First Horizon National's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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First Horizon National (NYSE:FHN)

Q4 2011 Earnings Call

January 20, 2012 9:30 am ET

Executives

Aarti Bowman -

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

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

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

Greg Olivier -

Analysts

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

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

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Kevin Barker - FBR Capital Markets & Co., Research Division

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

Marty Mosby - Guggenheim Securities, LLC, Research Division

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

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

Michael Rose - Raymond James & Associates, Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

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

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

Operator

Good day, ladies and gentlemen, and welcome to the First Horizon National Corp. Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Aarti Bowman of Investor Relations. 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 in 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 our most recent annual and quarterly report. Our forward-looking statements reflect our views today, and we are not obligated to update those. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call and is reconciled to GAAP information in those materials. Also please remember that this 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.

I'll now turn it over to Bryan.

Bryan Jordan

Thank you, Aarti. Good morning, and thanks for joining our call. 2011 marked another year of successful execution of our strategic priorities, positioning us for further progress in 2012 and moving us closer to achieving our long-term profitability goals. We continue to positively shift our business mix, profitably building our core businesses, regional banking and capital markets while reducing our lower margin Non-Strategic segment. We lowered expenses while maintaining superior customer service. We continued to improve our asset quality, significantly reducing credit-related costs. And we managed our excess capital in a disciplined manner, repurchasing $44 million of stock in the fourth quarter.

Our efforts to improve profitability in our core businesses are paying off. As you can see on Slide 4, we grew our core businesses' pretax income by 28% in 2011 to $342 million. The Regional Bank's pretax income was up year-over-year, benefiting from lower operating and credit-related expenses. Over the past year, our bankers focused on providing great service and deepening customer relationships. We made outbound contact with existing and prospective commercial and retail customers more than 400,000 times in 2011.

Customer retention remains high. We've increased our deposit market share and we grew our assets under management and our investment fee business, First Tennessee Advisory Services.

The Regional Bank grew period end loans by 6% from last year, largely offsetting runoff for the Non-Strategic portfolio. C&I growth was especially strong, and the banking was up 11% from last year. And despite the competitive environment, yields on the Regional Bank's loans are holding up at 4%, which is above the runoff portfolio yield.

At the same time, the Regional Bank grew low-cost deposits by more than $600 million or 5%, helping us maintain a stable consolidated net interest margin in 2011.

Turning to Capital Markets. 2011 results remain strong with fixed income, average daily revenue at $1.3 million for the year. Our unique business model allows us to successfully manage through periods of market volatility. An exceptional sales and trading force, extensive distribution network and low balance sheet usage results in Capital Markets being a strong contributor of fee income and providing consistently higher return on capital.

We also made headway in our 3-year efficiency initiatives. We've implemented $112 million of our $139 million cost-saving actions. Environmental costs were also lower in 2011, contributing to full year 2011's 4% drop in consolidated expenses. We remain on track to reach our goal in reducing the level of expenses to approximately $1 billion by the end of 2013.

Credit quality continued to improve. For full year 2010 to 2011, net charge-offs dropped 38%, we decreased reserves by 42% and NPAs declined 38%. We also reduced our Non-Strategic higher risk portfolio by $1.1 billion.

In 2012, we will continue to control what we can control. We expect the operating environment to remain challenging as low interest rates persist and the economic recovery remains slow. But we're well positioned to successfully deal with the challenges and expect to make further progress toward reaching our profitability goals.

With asset quality, we anticipate continued favorable trends this year, keeping provision below our bonefish targets. However, we are committed to maintaining a healthy loan loss reserve. And environmental costs are likely to stay elevated until the industry issues are better resolved, especially in housing and real estate.

It's more important than ever to tightly manage expenses. And we will continue to reduce expenses in 2012, even as we continue to invest appropriately in technology and business developments. I mentioned earlier, we're on track to achieve our 3-year cost-cutting goals. In a few minutes, BJ will give you more information on where we currently stand and opportunities for further efficiency improvement.

Turning to capital. We ended 2011 with a strong base, providing us considerable flexibility to deploy capital in 2012. We bought $44 million of stock in the fourth quarter and expect to continue to repurchase shares in a disciplined manner. I'm pleased with the progress we made in 2011 towards achieving our bonefish targets and look forward to making additional headway in 2012.

BJ will now take you through the detailed financial review, and I'll be back for some final comments. BJ?

William C. Losch

Thanks, Bryan. Good morning, everybody. I'll start on Slide 6. For the fourth quarter, net income available to common shareholders was $35 million relatively flat to last quarter. Diluted EPS was at $0.13. Significant items in the fourth quarter included an $8.3 million pretax expense from an increase in derivative liabilities related to the prior sales of Visa stock. We had a $4 million positive impact to noninterest income that was related to a tax refund. And we also had $5.9 million of benefit in tax expenses on the tax line from the resolution of an audit in statute expirations.

