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First Horizon National (NYSE:FHN)

Q1 2012 Earnings Call

April 19, 2012 9:00 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

Analysts

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

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

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

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

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

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

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

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Russell Gunther - BofA Merrill Lynch, Research Division

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

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

Operator

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation First Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will turn the conference over to your host, Aarti Bowman of Investor Relations. Please begin.

Aarti Bowman

Thank you, operator. Please note that the press release and financial supplement, which announced our earnings as well as the slide presentation we'll use in this call this morning, are posted 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 them.

The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call, and is reconciled to GAAP information in those materials. Also please remember that this 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

Thanks, Aarti. Good morning, and thank you for joining our call. We're off to a solid start in 2012. First quarter results on the surface look a bit mixed, but our core businesses performed well. The pretax pre-provision income increased 21%, and pretax income was up 12% year-over-year. Our asset quality continued to improve. In the first quarter, we bought back $44 million of our common stock, leaving $11 million under our initial $100 million share buyback program.

Earlier this week, our board approved an increase of $100 million to our share repurchase program. I'm pleased with the strength in our core business. Regional bank's net interest income was up 9% from a year ago driven by higher loan volume.

Capital markets' revenues increased 18% year-over-year, benefiting from strong fixed income activity from both depository and non-depository clients. Our capital markets segment continues to be a significant contributor to the income with a higher return on capital.

Our ongoing efforts to optimize our business mix paid off. We grew our regional bank loan portfolio, while the non-strategic loans continue to roll off. The banks increased period-end loans by about $1 billion or 10% year-over-year, driven by lending in C&I, commercial real estate and corporate borrowers. Our loan pipeline remains solid and slightly up at the end of the first quarter.

Loan pricing was relatively stable despite aggressive competition in our markets. Our bankers' disciplined pricing allowed us to hold the consolidated average loan yield relatively flat at 408 basis points.

In the non-strategic portfolio, loans declined $1 billion from first quarter 2011 and were $189 million below the year-end level.

We also continue to improve our funding mix. Average core deposits in the regional bank increased 12% from last year and were up 4% from fourth quarter. The decline in our net interest margin was largely due to excess cash balances. BJ will go into more detail of the margin in a few minutes.

Turning to expenses. First quarter's consolidated expenses were up 3% year-over-year due to capital markets' increase in variable compensation, as well as higher personnel and mortgage repurchase costs. Our productivity and efficiency efforts remain on track. We've implemented $116 million of annual savings out of our targeted $139 million. While total revenues in the bank increased 3% compared to the first quarter of 2011, annualized revenue per FTE improved 13% to $261,000 from a year ago.

We're continuing to invest in systems and technology. We want to make it easy for customers to do business with us by simplifying our processes and offering innovative solutions. And we're also driving long-term efficiency. With consolidated expenses, we are firmly committed to reducing annualized level to about $1 billion by year-end 2013. We feel good about our expense control efforts.

Moving onto asset quality trends, which remain favorable. Year-over-year, net charge-offs dropped 40% while nonperforming assets were down 36%. Reserves continue to decline, ending the quarter at 2.17% of loans outstanding. We're seeing stable to improving trends across all of our loan portfolios. To sum up, we're seeing signs of improvement in the economy, but we expect the recovery to be slow, interest rates to stay low and regulatory challenges to persist. In this environment, we will keep controlling what we can control. Our bankers are focused on making profitable loans to optimize returns, earning more business from existing customers and taking market share by providing excellent and convenient service. We're working hard to lower our expenses to become more productive, and we're returning capital to our shareholders with buybacks.

I'll be back for some closing comments, but now BJ will take you through the detailed financial results. BJ?

William C. Losch

Thanks, Bryan. Good morning, everybody. I'll start on Slide 5. For the first quarter, net income available to common shareholders was $31 million, diluted EPS number of $0.12. Taxes were $11 million in 1Q '12 reflecting an effective tax rate of 23%. Within that, there were tax credits -- current tax credits of about $6 million. Linked quarter total revenue rose 4%, and expenses were up 3%.

Turning to Slide 6 on segment highlights. Regional bank's pretax income was $75 million in 1Q '12, down $16 million from the fourth quarter, but up $10 million or 14% versus 1Q '11. Provision in the bank was a credit of $7 million compared to a credit of $13 million in the fourth quarter. Linked quarter net interest income declined 2% from lower loan balances in a day count variance.

