have of that capital markets in a couple of years. Can we expect that to bounce back? Or this was just a bad quarter? Or this is a trend rate now in that segment?

Bryan Jordan

The interest rate environment has been very volatile, yields on the fixed income business tightened a lot. But if you looked into our quarter, you saw early in the quarter average daily revenues were lower. They've built over the quarter. They were stronger in the June time frame. So we think there is likely to be some volatility around revenues over the next several quarters. But we do expect to see the significant amount of cash that's got to be invested over time, and we think that we're well positioned to help in that, and we think there's great opportunity for our capital markets business in that effort.

William Losch

I'd also add, Paul, that we've talked about a normalized range of $1 million to $1.5 million. We're $1.1 million this quarter. I would expect that we would certainly be able to stay within that range over the next several quarters.

Operator

Our next question comes from the line of John Pancari of Evercore Partners.

John Pancari - Evercore Partners Inc.

Can you talk a little bit about on a putback side or the home mortgage issue, the FHA investigation to representations in mortgage originations, and if you can just discuss your potential exposure on that front.

Bryan Jordan

You mean the FHFA?

John Pancari - Evercore Partners Inc.

Yes.

William Losch

Okay. So -- I don't know if there's anything particularly new. You're talking about the subpoenas that were sent out to multiple institutions? Is that what you're talking about John?

John Pancari - Evercore Partners Inc.

Yes. And then also I know the FHA loans have been getting a lot of scrutiny more recently about banks that have been big in originating those loans. And I wanted to see what your general view would be in terms of exposure on that front from the underwriting perspective?

William Losch

I got you, John. I apologize for misunderstanding the question. On the FHA side, there's not really much materially new with us. We're certainly monitoring the situation, but there's not anything that's been material that's come up here recently.

John Pancari - Evercore Partners Inc.

Okay. And then also on the putback side, you identify that private label risk, from your perspective, given all the trends and the differences between the Bank of America portfolio that it should not exceed that of the GSE losses you've incurred? Is that how you put that?

William Losch

I think the way, John, we think about it, and again, we try to lay out our view, again, considering that we haven't had any repurchase requests to date. So we don't have any basis, tangible basis, necessary for it, but we do certainly have views. And so as we look at all of the things that I mentioned, we believe that it's unlikely that we would see -- that we would have risks that was more than what we have experienced or will experience with the GSEs. It's just our current view.

John Pancari - Evercore Partners Inc.

Okay. All right. And then lastly, actually a question on credit. The new SEC TDR guidelines to be implemented in the third quarter or required to be implemented in the third quarter, first, have you implemented that, or you've been an early adopter at all? And then, second of all, do you expect an increase in TDRs as a result of it? I know your TDRs did jump about 28% this quarter.

Gregory Jardine

John, this is Greg Jardine. We -- actually, we've met with regulators, as well as our accounting firm, when that came out to make certain that as we were practicing our TDR processes now that there would not what the impact would be if there was a gap. The good news is based upon that meeting, that we believe that we are substantially in the right space in terms of how we approach TDRs at our institution. So I would not expect a large change or difference based upon that meeting.

Operator

And our next question comes from the line of Bob Patten from Morgan Keegan.

Robert Patten - Morgan Keegan & Company, Inc.

I guess it really comes down to what the market is going to try to figure you guys out in terms of normalized earnings, and so I'm looking at the size of the balance sheet. Can you give some commentary on where you guys think you are in terms of accelerating momentum on, one, the culture of the company changing from a credit side to a revenue-producing side? It's been kind of a long haul. The second thing is warehouse was up a little this second quarter. What you're C&I opportunities and CRE and so forth? And what's the general quarter like this quarter and your expectations going forward.

Bryan Jordan

Bob, this is Bryan. I'll start, and then BJ and Greg can chime in as they like. We -- I mentioned the bonefish tool, and you talked about the culture. We spent a lot of time and energy in the organization, and people, as I said in the prepared remarks, really do focus on the bonefish tool. It's a way we measure performance in the organization, and it's driven by driving profitability. And I think we've made great progress in that regard. I'm really encouraged by the usage that it's getting. The business is one that is going to be scalable over time. We thought we sort of hung around this $25 billion asset number. We're working to control our costs, and we're going to be driven by how the bonefish drives our results. So we're going to look to book profitable loans. If we have fewer profitable loans that we can book, we'll control our costs and we'll fit into that right side, but we're going to scale the business to drive profitability. The pipelines have been strong. The second quarter was strong, particularly with our corporate borrowers. We saw good volume there. We saw our pipelines build significantly over the last several quarters, and they continued strong end of the third quarter. So we feel like we've got very strong momentum, and encouraged by the call-in efforts that we see going on in the business and the results of this call-in efforts, it is still a competitive environment. There is a lot of pressure still on pricing and structure, more so at this point in the credit cycle than we would have expected. But we do think that we're doing a good job competing in that environment. We're winning high-quality business. We're doing a good job, in my view, serving our customer base. And so I feel good about the momentum that we have in the businesses we sort of transitioned here into the third quarter.