Turning to segment highlights on Slide 7. Pretax income in the Regional Bank for the fourth quarter was $91 million compared to $94 million in the third. Pretax pre-provisioned income was up 11% linked quarter. The bank had a provision credit of $13 million compared to a credit of $23 million in third quarter of '11. Net interest income was up strongly at 7%, driven by higher loan volume. Noninterest income declined 5% linked quarter. And fourth quarter included the implementation of the Durbin Amendment, which reduced fourth quarter's 2011 debit card fees by about $4 million.

However, we were able to mitigate some of the lost revenue by actions such as modifying our checking account product and increasing other fees. Linked quarter expenses declined 1% and were down year-over-year 7% driven by efficiency actions.

Capital Markets' pretax income was relatively flat at $27 million. Average fixed income daily revenue was $1.3 million compared to $1.4 million in the third quarter. Linked quarter expenses declined 14% from lower variable compensation and a decline in legal expense.

And looking ahead to 2012, fixed income revenue should continue to benefit from the interest rate economic environment. We currently expect that average daily revenues will remain solidly within our $1 million to $1.5 million normalized range.

Pretax loss in the Corporate segment was $23 million this quarter. Recall that in 3Q '11, we booked a $35 million securities gain from the sale of a portion of Visa shares. Expenses in the Corporate segment were up due to the $8.3 million expense related to the Visa stock we previously sold.

Pretax loss in the Non-Strategic segment narrowed to $57 million due to lower loan loss provision and a decrease in mortgage repurchase cost. Linked quarter loan loss provision declined by $32 million. Third quarter included $31 million of provision associated with the sale of nonperforming loans.

Turning to net interest margin on Slide 8. Our consolidated net interest margin was 3.23% flat to third quarter. We were able to defend the margin by continuing to replace the lower yielding Non-Strategic loans with higher yielding loans in the Regional Bank. And if you look at the chart on the lower right, you'll see the strength of new loan spreads being booked in our Commercial segment versus the payoffs. And to give you an idea, in the last 12 months, our new loan fundings commercial-wide were about $1.7 billion at a spread of 3.35% compared to loans paid off over the last 12 months of $1.3 billion with a spread of 2.61%. So we feel very good about the changing mix we're seeing in the Regional Bank.

In the fourth quarter, an increase from loans to mortgage companies and a decrease in the cost to deposits also positively impacted our margin. Additionally, the adverse impact from nonperformers declined to 4 basis points compared to 8 in the third quarter. The lower reinvestment rate of securities portfolio somewhat offset these positives. And throughout 2012, we expect that the margin will remain flat to down a few basis points a quarter, assuming the low rate environment continues.

Turning to Slide 9. Loan pipeline trends remain solid. Borrowers do remain cautious, but we've seen steady demand from areas such as corporate lending, asset-based lending and income CRE. Pricing in our markets remains competitive. But loan yields in the bank are stable at 4.01% due to the excellent efforts of our bankers holding to disciplined pricing.

We've also seen growth in our loan portfolio. Year-over-year, period end loans in the Regional Bank were up 6%, outperforming industry growth of 2% according to the latest Fed H8 data. Over the next year, we expect moderate loan growth, given the solid trends in our pipeline. While the runoff from the Non-Strategic portfolio will constrain total loan growth, we expect ongoing positive shift in our business mix.

Turning to expenses on Slide 10. We continue to make progress with lowering expenses. Consolidated expenses declined 3% in the quarter. Efficiency actions in the year included reducing personnel costs, closing and consolidating branches, renegotiating vendor contracts and proactively managing discretionary spending. We're constantly reviewing our expense levels, so we can become a more efficient organization.

Last year, we identified $110 million in cost savings initially. We increased that amount to $125 million. And now, we're at $139 million. Out of our current planned cost saves, we've executed $112 million that are in the run rate for the fourth quarter. We've also decreased the targeted level of total expenses over time.

Our initial goal was to reduce the level of 2010 expenses by about 20%. Now we're planning on 25% to 30% below the level of 2010 expenses, meaning our goal is to have consolidated expenses down to approximately $1 billion by the end of 2013.

Pulling in [indiscernible] that we did not view efficiencies as a program with a finite end as circumstances or the environment dictates, we will respond appropriately.

Moving on to mortgage repurchase on Slide 11. Linked quarter mortgage repurchase provision expense decreased to $45 million from $53 million. Net realized losses were $49 million, and we decreased the repurchase reserve to $165 million in the fourth quarter. Our operational pipeline declined 8% to $384 million from last quarter. Total new requests declined 12%, and resolutions were up 2%. The rescission rate remained steady at 45% to 55%.