Fee income was down 7% due to seasonal declines in NSF fees. Also you remember that the fourth quarter included a $2 million Visa incentive fee. We're working hard to negate lost revenue from the regulatory changes related to Reg E in the Durbin Amendment. So far, we've been able to offset about 80% of this lost revenue through various initiatives. Regional bank's 2% linked quarter increase in expenses is primarily related to elevated hedging costs and seasonally higher personnel expense.

Turning to capital markets. We were very pleased with continued strong results at FTN. Our capital markets' pretax income was $32 million, up 5% linked quarter and up 45% year-over-year. Linked quarter total revenue increased nearly $19 million, while expenses were up $14 million due to higher variable comp and payroll taxes. Fixed income average total revenues were $1.6 million compared to fourth quarter's $1.3 million. First quarter's fixed income ADR levels were above our normalized range of $1 million to $1.5 million.

Following the Fed's reaffirmation of an extended low rate environment, we saw spreads tighten and saw our customers deploy excess liquidity resulting in increased fixed income buying activity. We saw strong performance across the board on all of our debts and all of our customer types. Looking ahead, we expect ADR to be more on our normalized range over the course of the rest of 2012.

In our corporate segment, we had a pretax loss of $18 million compared to a loss of $23 million in the fourth quarter. Our expenses there declined 23% linked quarter. And as you recall, in 4Q '11, we had an $8 million expense related to the Visa stock we had previously sold.

Our pretax loss in the non-strategic segment narrowed to $44 million in the quarter, compared to a loss of $57 million in the fourth. Revenues were $51 million versus $46 million in the fourth quarter. The increase was primarily due to higher hedging results and an increase in servicing fees. Non-strategic expenses were relatively flat linked quarter with a reduction in other costs offsetting incremental mortgage repurchase costs.

Turning to Slide 7, take a look at the balance sheet and margin trends. Our consolidated average total assets were about 25 days. Our consolidated average loans decreased slightly both linked quarter and year-over-year, while average core deposits were up 3% and 7%, respectively. Consolidated net interest margin was weaker than expected at 3.12% compared to 3.23% in 4Q. Our core net interest margin was at 3.42% in 1Q '12.

The decline in our margin was notably driven by excess cash on our balance sheet, due to large inflow of customer deposits in the quarter and a decline in interest collected on nonaccruals in our 4 years into this low interest rate cycle, and it continued to pressure yields in our consumer loan in our securities portfolio.

Margin decline was somewhat mitigated by stable commercial loan yields and lower deposit costs. Our core deposit costs in the bank were 47 basis points, down 4 basis points from the last quarter. And we're continuing to book new loans in the regional bank's commercial portfolio at a higher spread than loans that are paying off. As you know, seasonal factors do cause volatility in the margin. But sitting here today, we expect that the net interest margin could continue to float down modestly over the course of the year.

Moving on to Slide 8. You can see our bankers' efforts to stick to disciplined pricing has resulted in commercial loan pricing holding up pretty well, but we're seeing competition in our markets in both pricing and structure. Regional bank CRE loans declined 2% linked quarter, driven mostly by lower balances and lower end loans to mortgage companies and payoffs.

Core C&I loans were up 2%, and commercial loan commitments increased more than $200 million linked quarter. You can see our loan pipeline remains solid. Areas of loan demand include: commercial real estate, and corporate, and industry such as health care, manufacturing and certain sectors within our asset-based lending group. We expect that net loans on a consolidated balance sheet will likely remain flat to down for the remainder of the year, as customers remain cautious on borrowing and continue to de-lever in this somewhat uneven economic recovery.

Turning to Slide 9. Looking at our productivity and efficiency initiative. As Bryan said, we believe we're on track with our initiatives and remain committed to our goal of lowering consolidated expenses. In the first quarter, the progress that we're making was more than offset by a $26 million linked quarter update -- uptick in personnel-related costs, which were inflated by capital markets' variable compensation. Otherwise, costs were mostly flat to down. We were particularly focused on improving productivity in the regional bank and are pleased with our progress.

Year-over-year, regional bank expenses declined 6%. And as you see on the slide, if you step back and look at our progress by a comparison to 2 years ago in our banking and corporate segments, you can see the significant progress achieved on our efficiency efforts.

Moving onto mortgage repurchase on Slide 10. Our operational pipeline fell to $380 million in the first quarter. Our mortgage repurchase provision remained elevated at $49 million, up from $45 million in the fourth. Net realized losses increased slightly from last quarter to $53 million. Resolutions were up 4%, and our reserve declined to $151 million.