William Losch

Bob, I might add too. I mean, if you go back to Slide 9, that one to me is particularly impressive. It's really talking about all the effort that all of our bankers are doing across our franchise to really serve customers and get out on our front foot. I mean, if you look at how much of our pipelines are doing year-over-year, how much the fundings have increased year-over-year, we're getting better spreads. We're getting better quality loans. We're making a bunch of calls. This is all against the backdrop of doing some very difficult things from a change perspective across the bank, whether its process improvement changes, whether it's efficiency and cost reductions. Our folks are facing all of that every day, still having to talk to customers and starting to deliver results like this. I'm very encouraged by what we're seeing in terms of the culture.

Robert Patten - Morgan Keegan & Company, Inc.

Okay. and the just one last thought. In terms of the temperature today, piggybacking on Steve's question initially, originally, when we talked about capital deployment, we talked about and maybe keeping a Tier 1 of 9% and that we've kind of came down to around 8%. What's your gut today? And are you optimistic that something in terms of dividend and capital deployment will happen in 2011?

Bryan Jordan

Bob, this is Bryan. There is still a lot revolving around what is adequate capital levels for the industry, but we still believe in an organization like ours is probably in the 8% to 9% Tier 1 common ratios. We're -- the answer to Steve, I sort of indicated the process in terms of the capital repatriation that you work with your regulators, I don't how long that will take, but that's something that we intend to work on and we'll continue to work through that process. And whether we make 2000 -- progress in 2011 or not, we're going to work on it and see if we can get that done.

Operator

Our next question comes from the line of John Arfstrom from RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets, LLC

A couple of, I guess, more model questions. But, BJ, do you expect any restructuring and repositioning-type charges for Q3?

William Losch

I think you will continue to see some restructuring and repositioning charges from us because as I talked about, we have more efficiencies to go in the second half of the year. We talked about $60 million that are identified for execution. But with that said, I don't see the level of restructuring charges being nearly as high as what we saw this quarter. We had $9 million termination of a technology contract in addition to some other things that I don't see repeating going forward.

Jon Arfstrom - RBC Capital Markets, LLC

But that's $7.5 million number obviously seem a bit high?

William Losch

Yes, that one was pretty high this quarter. I would not see it higher than that going forward.

Bryan Jordan

Yes, I think first quarter -- Jon, this is Bryan. I think first quarter, it was in the $2.5 million, $3 million range, so more in that range.

Jon Arfstrom - RBC Capital Markets, LLC

And then maybe a question for Greg, there was a big decline in the non-strategic income CRE, and I wondering if you could touch a bit on what happened there?

Gregory Jardine

Sure. There was a couple of things. One, there was a large loan that was taken out, and that was a substantial piece of it, as well as just refinancing that happened and a couple of smaller loan sales.

Jon Arfstrom - RBC Capital Markets, LLC

Okay. And then just one follow-up on that. I don't know which one of you will take this, but you talked a little bit about income CRE in your appetite, maybe getting a little bit better for that business. It seems to be the one category in the core bank that's not growing yet. But give us an idea of what you're seeing and what's possible for that business for you.

Gregory Jardine

Sure, Jon. This is Greg again. Within income CRE, if you think about the vintages of '05 to '07 where there was some kind of a peak, and so as we've been working through those, that has turned better than I would have expected as the CRE market is more stable than I expected in early fourth quarter. So what we see within the book is a continuing kind of improvement within credit grade categories. As it relates to opportunities we have, we were probably an early adapter because we were not heavy in income CRE compared to some of our competitors. What we see now -- so we also have seen in the second quarter and really at the end of first quarter, is some permanent market activity as well. So where you are taken out of loans and as we're putting new loans on, there's kind of a trade going there. So we're seeing good activity, and I think the good thing, Jon, is it's good to see some permanent activity. So you actually see a role of the book which is a positive thing as opposed to a stagnant book. So like this is moving in the right direction, I think there is an increasing competition in CRE from what we saw in the fourth quarter and the beginning of -- into the first quarter. So that competition is increasing there, but it's -- we're still in a good place.