Sitting here today, we continue to believe that we are on the back side of GSE-related requests. We had no repurchase requests from first-lien private securitization. Right now, we have 4 lawsuits, including the FHFA matter related to private securitizations that are in the early stages of litigation. And we recently received requests from the FDIC and the Federal Home Loan Bank San Francisco requesting information regarding private securitizations.

At this time, based on our private securitizations origination mix, yield size and performance, we continue to believe that the risk from private securitization should be significantly less than from the GSEs.

Turning to asset quality on Slide 12. In the fourth quarter, charge-offs were $75 million compared to third quarter of $106 million. You'll recall the third quarter included $48 million of charge-offs related to loan sales. Fourth quarter's charge-offs of $75 million included a $21 million loss from one bank-related relationship, which had a TRUP and a bank holding company loan. We were fully reserved for this charge-off.

While the lowest tiers borrowers remain stressed within the TRUPs and bank stock portfolio, we have seen overall stabilization there.

Linked quarter, we decreased reserves by $65 million to $384 million. And our reserve to loan ratio was 2.34% in 4Q '11. Over the next year, assuming the economy continues to recover, we expect continued favorable credit trends and reserve decrease, but it's likely to be at a slower pace.

Turning to Slide 13, NPA trends. We've lowered our nonperforming assets significantly over the past year. Inflows are lower due to the runoff from the Non-Strategic portfolio and improved borrower performance. We saw increased disposition activity from both bulk sales and single transactions in 2011.

Linked quarter, NPAs declined 11% and were down 38% from last year. Year-over-year, our NPA ratio improved by 191 basis points to 2.57% in 4Q '11.

Wrapping up on Slide 14. Our core businesses showed great progress in reaching our long-term bonefish targets with solid results in the Regional Bank and Capital Markets. We're also controlling what we can control by lowering expenses and developing strategies to replace lost revenue. Balance sheet trends are positive, and net interest margin remained stable. The Non-Strategic segment remains a drag on our consolidated results, but we're working through the mortgage issues and we have made significant progress on mortgage repurchases. We've built momentum in the Regional Bank and in our Capital Market business and expect continued strong performance from these businesses.

Now I'll turn it over to Bryan for some final comments.

Bryan Jordan

Thank you, BJ. We made significant progress towards our strategic goals in 2011. We improved our profitability in our core businesses. We reduced expenses, and we returned capital to shareholders with share buybacks. Thanks to our employees, we've accomplished a lot, but we're not done yet. We have more work ahead.

We've got a strong business plan in place and the right people dedicated to its successful execution. As I said earlier, 2012 will be another year of controlling what we can control. Our goal is to consistently provide outstanding customer service. Customer service that differentiates us from our competitors and drives better profitability and returns.

We're committed to becoming more efficient. We will continue to manage the wind-down of our Non-Strategic assets and remain proactive with credit quality, and we'll continue to manage capital smartly. We're focused on the long-term sustainable profitability, not short-term temporary gains.

To sum up, I'm confident that 2012 will be another year of making progress toward our long-term bonefish goals.

With that, operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steven Alexopoulos of JP Morgan.

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

Maybe I'll start -- on the buyback, how should we think about the $44 million? Is this just a good run rate given where excess capital levels are? Or are you more opportunistic given the stock price?

William C. Losch

Steve, it's BJ. I'd say yes, a little bit of both. We wanted to be disciplined and opportunistic. If you look at the VWAP of what we repurchased the shares at, they were at $7.10, well below where we're at today. If you look at our daily volumes, we purchased more on down days and less on up days. So I thought we did a pretty good job of remaining disciplined, and I think that'll continue.

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

So BJ, you're saying we should expect less buybacks with the stock price where it is today?

William C. Losch

No, I don't think that's the case. No, I think we wanted to be measured and opportunistic about doing it over time. And we had said that we would take a few quarters to complete the purchase. So again, if there's volatility in the stock price and in the markets, we'll look to be opportunistic. But we still believe share repurchases are compelling at the prices that they're at today as well.

Bryan Jordan

Steve, this is Bryan. I'll add to BJ's comment. There's a lot of mechanical things that impact the buyback blackout periods around earnings and year end and things like that, and we announced it as you may recall in the third quarter call. We still think that being able to acquire our stock at these valuations is still an attractive opportunity for us, and we intend to execute on that.

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

Maybe just one separate question. On the mortgage put-back expense, I guess I'm trying to better understand why the net realized losses are still so high, given the trends you're citing in the presentation on the pipeline rescission rates, severity rates. Shouldn't we start to see a more meaningful decline in losses given those trends?