Linked quarter, we saw new GSE requests increased by $56 million due to spending recycling through older vintages. We're also receiving a higher number of requests from Freddie quarter-to-quarter. The GSE requests have shifted to an increased level of make-wholes, reflecting more requests for loss reimbursement on liquidations after foreclosure versus repurchase requests for delinquent loans.

For the remainder of 2012, we don't see it clearly and to expect quarterly mortgage repurchase provision expense to decline. But sitting here today, we continue to believe that we're on the back side of these requests, due to losses we've already experienced and the sale of our mortgage platform in 2008. We continue to be involved in various law states [ph] related to private securitizations that are in the early stages of litigation. And we've also recently received indemnification requests from purchasers that we sold whole loans to, that were then securitized by others. Again, we're in the very beginning stages of evaluating measures for us.

We had no repurchase requests from our own branded first-lien private securitization. And at this time, based on our private securitization origination mix, yield size and performance, we continue to believe that the risks from these private securitizations should be significantly less than what we've seen with the GSE.

Turning to Slide 11 on asset quality trends, which continue to be very positive. Our first quarter asset quality trends were favorable again with loan loss provision at $8 million. Charge-offs declined $29 million linked quarter with a $46 million, which included a benefit of about $3.5 million from a large recovery on a single credit. You recall that our fourth quarter's charge-offs included a $21 million loss on one bank-related relationship. Our commercial and consumer credit trends both remain stable. Our aggregate risk profile and commercial portfolio improved resulting in upgrades in the C&I portfolio.

In the home equity portfolio, we saw lower delinquencies and improved lower rates, with decreased reserves from the consumer portfolio by $18 million from last quarter. Our total loan loss reserve to loans ratio ended the quarter at 217 basis points, compared to 234 basis points at year end. Over the remainder of the year, assuming the economy continues to recover, we do expect continued favorable credit trends and reserve decrease but likely at a slower pace.

Quickly moving to Slide 12. Linked quarter, our nonperforming assets were slightly up about 1%. An increase was driven by regulatory guidance received in the first quarter, where we re-classified about $28 million of second liens where we know the first lien was 90 days left delinquent. This request did not impact the reserve. NPLs were stable. And ORE balances declined through continued disposition activity.

Wrapping up on Slide 13. In our bonefish, we've seen good progress in our core businesses. Our regional bank trends remain solid as we grew higher steady loans year-over-year. We're mitigating loss fee revenue from regulatory changes and improved annual efficiency. Our capital markets had another strong quarter. The non-strategic loan portfolio continues to wind down. Now we're defending the margin as it remains a challenging environment to do so. By controlling what we can control and being disciplined in our execution, we do believe we're still on track to deliver high levels of returns and profitability over the long term.

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

Bryan Jordan

Thank you, BJ. Thanks to the hard work of our employees, first quarter marked another step toward achieving our long-term bonefish goals. We've demonstrated continued profitability in our core businesses. Our efficiency initiatives are on track, and we're continuing to return capital to our shareholders with our ongoing share buybacks.

For the remainder of 2012, as BJ said, we will continue to control what we can control. We will focus on providing superior customer service that differentiates us from our competitors. We're committed to becoming more patient and productive through simplified processes and better technology. We will continue to manage the wind down of our non-strategic assets and remain productive with credit quality -- proactive with credit quality, and we'll continue to manage capital smart.

In conclusion, I'm confident the continued successful execution of our strategic priorities is leading to higher profitability and improved return. Thank you. And operator, we'll now take questions.

Question-and-Answer Session

Operator

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

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

I wanted to start. Bryan, on the mortgage repurchase request, are the GSEs continuing to recycle through these older vintages here into this current quarter, or is that captured in the first quarter? And did BJ say he expects mortgage provision flattish this year?

Bryan Jordan

Yes, Steve. Based on -- it's really an incomplete benefit exactly what they're doing. But BJ's comments were essentially what you described, and it looks to us like they're going back through some older vintages. We'll see more make-whole requests, components, which are indications that those are foreclosed loans somewhere in the dead file as opposed to current delinquencies. And BJ's forward-looking comments sort of reflect, I guess, our frustration with knowing exactly where that is headed. You saw some decline in requests in the middle part of 2008. They spiked in the third -- excuse me, in 2010. You saw it start to slope up in 2010 third quarter -- or 2011 third quarter, and that trend has continued at a little bit higher level than we would hope at this point. It's -- our sense as we sit here today is that we'll continue to work through it. We don't see the size of the risk increasing. The overall drivers continue to work towards -- we think the resolution sooner rather than later of these claims simply because we're now 42, 44 months from the last time we originated and sold. We're continuing to see improvements in the overall fundamentals of housing in the U.S. And delinquency trends continue to stabilize to improve on the whole. So we don't think the overall risk is going. We just think we're continuing to work through a sustained level of these repurchase requests. The sooner we get to the end of it, the better we think it is.