Bryan Jordan

Momentum is doing good there. Pipeline has been strong. We're booking more loans this year than we were booking last year, and we have an opportunity to look at a lot of very good deals, so we're encouraged by it.

Operator

And our next question comes from the line of Bryan Foran from Nomura.

Brian Foran - Nomura Securities Co. Ltd.

I guess looking at the mortgage warehouse balances being up $200 million linked quarter, how should we think about the size of that book? It's accounted for a lot of the strength in 1Q, accounted for a good chunk of the growth in Q2. So as we think about modeling that out, should we just link it up to overall market application volumes or to your geographic expansion? I guess how should we think about the size of that book going forward?

Bryan Jordan

Brian, this is Bryan Jordan. I think that's a good way to think about it. It's going to be sensitive to rights and mortgage applications, and it's going to be based on the warehouse customers that we support, how much activity they're seeing, and those are probably as good a proxy as any.

William Losch

And, Brian, you mean loans to mortgage companies, not mortgage warehouse loans?

Brian Foran - Nomura Securities Co. Ltd.

The one that's in the appendix. I think it's Slide 22.

William Losch

That's right.

William Losch

Yes, that's right. Mortgage companies.

Brian Foran - Nomura Securities Co. Ltd.

And then it was up this quarter. Just -- I guess I was surprised it was up this quarter. Was I thinking of the wrong kind of variable that drives it?

William Losch

I mean I think you saw a significant drop, which we talked about in the first quarter. This was just a little bit more of a normalization. So it's still going to be -- it's still going to bounce around, but the big drop from fourth to first was certainly a big drop. This was just a bit more growth in the second.

Bryan Jordan

The big 2 variables that are hard to get proxies for and to model would be delivery of loans out of the warehouse to buyers and then the closing of loans. So the 2 best market proxies are going to be rights and application volumes. And it's hard to put -- to model some of the other variables.

Brian Foran - Nomura Securities Co. Ltd.

And then on the GSE putbacks, I mean, is there anything obvious to you why BofA and JPMorgan would be seeing acceleration in their GSE problems and you'd be seeing, I guess, declines, and I guess maybe specifically, does it feel like maybe the GSEs are working through the file sequentially. And so if they're on 2008 now and you only have half the vintage, then from here, you would have half the problem?

William Losch

Yes, Brian, I think, certainly, that last part progress is right, that we have a truncated year in '08. I think it goes back to how we like to conduct ourselves as a company and being proactive in trying to tackle issues. And one of the things that we've done, I don't know if others -- all the others do it, is that in our pipelines, we put mortgage insurance rescissions in the pipeline even though they aren't necessarily actual requests yet from the GSEs. So it's almost like we have a pre-pipeline pipeline. So that when that comes, we've already prepared for it and reserved for it, and so I'm not sure if others are doing it that way or not, but we certainly feel comfortable about where we are and continue to see improving trends.

Operator

Our next question comes from the line of Kevin Fitzsimmons from Sandler O'Neill.

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

Just a few questions on credit. I know you have the total TDR number that you give us. Would it be possible to get what part of that is accruing TDRs? I believe it was roughly $154 million last quarter.

William Losch

Yes. About 61% of the book is accruing. 50% is current, and 11% is accruing but delinquent. That is slightly up from the first quarter where it was about 58%.

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

Okay. But the 61% of that balance you gave of TDRs is accruing?

William Losch

That's correct.

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

Okay. And then should we think of the pace of under-providing as I believe you said a few quarters ago that it would probably be declining as time goes by because of working off more of that non-strategic portfolio? Should we think of that as the credit leverage theme continuing to play out, probably continuing to under-provide net charge-offs, but maybe at a lessening pace?

William Losch

I think that's a fair way to put it.

Operator

Our next question comes from the line of Marty Mosby from Guggenheim.