William C. Losch

Steve, it's BJ again. I think what happens is when you have higher net realized losses, that comes from higher resolutions. And so, I actually see this as a fairly good thing. If you were to go back and look over the last 8 or 9 quarters, you'd see lower charge-offs but us building provision in excess of charge-offs. But once you're getting towards where you're realizing the losses, then you're seeing stabilization in the reserve and even bringing the reserve down. So I actually see it as a fairly good thing that you're seeing net realized losses at elevated levels just means that we're working through more of the book, and you can see that in the pipeline declines as well. So that's why we say that we feel like we're well on the back end of this thing and should see further improvement.

Operator

Our next question comes from John Pancari of Evercore Partners.

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

Along the buyback lines, can you talk about where your targeted payout ratio, combined payouts of dividend as well as the buyback, would be for 2012 under your current capital plan?

Bryan Jordan

John, this is Bryan. To put it in context, we've announced the $100 million buyback. And so, at this point, what we've got approved in terms of board authorization, et cetera, is remaining, I guess, the $56 million remaining on that authorization. We'll work with the regulators at the appropriate time in the appropriate way to go back and revisit authorization. We'll learn a lot as we come out of this stress test process that the largest $50 billion and greater institutions are going through now. We'll learn a lot more. My hope is that we can follow this up with an opportunity to continue to repatriate capital to our shareholders. We think our capital base is very, very strong, that given the dynamics of an economy that is not producing significant loan growth per se, that the balance sheet growth with modest loan growth environment offset by runoff in the national portfolios is not likely to grow very significantly. So we think we've got the opportunity and the ability to maintain strong capital ratios and repatriate a tremendous amount of capital to our shareholders over the course of 2012.

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

Okay, all right. And then separately, can you give a bit more color on your margin expectations going forward, just given that the deposit cost reduction helped you in the quarter, this quarter? But I just wanted to see how much more room you may see there and how that impacts your margin outlook.

William C. Losch

Sure, John. It's BJ. I think we're pretty pleased with how we're defending the margin flat this year, really flat across all of 2011. We think it's a pretty good accomplishment. The headwinds that we have are certainly -- the rate environment, the reinvestment rate on the securities portfolio, so those are going to continue to be difficult. But the positives are the shifting business mix in the Regional Bank that I talked about, how we're replacing business with business running off at higher spreads. So that's helpful to us, and we expect that to continue. We do see further opportunity in bringing down deposit rates over time. In the extended low rate environment, that's simply something that we'll have to do. So we're looking at ways to do that, and we do see opportunity there as well. But in general, I see across 2012, our margin being stable to maybe down a basis point or 2 every quarter but holding up pretty well over time.

Bryan Jordan

John, this is Bryan. I'll add to what BJ said because he was really amplifying the point I made in response to the first part of your question. The runoff of these Non-Strategic portfolios are at significantly tighter margins than the loans we’re booking in the core franchise and banking business today, and so our balance sheet can remain relatively stable. And our profitability, we believe, can go up as a result of that because we're replacing these and are changing our business mix, replacing it in a way that makes us more profitable over time.

Operator

Our next question comes from Bob Patten of Morgan Keegan.

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

BJ, could you just refresh us on the expense numbers? And what is the core expense base? What's the environmental expense base? What's the growth rate on core that ends up at the $1 billion number by the end of 2013?

William C. Losch

Yes, Bob. Let's hear what I'm talking. But really, when we think about the core expense base, we think about Regional Banking, Corporate and our Capital Markets businesses. And so, if you look at Regional Bank, our expense base there for 2011 is $565 million, Capital Markets, $320 million. And our Corporate segment is about $105 million. So those 3 combined are kind of what we see as core Non-Strategic expenses or about $300 million. So what we would expect over time is that, that $300 million decline substantially probably doesn't all go away over the next 3 years, but a majority of it goes away. And then, of the other 3 components that I just talked about, that's where we see the $139 million of efficiencies coming out. So that kind of adds up to about, well, from 2010 levels, about $350 million-plus of expenses coming out of the organization from 2010 to 2013.

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

Okay. And just what's your anticipated growth rate of, say, for example, Regional Bank core, a couple of percent a year, or is that $139 million the net number? So you're going to hold everything flat and still get $139 million out by the time you're at 2013?

William C. Losch

That's correct, yes. So the $139 million is not a gross number. That's a net number that we're taking out of the organization.

Operator

Our next question comes from Ken Zerbe.

Ken A. Zerbe - Morgan Stanley, Research Division

In terms of the NIM guidance, obviously we talked about deposit clients, looks like some of that’s being helped by loan growth. What is -- if you were to, I guess, pick the single biggest area where you could be wrong, right, in terms of net, where might you be more likely be surprised if NIM ends up coming down faster than you expected? Like where's kind of the softest area, so to speak?