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

Bryan, to get to the $1 billion target by the end of '13, do you essentially need all these costs to come off the P&L by then?

Bryan Jordan

Well, we need a fair amount of what we described as the environmental mortgage repurchases, a significant part of that. There are still some continued costs with ORE and foreclosures and default servicing and things of that nature. But that would be a big step in that regard. And if you take the level of expenses in the early part of this year and you start to adjust for some of these environmental costs, you can see that we are making pretty good progress towards our $1 billion goal. So we need a substantial portion of it to come off by the end of 2013. As we sit here today, we don't see any reason that they wouldn't drop over that time period.

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

And just finally on expenses. BJ, is a good run rate of expenses near term somewhere around $300 million?

William C. Losch

Yes, I mean, if you try to adjust some of these things that are hard to look at quarter-to-quarter because of volatility, whether it's mortgage repurchase costs, whether it's variable compensation from capital markets, et cetera, somewhere in that range between where we are today, and that number is probably pretty good for the near term.

Operator

Your next question is from Brady Gailey of KBW.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Bryan, I was wondering at what stock price does it not make sense for you to repurchase your stock.

Bryan Jordan

Well, we're obviously sensitive to price. And as we look at our current valuations and valuations relative to tangible book value, we think that it's an attractive value at these levels. And as we approach more medium valuation multiples, we become more price-sensitive to it. So I don't want to get in to try to say this price or that, but I think we look at it in a range -- the stock we've repurchased to date, we bought back at an average cost of 8 11, pre-commission, 8 14 if you include the commission, so at a discounted tangible book. So we're going to be opportunistic. We're going to pick our spot. We're going to get the capital back in our shareholders' hands at attractive prices. And we think that's a good use of the capital in today's environment.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then on the loan loss reserve, could you or BJ just talk a little bit about what you think that will do in the rest of '12? I mean, we've seen it come down a decent amount. You're now close to 2%. I'm guessing that release is going to slow. If you could all just give some color on where the reserve goes from here.

William C. Losch

Yes, sure. It's BJ. So we ended the quarter at 217 basis points on reserve. And yes, you've heard us talk about our bonefish. We think on a normalized level, it is really more in the 1.50% [ph] to 2% range. So yes, what we talked about is, we continue to see some reserve decrease because of improvement in our portfolios but likely at a slower pace. So you can kind of extrapolate those data points I just gave you to kind of say what we're thinking about over time.

Operator

The next question is from John Pancari of Evercore Partners.

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

Bryan, can you talk a little bit about the pace of the buyback now that you've upped the program, and just looking out through the remainder of 2012 specifically? Can you talk about the pace of repurchases?

Bryan Jordan

Yes, John, we're not -- we try to -- we're not locked in to any particular pricing. What we're trying to do is make sure that we use the capital smartly. And as I said in the answer to the previous question, we're going to be sensitive to price. Now on a macro sense, our capital ratios continue to remain very, very strong. Our Tier 1 common ended the quarter at 11.7%, virtually unchanged with $88 million of stock bought back today.

Now we're going to look at using that buyback program to get significant capital back in our shareholders' hands over the course of the next 3 or 4 quarters, a year or whatever it takes. But we're going to be opportunistic. We're going to be smart hopefully in the way we pick our prices and do it in a targeted fashion. So we don't see a need for our capital ratios to grow. We'd like to see them remain stable. And if we can do that, that's a really good start in our view.

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

Okay. And can you give us a little bit more color on the margin outlook? I know you expect some modest compression. But just given that the runoff is accretive to your margin and that your loan yields overall also remained relatively stable, that would bode for some support, but you continue to expect some pressure here, so can you give us a little more clarity there?

William C. Losch

It's BJ. What we saw quarter-to-quarter was clearly a little disappointing. But on the flip side, a lot of it was driven by something that's a little more positive, which is customer deposit inflows. So a lot of that was just excess balances that we had at the Fed, which hurts the margin but not necessarily NII. But even with our bankers doing the right things on holding up loan yields, reinvestment rates in the securities portfolio are very difficult. They're down 1% to 2% range, and it's hard to replace what's running off in that portfolio with what's coming on. So there's a lot of dynamics in the margin. And the longer this low interest-rate environment continues, the harder it is for us to defend the margin. So like you said, there's positives from the non-strategic runoff, but there's also headwinds from the securities portfolio and so on. So we're doing everything we can to control the pricing that we have in the bank, bringing our average deposit rate paid down. And we think we'll be able to do that. But in the interest of caution knowing that it's an uncertain environment, we think that it could continue to put down modestly over the course of the year.