Marty Mosby - Guggenheim Securities, LLC

I wanted to go back to the normalized earnings in a sense that the excess capital that we have, and if you look at the positive trend that we're seeing and the momentum on the risk items, the loss and the non-strategic items coming down, basically, I think starts to take off the risks in a sense of that a lot of that's covered in the capital cushion, and we're already starting to see nice progress. So once we get past that, it really comes back to normalization. If we look at continued operations this quarter, about $0.15 worth of earnings, you can add back the unusual items of $0.02, and that gets us to about $0.17 number. And then if you look at the non-strategic, so if we wipe out the loss that we have there, that $11 million loss, then you end up adding $0.03. However, we're not providing anything. So if you take the provision back to a normal level, you would take out $0.05. You don't do a lot of gymnastics to get down to kind of a still run rate around $0.15 or $0.60 per year. Bryan, if we go back and look at the $60 million in incremental savings that you're -- we're now still working towards and what have in place by the end of the year, that would add another $0.15. So that gets us potentially up to $0.75. Within the critical thing in my mind is that we kind of have to look for a normalized number around $1, which whould be kind of a long-term goal. And there's really 2 levers to get there, which would be further efficiencies or share repurchase. So untapping those 2 things becomes pretty critical. And so I was just wondering, if we add another $40 million in expense savings, we have to take the regional banking kind of efficiency ratio down towards 60, and then getting about $500 million worth of share repurchase, that would give us the 20% accretion that could get us to $1. So all that financial engineering to get back to really 2 questions, can we see an additional $40 million to $50 million in expense savings? And is $500 million kind of the right bogey to think about eventually to be able to get back from the share repurchase?

Bryan Jordan

Marty, this is Bryan. I trust that BJ followed all the math problem. Real simply, on the expense side, and we -- I talked about this in previous calls, and I talked about it a lot internally. Expense control has got to be cultural. It doesn't have to be a project. It's -- we talked about targets, we laid out target, $100 million. We talked about $110 million. That don’t mean we get to that level and quit. That means we keep going. We're working to get more efficient day in, day out. And as I said in the comments earlier on, we're targeting to see that 60% to 65% ratio sometime in 2013. That means we've to get the efficiencies that we've talked about this morning and probably a little bit more. It means that we've got to get some of these environmental or credit cycle kinds of cost reducing. It means we'll probably get a little bit of continued help on the revenue side, but we think we can do that. And we think that the banking overhead efficiency ratio ought to be in the high-50s over time. But we've got an opportunity to do that, and we will. And on the capital side, as I mentioned earlier, that's still going to evolve, but that's an area that we're focused on. We recognize that we have greater capital in the organization today than we believe we need to run it long term. And we'll look for ways to be repatriate that to our shareholders, either in dividend or stock buyback, if we can't put it to work attractively in organic growth or otherwise. So we're going to work through that process with the regulators on an appropriate fashion and at an appropriate time, we'll deal with that.

Operator

Our next question comes from the line of Erika Penala from Bank of America.

L. Erika Penala

I wanted to ask about the timing of the repatriation. I guess what I'm struggling with is you mentioned that there is regulatory involvement and not being able to buy back stock this quarter. And you clearly have improving credit, very high Tier 1 common ratios. No matter what the eventual bogey ends up being. And I'm wondering is the private label overhang preventing the timing of capital repatriation at this point in terms of your conversations with the regulators?

Bryan Jordan

Erika, this is Bryan. As you saw with the largest institutions, there's a series of testing and stress testing, and there's nothing about anything that we know about that would impact that. It's just -- it's a process much like repaying the TARP. You go through an analysis with the regulators. You lay out stress testing. You go through a lot of work. It's takes a little bit of time. It's done in connection with examination cycles and so on and so forth. It's just a process, and it then -- as far as I know, it has nothing to do with anything on the balance sheet. It's just where we are in the process.

L. Erika Penala

Okay. But is that -- I mean, is that a big part of that process in terms of that discussion? Is that a variable that, of course, they're taking into account when thinking about timing and magnitude of distribution that they'll permit in 2011?

Bryan Jordan

Well, yes. Clearly, our regulators, they know us very well. We spend a lot of time with them. They're here with us on a 24/7 basis, and we have a lot of transparency with the regulator. And as you think about TARP repayment last year, and as you think about capital repatriation this year, all those issues are not new, and all that gets factored into the analysis and stress testing around capital. So I would say it's not a new issue or new discussion for our regulators. That's factored into our capital management last year, and I'm sure it will factor into our capital management again this year.