William C. Losch

I think reinvestment rates on the securities portfolio are difficult, will continue to be difficult. And if we see some kind of QE3 [ph] and long rates have moved lower, that could impact us as well. So that's one place that we watch. But really, I feel pretty confident about the other pieces and components of our margin, whether it's continued improvement in NPA and less drag there, continued pricing discipline from the Regional Bank, continued reduction in our Non-Strategic portfolio that will improve the NIM. So I actually feel pretty good about the guidance that we talked about in 2012 for the NIM.

Bryan Jordan

Ken, this is Bryan. I'll add to BJ's comments, if I may. Just to prove we worry about different stuff sometimes, I worry about the competitive environment that we've talked about, that I've talked about a lot. I’ve described it as late cycle behaviors. And I think, given this low rate operating environment, what we've seen in terms of -- in the marketplace and in pockets, not universally, but in pockets, pressure on spreads, on loans, I worry that, that could be an area of risk, not only for us but for the industry as a whole. There's a lot of competition for what is otherwise very modest, new loan opportunities for the industry.

Ken A. Zerbe - Morgan Stanley, Research Division

Understood. And then -- and so just going back to BJ's comment about the security reinvestment. In your sort of guidance of modest pressure, is there any -- on your part, is there any expectation for increases in any of the rates? Meaning, like, would you expect to get security reinvestment at a higher rate than what you're getting today, or is it flat to down in your guidance?

William C. Losch

Flat to down.

Operator

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

Kevin Barker - FBR Capital Markets & Co., Research Division

This is Kevin Barker filling in for Paul Miller. Just wanted to talk about the 4 lawsuits you have out there related to private securitization. You said the FDIC asking for information and the Fed Bank of San Francisco. Is there any way you can put numbers around what the size of the originations they're looking at, and what the default rates are with that block of originations?

William C. Losch

Kevin, are you talking about the 2 requests for information we got or the 4 existing lawsuits about?

Kevin Barker - FBR Capital Markets & Co., Research Division

The 4 existing.

William C. Losch

The 4 existing, I think, we had...

Aarti Bowman

It’s in our Q.

William C. Losch

It's in our Q, and there's...

Aarti Bowman

$0.2 billion for 3 lawsuits, and then the FHFA is -- the original balances are $874 million. The UPB is about $400 million.

Bryan Jordan

We actually have a detailed sheet in the appendix to the financial supplement or the slides that we put out this morning that gives the performance there.

Aarti Bowman

Yes, Kevin, it's Slide 27 in the earnings set.

Kevin Barker - FBR Capital Markets & Co., Research Division

Okay, and then you had repurchase claims go up in 2007 vintages. And we're seeing that across most banks this quarter. Is this something where it's -- Fannie and Freddie are really ramping up, looking at the 2007 year? Or is it something where you're seeing just broad-based reps and warrants, where they’re looking at all originations? Can you give us some color around where specifically, what years and what levels they're looking at these originations?

William C. Losch

Sure. I think that sands have been shifting here over the last several quarters in terms of what we've seen. The GSEs will not tell you directly where they are in their processes. But generally, a few quarters ago, we would have thought that they were going a little more methodically through the vintages. And now, we see them kind of recycling back. And we are seeing higher requests coming from the '07 vintages and even a little bit more in the '06. So it does seem like they're going back. They are also seemingly getting more technical in their put-back requests. And so, we're continuing to work through that and fight that. But again, we've seen quite a bit and been very proactive on how we've managed these requests. So we're not worried about this. We continue to see it as an unfortunate headwind, but we again think we're on the back end of it.

Kevin Barker - FBR Capital Markets & Co., Research Division

Do you see lower rescission rates for put-backs that are technical in nature rather than for cause?

William C. Losch

No, not really.

Operator

Our next question comes from Emlen Harmon of Jefferies.

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

Just a quick question on loan growth within the Regional Bank. We back out -- if you were to back out the growth related to just mortgage or alliance to mortgage companies. Growth just kind of in the core commercial portfolio, kind of flat. Are you guys starting to see a turn in trends in your footprint or anything that would lead you to believe that we see that pick up in 2012?

Bryan Jordan

Emlen, this is Bryan. The pipelines have remained pretty strong and pretty steady throughout the year. There's not a whole lot of change from what the pipelines would have looked like 90 days ago at the end of the year. So it seems to be rather steady. Utilization is still a problem. We originate a lot more than people draw. But it just seems to be steady. We're not seeing a big inflection. The way you set up the question, clearly, we had some solid growth in the mortgage warehouse line, and that's a very attractive business to us. It does tend to be more volatile, but I wouldn't take it out or discount it too much. It is good steady profitable business for us.