Operator

The next question is from Emlen Harmon of Jefferies.

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

Can we talk a little bit about just the re-class of some of the junior liens and NPA? I guess, you've indicated that the loans that you did move into NPA there were those that you knew had gone 90-day delinquent on the first. Can you give us a sense, I guess, of what portion of those you guys are actually servicing, kind of what's tipping you off that those are going to a 90-day bucket?

William C. Losch

Sure. It's BJ. As you know, the new guidance issued by the Fed in the first quarter that required institutions to perform reviews over the allowance of loans primarily focused in audit [ph] loans, where you had performing loans secured by junior liens but the first was delinquent or has been modified. And it also talked about where institutions do not own or service the associated first lien, which the bulk of ours fall in this category that you should use. It's reasonably available tool to determine the payment status. So for a significant majority of our seconds, we don't have first-hand visibility in the payment status of those since we sold most of the servicing. But as we went through our review, there was about $27.5 million, $28 million of our nearly $4 billion of second liens, where we service it or own the associated first lien, and that first lien was 90 days delinquent. We do monitor refresh FICAs [ph] each quarter, which is what we really use to evaluate these, and those are obviously impacted by payment status of the first lien. We review delinquency trends and negative equity positions among other things to detect deterioration. So really, all in all, it had a $28 million impact on our NPLs, but the issuance of the guidance didn't really have a material impact on our reserves.

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

Right. And the other portion of the guidance too, so that -- you may need to look at -- from the portion that you don't service, you may need to look at kind of, I guess, broader industry metrics to get a sense of whether there needs to be some migration to NPA in that portfolio. Have you put any thought into kind of what you need to look up there and what could be -- for the portion of the portfolio you don't service, what could be the driver to kind of push things to NPA there?

William C. Losch

Yes, so -- yes, like I said, use reasonably available tools, the largest of which for us is refresh FICAs [ph]. So if you have a borrower where we have the second, we don't know the first, and they had a 7 20 FICA one quarter and a 6 20 FICA the next, you might recently assume that something happened with the first. So that's part of how we detect it. We also look at negative equity positions if there's a significant change in the loan of value on our second that might also lead to something that we need to look at. So that's really how we monitor it on our side.

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

Okay. And then just one quick one. And the make-whole purchases or larger portion of the repurchase requests are now for make-whole. I mean, you guys did indicate the losses stayed pretty, pretty similar quarter-over-quarter. But is there a potential change to severities as a result of the mix of new requests shifting that way?

William C. Losch

It's BJ again. Not really. What you've got if it's gone that long, you've got accrued interest but they're going to ask for -- they're also going to ask for imputed interest, which is after it actually goes to foreclosure and however long it takes, they're going to ask for continued interest on that plus the loss severity on what they lost. So there might a little bit more in terms of interest, but it's not material. To give you an idea of how the mix has changed, 9 months ago maybe, we would have seen 80% repurchase requests, 20% make-wholes. And today, we're seeing around 50-50. So that really does tell us that they're recycling back through the foreclosed loans and trying to put those back.

Operator

The next question is from Paul Miller of FBR.

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

This is Kevin Barker on behalf of Paul Miller. I just had a question about the personnel expense, you noticed it's come up about $26 million this quarter. You know capital markets are trading about -- expenses came up about $19 million. How should we look at the variable piece of the personnel expense going forward, and what part would be fixed? Can you give an idea around that?

Bryan Jordan

Kevin, do you mean the increase or...

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

But you're running about in between, you're running about, what, 150 to 155 last year and you came up to about 175 this quarter. How should we look at like a run rate going forward if you normalize trading revenue?

William C. Losch

Yes. So if you think about it quarter-to-quarter, variable comp from FTN was maybe $9 million of the increase, so that's probably 30% of the increase. And in the first quarter, what you're going to have is things like annual bonus payouts. You're going to have resets of FICA and payroll tax-related items. There is some deferred comp that goes on in the first quarter, some true-ups there, and we had an increase in pension. So I'd say for the increase that we saw in the first quarter relative to the fourth, I think 80% -- let's call it 80%, 85% of it is more seasonal, if you will, or variable. So one that will not go away for this quarter that will remain elevated throughout 2012 is our pension expense. Pension expense quarter-to-quarter was about -- up about $6.5 million, and that will continue to stay elevated throughout 2012. We are closing our pension plan as of the end of this year. And we do expect a material drop-off in the expenses going into 2013, but there is a bubble that will incur in 2012.