L. Erika Penala

Okay. And one more question, and not on capital or buybacks, or is that rather repurchase, but in terms of Slide 9, it's clear that you've done a lot in terms of changing the culture of this firm. And I'm wondering if you could give us an update in terms of the other side of the coin in terms of demand. When you talk to your customers, are they -- do they have enough confidence to expand or invest in their businesses this year, and that we could actually see loan growth x residual loans, x the correspondent banking momentum that you saw this quarter. Is there enough confidence that we could see 2000 -- back half of the year C&I loan growth on balance sheet?

Bryan Jordan

Yes. If you look at the loan growth in the second quarter, a couple of $100 million or so was the mortgage warehouse, which was following that corresponding period category. So we actually have 3 good growth in our large Corporate and our C&I borrowings as well, net loss would have been up, and if you exclude what happened with loans to mortgage companies. From the conversations we have with customers, it's still mixed. There are some customers, principally our larger customers that are becoming more confident. There seems to be some disparity on what segment of the economy is being served, whether it's the consumer segment or whether it tends to be more of a manufacturing base of the segment -- of the economy. But we're seeing a little bit better demand across the entire spectrum but particularly with our largest customer.

William Losch

The only thing I would add is what Bryan said is exactly right. But I think what you see in our results is our folks taking more share than there is demand out there that demand is still a bit mixed, as Bryan said.

Operator

Our next question comes from Todd Hagerman from Sterne Agee.

Todd Hagerman - Sterne Agee & Leach Inc.

On the reserve position, just curious, Bryan and BJ, if you can kind of update on the credit side, there was an earlier question on the kind of the pace of the reserve release, but as I look at the numbers in terms of the regional bank and the non-strategic portfolio. The regional bank, the credit stats are pretty close to normal in my view, and similarly, we still have our ways to go on the non-strategic end, but we're now -- you're now starting to see a little bit more momentum on the loan side. TDRs are ticking up a little that. How do we think about kind of the reserve coverage and, again, kind of the -- when you're going to have to start providing again for that incremental growth and the fact that kind of the core bank is close to normal, if you will?

Gregory Jardine

Todd, this is Greg Jardine. I think what we're still seeing, as I mentioned, is some continued healing within the regional bank portfolios. We're getting closer to normal, but after the nuclear winner, we're still not all the way to the normal high environment yet. So I think the pace decreases in terms of the healing because we're getting closer and closer. But if you look at our coverage ratios, we still see, we still have the decent coverage in the regional bank, in the income CREs, as an example. And so I think you'll continue to see releases into -- a little bit into to future. And at some point in time, it stabilizes. The other side of the equation obviously is the non-strategic. And the C&I portfolio in the CRE portfolios and non-strategic is almost wound down x the trough. So I think that just continues to play out over the next foreseeable future.

Robert Patten - Morgan Keegan & Company, Inc.

Okay. But what I'm hearing is no real change kind of near term in terms of -- as I think about 2011.

Gregory Jardine

I don't think so.

Robert Patten - Morgan Keegan & Company, Inc.

Okay, and then just a separate question. BJ, just in terms of the MSR and the environmental costs, if you will. Just curious with the write-down in the MSR this quarter, I'm just kind of curious kind of where -- if that was largely rate-driven, if there was any incremental in terms of foreclosure-related cost issues that may have factored into that decision, and then how do we think about kind of where you are on the expense side in terms of that run rate of environmental costs? And is there something based on all the discussion in terms of approval on the reps and warranties, credit improvement and so forth, is there anything -- any potential roadblocks or hurdles out there from preventing that environmental cost, if you will, from continuing to trend lower?

William Losch

Yes. I think there are 2 questions there. One on the MSR, it wasn't anything special. You will see if you look back in our supplement that there were some change in the prepayment rates, interest rates that weren't credit related. So there's not anything particularly special going on, on the MSR valuation. And so as it relates to the environmental expenses coming down, sitting here today, we expect that to continue to trend down nicely as we've seen over the last several quarters. We can always have something that comes up that we don't anticipate whether it's double dip in the economy or other factors. But in general, based on what we can see sitting here today, we expect that to continue to come down in a very nice growth over the next few years.

Operator

Our next question comes from the line of Kevin Reynolds from Wunderlich Securities.

Kevin Reynolds - Wunderlich Securities Inc.

Bryan, a couple of questions for you. I mean most of mine have been answered, and we've kind of gone way down into the granular part of the soil. But bigger picture, I know one data point doesn't really make a trend, but does it feel to you like with core revenue up slightly this quarter, do you feel like your business might have made a turn on an overall basis? Or are you not comfortable saying that yet? And then I've got a follow-up question on capital markets.