Gregory D. Jardine

Emlen, this is Greg. If I could add that our consumer portfolio grew $100 million quarter-over-quarter as well, so we've seen some good activity there in our installment loans secured by real estate.

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

Got you. Okay, and going back a few quarters, you guys have talked about starting to see some opportunities within CRE and just picking up some loans that may be dislocated from other lending sources. I mean, are those opportunities still out there? Has that business gotten more competitive?

Bryan Jordan

Yes to both. It's still out there, and it's gotten more competitive. More people are getting into it. And we're still seeing a lot of very good opportunities. We've got good pipelines and good activity flow there. But the thing that just started to occur really, I guess, 6 months or so ago, Greg, we started to see the permanent markets open up more. And so, more stuff is moving out earlier than we've seen in the last couple of years in the permanent market.

Gregory D. Jardine

That's right.

Operator

Our next question comes from Marty Mosby of Guggenheim.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Bryan and BJ, I had a question I wanted to deal with on the reserve release generated about $65 million worth of earnings this quarter. That's about $0.16. So if you kind of back that out, overall earnings would still be at about the breakeven standpoint. When you're looking at a 2.34% loan-to-allowance ratio, my question is, do you think you would move into the 2%? Could you break the 2% barrier and move more towards 1.5%? Where do you think we stop off on that ratio?

William C. Losch

Marty, it's BJ. I think what we see is continued credit quality improvement, which translates to improved charge-offs and continued declines in charge-offs. And we continue to see reserve releases into 2012. But you'll see reserve releases at a slower pace than what you would have seen last year or the year before. So we still see the provision line at or below what we would consider normalized bonefish, which would be 50 basis points of charge-offs on loans or roughly with our balance sheet today, $20 million, $25 million a quarter or something like that. So we still see it lower through 2012 but driven more by lower charge-offs and less by reserve decreases. So all of that to say, yes, we see it slowing down by the end of this year more towards 2%. And we'll have to see whether it goes below that or not. But we are committed to keeping very adequate reserve levels in an environment that continues to remain uncertain.

Bryan Jordan

Marty, this is Bryan. Not to sound defensive about it, but I will take a little bit of exception to the premise of the question. You take the example BJ described where we had the community bank loan, TRUP and a loan that we took a 100% loss on. We took -- we hadn't fully reserved. And so, I guess, the basic point is those reserves when we set them up in the past didn't get added back to earnings, so you would expect when we charge off 100% that those reserves ought to be released and they come down. And to accentuate BJ's point, we did provide $10 million in the quarter, which is essentially 25 basis points, which is really pretty darn close to the bottom of our range in terms of bonefish targets around expected losses. So I would not agree with the premise that it's essentially a breakeven quarter, if you add -- if you take charge-offs and reserve release, I think that's the wrong way to look at it. When you got loans fully reserved and you take the losses, you're going to have that situation arise.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Yes, and I would agree with that. What I was trying to get at was how much farther can you go down because if at 2% that gives you about $64 million of incremental reserve release to get next year and $75 million worth of charge-offs, then that becomes the other piece that has to start to improve, so you need to see the $75 million go down -- cut in half -- to really start to make a meaningful difference and the reserve release going away. So you're exactly right, these are pre-reserved, and the release of the allowances are very appropriate at this point.

Bryan Jordan

That's right.

William C. Losch

Marty, the $75 million, again, includes that $21 million of -- which is one related credit, bank-related credit. So if you take that out, I mean, you can see a very steady march downward in our net charge-off numbers, and we expect that to continue.

Marty Mosby - Guggenheim Securities, LLC, Research Division

And the other piece of the puzzle is really the Non-Strategic losses that go away as well. So in a way I was looking at it is you had that negative and you had the charge-off negatives. So those are the 2 sources that would be available to offset that $65 million benefit you had this quarter.

William C. Losch

Yes, I think that's right. This is why we are trying to manage the company for profitability and returns and looking at all the key drivers of the bonefish. I mean, it's a very difficult operating environment. And sometimes you have certain levers that you can pull when others aren't yet available. So as we continue to chop wood on reducing our expenses, which we continue to manage in unprecedented low rate environment that hurts our efficiency ratio, we are getting the benefit from being proactive on credit actions that provides us now for now our tailwind in provision. So all of these pieces go together to long-term move that's more towards good profitably targets within those key driver buckets that we want to be in.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Right. And I was just interested in the transition more than anything else of how you saw that happening over the next couple of quarters, so I appreciate it.