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

Okay. And then one other question concerning your provisions. Do you have a specific reserve to loan ratio you're looking at? You're trying to target maybe 1.5%, or at what point do you -- is there a certain target that you're looking at?

William C. Losch

Yes. In our bonefish, we assume in a normalized environment, we would have about 50 basis points of annualized charge-offs in provision. And for the reserve, we would hold roughly 3x to 4x that level at any given time, so that's 150 to 200, so we figured 217. So it means that we have room to go on reserve decrease, but it's getting closer to our normalized targets.

Operator

The next question is from Chris Gamaitoni of Compass Point.

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

If I look at Page 23, there's a $36 million -- it's for mortgage request outstanding, there's a $36 million amount that's in non or other category. Is that the loans that are related to the Citigroup transaction where USB has initiated a suit?

Bryan Jordan

Chris, I apologize, we couldn't hear you very well. Could you repeat it?

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

Sure. On Page 23 of the presentation, when you break down the outstanding repurchase request by type, there's a kind of other category that comprise of $36 million, is that the balance where -- on which the USB acting as trustee suit is related?

Bryan Jordan

No, those are -- the $36 million is really other non-repurchase requests. So those are things like requests for research, for...

Aarti Bowman

Chris, it's Aarti. Those are non-repurchase requests, meaning there's -- cash doesn't go out the door, so for example, maybe a document is missing its validable signature or something, so it can be cured without cash. That is what that represents.

William C. Losch

Yes, the bullet point right above it, the $3 million of non-GSE whole loan-related claims is I think what you were looking for.

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

So the -- like if I look at that USB lawsuit, which you heard about, it states that UPB of $36 million. I'm just wondering, did they request those and you turned them down, or they just initiated a suit without speaking to you?

Bryan Jordan

Chris, we've gone through everything, and we can't find any evidence that they've made a request for us to repurchase those loans. Those are home equity loans. So we know what you know at this point, which is they're about a 2-paragraph suit, and so we're digging into it. We don't have any detail on the reason for the request, et cetera, et cetera. And we've got no evidence with them actually making the request at this point.

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

And then, do you know the UPB on the balance where you've been asked to indemnify?

William C. Losch

We don't know that.

Aarti Bowman

It hasn't been identified.

William C. Losch

We don't have that. And actually on that suit, we haven't to my knowledge, even been served with it.

Operator

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

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

Just a few questions. I just wanted to clarify the outlook for loan balances. I know last quarter was the first quarter in quite some time that we, on a net basis, went from negative linked quarter movement in loans to actually positive, and then we went back to negative this quarter. Was this more just a outsized reduction of the non-strategic, or should we expect a return to positive sometime soon?

Bryan Jordan

Kevin, this is Bryan. There are a number of moving parts. Clearly, we saw a little pickup in the run-off, particularly the national home equity portfolio. But if you sort of go back to the fourth quarter, we had strong year-end closing. In the first quarter, we thought we had very good closings. Our commitments were actually up a couple hundred million dollars during the course of the quarter. Our pipelines ended the quarter strong. We feel good about that. In fact, the pipelines at the end of the quarter are strong as they've been at any point in the last year or so and even more confidence in our 90% confidence level. So I don't know that I would let one trend, one quarter indicate a trend one way or the other. We are going to have continued runoff in the non-strategic portfolios, which is a positive. I think our bankers are doing a fantastic job. And their call-in efforts, I think they're doing a fantastic job in building long-term customer-oriented lending relationships. I feel good about the spreads that we're able to achieve. And back in -- I wouldn't take the first quarter and make a trend one way or the other, but I feel really good about the progress our teams have in growing our balance sheet in a quality way for the long term.

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

Okay. One other just follow-up. On the GSE's focus on the older vintages and doing this make-whole purchases, what does that tell you or suggest to you about where they are in the process? Is it a positive? Is it a negative that they're focusing on this in terms of the grand scheme of how it will all play out? Does it suggest that it's going to take longer, it's going to go faster? Just wondering what your thoughts are on that.