Bryan Jordan

Sure. I think your question assumes or makes us I guess an embedded or implied assumption about what happens in the economy. The economy is still improving in our view. But clearly, there's been some tremors through in terms of the last couple of months. It probably doesn't feel like it's improving at the same rate it did maybe even 90 days ago. But that said, I feel very, very good about the momentum that we see in our business, as we talked about the loan portfolios and the growth there, as BJ rightly pointed out the great job that our folks are doing on winning market share in a difficult operating environment where loan growth is probably not as strong. I feel good about the momentum in the balance sheet. I feel good about the momentum in our revenue streams. And as we said at the very beginning, we're working real hard to control what we can control, winning customer business, serving those customers well, getting more efficient and growing the business in a thoughtful and profitable manner for our shareholders. And so, to me, yes, it feels like we're making good progress on those fronts. It gets diluted or masked from time to time by what happens in the non-strategic portfolio, but the core franchise, both banking and capital markets seems to have very good momentum.

Kevin Reynolds - Wunderlich Securities Inc.

Okay. And then I guess a follow-up question on the capital markets. The trends -- the revenue trends are down. We know your business is largely fixed income sales to the community banks out there across the country. Can you read into lesser activity the fact that there may be a slight uptick in loan activity for those banks out there or may it be a slower inflows of deposits and less liquidity just sort of building up on the balance sheets of these banks?

Bryan Jordan

I think it's probably more the latter, coupled with the fact that 3% plus or minus 10-year treasury gets harder to pull the trigger, particularly when you question whether rates are going to get higher, whether they're going to get lower. And in early part of the quarter, rate seems to be picking up a little bit, and they rallied in later in the quarter, and volume picked up. So I think it's probably more of latter. If liquidity continues to build, then at the same time, you're seeing rates that pull on the trigger, it gets more difficult at different levels.

Operator

Our next question comes from the line of Jefferson Harralson from KBW.

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

You touched on it a little bit, but I want to ask you about home equity. If some of the weakness you're talking about maybe in the last 90 days, is there anything tangible you're seeing that might made you think that home equity delinquencies or loss rates changed versus your original expectations in the second half of the year?

Gregory Jardine

Jefferson, this is Greg Jardine. No. I think we, as you know, as we look quarter-over-quarter, actually, a quarter trend, you see our delinquencies decreased in the home equity book. And so we are actually seeing it's been stabilized to improving across those books. If you look in the regional bank, it's a very clean book. And then the non-strategic home equity book, quarter-over-quarter, you can look at the metrics and see the improvements. So we're not seeing anything that would indicate to us that it would move a different direction. We'll obviously keep our eye on the unemployment figures, but to date, that has not been an impact.

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

And how about the concept of principal forgiveness and some of these settlements you're talking about. Do you think a concept about principal forgiveness could come in and affect these products at all?

Gregory Jardine

Yes. Certainly any kind of regulatory, other impact like that is not there, we have to keep an eye on. But I hate to speculate one way or another on that, but we watch it. I don't know that the momentum is picking up that direction, but we keep an eye on it.

Operator

And our next question comes from the line of Mac Hodgson from SunTrust Robinson Humphrey.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Just a quick clarifying question on expenses and the target of 20%, 25% reduction from the 2010 level by the end of 2013. Does that assume that you'll have any environmental cost in 2013? Or is that exclusive of environmental cost?

Bryan Jordan

It does include some. I think I said in the past that in 2013, we'll still have non-strategic expenses largely because we'll still have a non-strategic book. We'll still have mortgage servicing, all that kind of stuff that's in those numbers. But I think what we're seeing is that those numbers, assuming credit continues to improve, the cycle continues to normalize, that those expenses will continue to fall out of the run rate.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

I didn't mean non-strategic, I meant environmental cost will be in that 2013 number?

Bryan Jordan

Correct.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Okay. So you've got some environmental stuff baked into that number.

Bryan Jordan

We do.

Operator

I would now like to turn the conference back over to Mr. Bryan Jordan for any further comments.

Bryan Jordan

Thank you, operator. Thank you for your questions. Thank you for participating in our call this morning. We appreciate your interest. If you have any further questions, please don't hesitate to contact one of us during the day or sometime next week. I hope everyone have a wonderful weekend. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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