Operator

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

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

Just a couple quick questions that remain. One on the Capital Markets revenues that's been fairly lumpy over the last number of quarters, and I think your comments were you expect that to still remain at strong levels. But kind of coming out from this quarter, you expect it to be relatively stable at the -- or does it still have room to decline? And then secondly, if you could just comment a little bit on the -- you said those information requests that you got I believe you said from the FDIC and the Fed on the private securitizations. What do you view coming out of that? Is that just -- I'm sure it's not going to be good if they're getting involved and what would possibly be coming out of that?

Bryan Jordan

This is Bryan. I'll start, and I'll let BJ take the second part of the question. Capital Markets is inherently going to be affected by what happens with interest rates and how things unfold. The year has started very much where 2012 -- excuse me 2011 left off, so we feel good about the progress and what we're seeing in the early part of the first quarter. The first quarter is impacted by the number of calendar days and things like that. But in terms of average daily volume, we're very, very pleased with the volumes we've seen in the early part, the first 2 or 3 weeks of the year.

William C. Losch

And Kevin, on the second. The 2 requests for information that we got, to be real honest, we don't know a lot about them at this time. But the first one on the Federal Home Loan Bank in San Francisco, they've asked for loan information on 3 securitizations that we did. And the FDIC asked for the offer of sale, not loan information or documents, on behalf of 45 failed banks. So they're asking about 17 of our securitizations that some of these failed banks had purchased. So again, we don't know a ton about it yet, but we'll -- that's what we know right now.

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

But I would guess what that means is they're looking for a way to recoup losses that they've incurred on some of those failed banks, I would assume. Whether they're going to be able to prove that or not is another thing but...

William C. Losch

Sure.

Bryan Jordan

That's what you conclude. The other thing, I guess, you would probably conclude is there's probably a smaller institution, smaller portfolio, smaller pieces. So I'm not sure what it aggregates at this point but essentially looking for the perspectives or the securities offering documents at this point.

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

Can I just ask, do you -- I know the thing we always end up with each quarter on the private side is that -- well, there's not enough out there yet to estimate losses and to start building reserve. What does need to happen? Do you have to see a certain number of requests? Or do these lawsuits have to sort of get to a certain point in terms of how the progress is going? How do you see that playing out?

William C. Losch

Yes, Kevin, remember on private, there are 2 pieces, right? It can come back to us as actual repurchase requests if the trustees are compelled by more than 25% of the investors, et cetera, or it can come through the courts in terms of lawsuits and litigation. So they’re both a little bit different. But on repurchase requests, again, we haven't seen any repurchase request, so it's kind of hard to estimate anything there. On lawsuits, we're still very early in -- very early stages of all the lawsuits that we're currently named in. So it will be very premature to say that anything was either estimable or probable.

Operator

Our next question comes from Chris Gamaitoni of Compass Point.

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

Just a housekeeping. I'm looking at your noninterest-bearing deposits. Core end balances were up nicely. It was about 4.5%. But if you look at the average balance, I think they were up about 0.5%. So could you give us what the difference was and why more came on at the end of the quarter?

William C. Losch

I can't give you much color other than that we usually do see some balance building at the end of the quarter, particularly from municipalities or larger clients for the end of the year. I don't think there's anything special in there, Chris.

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

All right. And then, on the capital markets, if you could just give us the gives and take, what positives could happen where your revenue maybe go back to the $120 million as a quarter and what would be the negative to reduce it from this level?

William C. Losch

Our Capital Markets business, you really look at 2 things, 2 things that can benefit it positively or negatively. One is volatility. So lack of volatility is not good, and a lot of volatility is good for the business. The second is level of rates and the direction of rates. So rates going down is generally good for our Capital Markets business. Rates going up is generally not good. So what we see certainly in the first quarter and probably throughout 2012 is continued volatility from lots of things going on in this country and around the world as well as potential QE3 [ph]. And if that brings rates down, that could be beneficial to our Capital Markets business as well. So all of that to say we generally think that volatility will continue, which is good. And there's a little more potential today for lower rates, which could also potentially be good for that business.

Operator

Our next question comes from Michael Rose of Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Bryan, do you have any updated thoughts on M&A at this point? I know you made some comments a couple months ago. But is there any update there?

Bryan Jordan

Yes, there's really not anything to add. It still seems like a somewhat reasonably benign market in terms of opportunities. I think you’d ultimately fit it back into the way we're looking at capital and can we -- where do we produce the strongest returns, whether it's in M&A or stock buyback. And we're going to be disciplined in the way we look at capital. I guess my sense is if we see a pickup in 2012, it's probably more likely to be the latter half than the early half, just simply because of the operating environment and relative valuations, et cetera. So there's really not a whole lot to add to what I've said in the past about it. We just intend to be very disciplined in what we're doing and make sure that when we put capital to work, that we do it in a way that creates value for shareholders. And as we've commented a couple of times, returning capital to shareholders through the buyback right now is the most effective vehicle in our view.