William C. Losch

It's BJ. Honestly, the direction of what we've seen from the GSE has changed so many times. I don't believe that I can give you a good answer I could believe. We've seen movement from foreclosure to delinquency focus. We've seen movement through the vintages and back, re-cycled back to older vintages. So it's hard to tell, but, I think what we believe is, a couple of things. We sold mortgage servicing, as you know, in August of '08. The increases that we're seeing are what we saw a big uptick in the '07 vintages. And if you think about that, it's been 52 to 64 months since any of those loans were originated. That's quite a long time. And if you're going through a foreclosure, you've also got to assume that they paid for a while, too. So there's a finite end to what we're going to have to deal with, with the GSEs. We do believe that we'll continue to be on the back end. And so, without having much knowledge of exactly what they're doing, which we can't really ascertain from them. In the interest of caution, we just say we don't see a reason throughout the rest of 2012 for it to come down. But we continue to see strong resolutions from our team. Our operational pipeline continues to come down. We're well reserved for it, and we'll just keep working through it.

Bryan Jordan

Kevin, this is Bryan. I'll add. In a macro sense, I commented earlier you don't see delinquencies. And the housing market seems to be reaching more stabilization, coupled with the fact that although we get a frustrating request here or there, we don't see a significant change in the types of requests that the GSEs are making at this point. So given that, we don't think that the overall size of the risk is changing very significantly. And as a result, you might conclude that a more aggressive pace in terms of making a request is actually a good thing in terms of getting to the end. But as BJ said, it's hard to call given the limited flow of information that goes on a day-to-day basis. And so, on the abundance of caution, I would suggest we're confident that we'll work through it, that would be on earnings headwind. But it's hard for us to sit here today and say we see a falling off in the next couple of quarters, several quarters.

Operator

The next question is from Matt Burnell of Wells Fargo.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

A quick asset quality question. In terms of the regional banking portfolio in the C&I portfolio specifically, it looks like you saw visible increase in the 30-plus delinquencies. It looks like that was -- that had more to do with what happened in the fourth quarter than the first quarter, but just curious if there's anything going on in that portfolio that is showing some early stage weakness.

Bryan Jordan

No, no, there's not. That portfolio is fairly stable. There was a one loan event that caused a big piece of that 30-day plus, which was more of a strategy-related approach. But that portfolio is fairly stable. We continue to see improvement in our weighted average probability to default within that.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay. And then a bigger picture question in terms of your cost targets, could you explain again for us again how the compensation related to the capital markets revenues sort of ties into your cost targets? Is that included in that at all? Or is that -- how should we think about how that would be included?

William C. Losch

Matt, it's BJ. It's not really what we're focused on in terms of the core efficiencies, that 139. It's really related to regional banking expenses and corporate-related expenses. We exclude the volatility as the variable comp...

Bryan Jordan

Matt, this is Bryan. We basically assume that the normalized range of average daily revenue for capital markets. And we considered a high-class problem to be outside of that on the high end and have higher comp expense.

Operator

Our next question is from Erika Penala of Merrill Lynch.

Russell Gunther - BofA Merrill Lynch, Research Division

This is Russell Gunther on for Erika. Quick question, you mentioned the pension expenses were up $6.5 million quarter-on-quarter. Do you have the total amount those expenses were in 1Q?

William C. Losch

You know, I have to look back, Russell, real quick. Aarti's going to look real quick for you.

Russell Gunther - BofA Merrill Lynch, Research Division

Okay, let me -- I'll jump in, in the meantime with just one other on the margin in terms of the bonefish target's of 3.50% [ph] to 4%. Outside of writing rates, is there anything else you can do in the meantime to help you hit that in a shorter order?

William C. Losch

I think rates are obviously our biggest help. We're asset-sensitive, we continue to be, and the rising rates would certainly help us. The things that we can control to do, I think, will help us on the margins modestly, things like continuing to bring down deposit rates paid where we can, improving NPL levels, which means less nonaccrual and NIM drag from nonaccruals. But things like the reinvestment rate on the securities portfolio, is difficult to overcome even if you just reinvest in cash flows. Yields on renewing loans, so we're remaining disciplined on pricing. You can see that yields are remaining relatively flat, which actually is a great accomplishment but it means yields will remain relatively flat. So it's hard to significantly move those up in a competitive environment that we see in lending. So we continue to work on it. We continue to focus a lot of our efforts on it, but it's just a very challenging environment to work with.