Michael Rose - Raymond James & Associates, Inc., Research Division

Given the mortgage issues, I mean, does that preclude you in any way from looking at whole bank deals?

Bryan Jordan

No, no.

Operator

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

Leanne Erika Penala - BofA Merrill Lynch, Research Division

I apologize if you’d already addressed this, as I hopped on late. But you mentioned that you hope to learn a lot after the $50 billion-above banks get their stress test results back. I was just wondering if they end up being capped at 50% to 60% total payout as the market is expecting, that's not going to preclude you from continuing to pay out 100% of earnings in '12 like we saw this quarter? Or are we thinking about that optimistically?

Bryan Jordan

Erika, this is Bryan. I would say that there's still a fair amount of, let's say, black box or not knowing in where we sit today. You're correct that we do want to see what comes out of the stress test and we'll learn from that. As you know, we've been through a very different process because we don't fall in to that systemically important category of institutions. And so, we don't think that as it stands today that necessarily the calendar and all those things work the same way. So we think we have the ability to work with our regulators at the right time. We'll figure out how any rules that may shake out of the CCAR test for the systemically important institutions will apply to us. But right now, it's not clear that, that's something that applies to us or that it should.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

I see. And just as a follow-up question to that. Other bank management teams under $50 billion assets sort of have a fear that they're using this as a template and could possibly roll this out to banks that are below $50 billion in assets. Is it too much speculation to ask for your opinion on that at this point?

Bryan Jordan

Well, I'll give you an opinion. I guess, pretty clear that banks over $10 billion are going to stress test and report that. And it will be hard not to use this in some way, shape or form as a template for that stress testing. But I'm not sure it has -- that it takes on the same focus from the Fed. I think it's more an individual institution exercise will be my guess. We've been stress testing our balance sheet on multiple scenarios for a long time as part of our management processes. And we’ve not been hesitant at any time to share that with our regulators either at the OCC or the Federal reserves. So it's not particularly troubling to me that stress testing is a part of the supervisory process. I think that's probably additive to the process.

Operator

Our next question comes from Dave Bishop of Stifel, Nicolaus.

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

Looking at the slide on Page 8 regarding the commercial loan spreads, it looks like there's a little bit of a dive there and during the latter part of the quarter there. Is that systematic of just the type of loans you were booking? Or did something happen within the marketplace that caused that late quarter decline?

William C. Losch

Yes, I'm not sure. You read too much into it. I mean, what we’ve showed you is monthly, and you can see it more substantially on the paid-off loans, how there's a little bit of volatility there. But we do think that, as Bryan talked about, pricing is competitive. And so, we're going to keep our pricing discipline and our standards and make sure that we get paid for the risk that we take, but there is pricing pressure that's occurring in the market.

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

Got you. And then, more of a housekeeping item, in terms of the other comprehensive income, it looked like there was a negative mark-to-market adjustment close to $50 million on a net basis. Any commentary in terms of what drove that decline?

William C. Losch

I'm sorry, can you say that again, Dave?

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

On the AFS portfolio, the other comprehensive income, it looks like it took a negative adjustment about $50 million quarter-to-quarter. Any sort of commentary?

William C. Losch

Yes. I think most of that is related to pension.

Operator

Our final question comes from Christopher Marinac of FIG Partners.

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

I'll keep this brief. I just want to ask about, I guess, the interest level, if any, on potential FDIC acquisitions, whether it be in the eastern side of the state or even in North Carolina, if anything of size would be meaningful for you.

Bryan Jordan

Chris, this is Bryan. This is sort of foreshadowed in the earlier question about capital and M&A. We're going to be disciplined, and we certainly would be interested in FDIC-assisted or other transactions for that matter at the right levels and the ability to understand the risk we're taking, put it on the balance sheet and create value. So that's a long way of saying yes, we'd be interested in looking at and participating in FDIC-assisted opportunities.

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

Okay, great. And then just for Greg real quick. The TDRs that you disclosed in the footnotes, are those separate from the NPAs, those are distinct from the nonperformers?

Greg Olivier

I'm sorry, could you...

Bryan Jordan

Are TDRs separate and distinct from nonperformers?

Gregory D. Jardine

They are. I don't know the exact disclosure, but they are inclusive. So TDRs are in some of the nonperformers, so you got nonperforming TDRs and TDRs that are continuing to be troubled debt but are performing.

Operator

And I would now like to turn the conference over to Mr. Bryan Jordan for any closing remarks.

Bryan Jordan

Thank you, operator. Thank you all for joining the call this morning. We appreciate your interest in First Horizon. Please let us know if you have any follow-up questions, and I hope you all have a great weekend. Goodbye.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.

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