Bryan Jordan

Russell, this is Bryan. We put the bonefish out there with -- sort of serves as a road map. But I think it's important to sort of focus on the left side of that, which is sort of our end objective which is to draw or drive strong ROEs in the business. And although we focus on the kind of margin we're putting on the balance sheet, and how it moves from quarter-to-quarter, our primary focus is driving the higher returns on equity over the long term. And so as we look at the margin on a short-term basis, we're also very focused on the long-term nature of the business that we're putting on the balance sheet, the types of relationships that we've had, trying to make sure that we have a high-profitability relationship-oriented business, that drives long-term shareholder returns through the bonefish but ultimately higher returns on equity.

Russell Gunther - BofA Merrill Lynch, Research Division

Understood. I guess, can we follow up on the pension expense?

Bryan Jordan

Yes.

Operator

The next question is from Christopher Marinac of FIG Partners.

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

Bryan and BJ, just curious if you can give us, I guess, a little more color beyond what you've already done about kind of margin at the regional bank level compared to the wholesale channels. And can that perhaps behave differently and maybe better in subsequent quarters?

William C. Losch

Chris, it's BJ. It could. Again, I think in the bank, we had somewhat of a high-class problem in that. We actually felt very strong deposit flows. And so, as you can imagine in this environment, unfortunately, the credit for deposits, if you will, that our regional bank will see continues to come down. So even though we've got strong customer relationships and bringing in to these deposits, they're actually worth less to us. And it's hard to deploy that and put it to work in anything besides Fed funds or investment portfolio. So you may see continued pressure on the regional banking net interest margin because of that dynamic. But again, overall, if you step back, we're pretty pleased with what we're doing in serving customers depending on the margin in that business.

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

And I guess, just one clarification that was sort of back to last quarter disclosures, on Page 24 on the private mortgage-backed securities, the $11 billion UPB obtained that already has netted for what you had paid off last year and some of those wholes that were called in mid-'11.

William C. Losch

That $11 billion is in those securitizations. What the outstanding UPB is across all the securitizations that are active.

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

Very good, just want to clarify. Great. And Bryan, just real quick with you. From a standpoint of mergers, is there anything seen like it's a possibility looking forward 12, 18 months? Or is the capital used today sort of more reflective of a lack of external opportunities?

Bryan Jordan

Yes, I think if you step back and you look at the little bit of pickup in activity in the early part of this year, I think it is a little more encouraging about the opportunities that might develop as the course of the year goes by. We continue to keep an eye on what's going on, we continue to look at things from time to time, but we intend to be very disciplined about it in returning capital to shareholders, like we have at attractive prices is a perfectly good alternative with us. We don't feel the need we have to do that, but we see the right kind of opportunity, we certainly would be willing and able to put it into an M&A transaction given the right fundamentals around it.

Operator

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

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

Just curious given the increase of the pipeline as it heads in the quarter. Overall for 2012, what are the overall expectations in terms of loan balances here? I mean, there's going to be obviously some runoff on the non-strategic. Do we see this balance as trending up, maybe single digits, relatively flat? Just curious in terms of any sort of outlook there.

Bryan Jordan

Well, yes. Dave, this is Bryan. When I answered earlier, I wouldn't draw a lot of trends. I think given the continued runoff in the non-strategic, which is a positive from our perspective, the opportunities for growth in the bank and really, if you go back to what we said about the economy with low interest rates and a relatively low economic growth, we sort of look at it as maintaining the level of loans sort of in the neighborhood that they're in is where it's more likely to come out than not. That doesn't mean we won't grow a little bit in one quarter and be down a little bit in another. And as we evidenced in the first quarter, we had strong mortgage banking warehouse lending in the fourth quarter, that receded a little bit in the first quarter, if rates tick down like they have early part in the quarter. It may go up again. So we're not trying to get real specific and say, this is where the numbers are going to come out over the course of the year. I'll take you back to the comment that I made earlier, which is we're really focused on putting strong lending relationships and transactions on our balance sheet, make sure we've got a strong customer-oriented balance sheet. And I think our bankers are doing a fantastic job on that. Some of the commitment growth that we saw in the first quarter we'll fund. And we're continuing to work on pipelines, and we'll continue that growth over the next several quarters in the core banks. Year-over-year growth of about $1 billion in that portfolio is rather significant. We feel good about the work that our teams have done.

Operator

There are no further questions at this time. I would like to turn the call over to Bryan Jordan for any closing remarks.

Bryan Jordan

Thanks, Darren. Thank you for joining our call. We appreciate your interest. Please let us know if you have any follow-up questions or anything that needs additional information. I hope you all have a great day. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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