Apr 19, 2013
Executives
Aarti Bowman D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association William C.
Losch - Chief Financial Officer, Executive Vice President, Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association Susan Springfield - Chief Credit Officer, Executive Vice President, Chief Credit Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association
Analysts
Robert Placet Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division Todd L.
Hagerman - Sterne Agee & Leach Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Nicholas Karzon - Crédit Suisse AG, Research Division John G. Pancari - Evercore Partners Inc., Research Division Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division Ken A.
Zerbe - Morgan Stanley, Research Division Kevin B. Reynolds - Wunderlich Securities Inc., Research Division Albert H.
Savastano - Macquarie Research Michael Turner - Compass Point Research & Trading, LLC, Research Division Emlen B. Harmon - Jefferies & Company, Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the First Horizon National Corp. First Quarter 2013 Earnings Conference Call.
[Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call, Ms.
Aarti Bowman. You may begin, ma'am.
Aarti Bowman
Thank you, operator. Please note that the press release and financial supplement, which announced our earnings, as well as the slide presentation we'll use in this call this morning, are posted on the Investor Relations section of our website at www.fhnc.com.
In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and on our most recent annual and quarterly reports.
Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and on the slide presentation for this call, and it is reconciled to GAAP information in those materials.
Also, please remember that this webcast on our website is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch.
Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ, for questions. I'll now turn it over to Bryan.
D. Bryan Jordan
Thank you, Aarti. Good morning, everyone, and thanks for joining our call.
We're continuing to make progress towards achieving our strategic priorities, as demonstrated by first quarter's 42% year-over-year improvement in diluted EPS. We're positively shifting our business mix, reducing the non-strategic portfolio drag, significantly lowering expenses and prudently returning capitals to our shareholders.
In the first quarter, we repurchased $30 million of common shares resulting in $205 million of total shares repurchased since October 2011. We also raised our quarterly common dividend to pay out $0.05 per share.
We're taking a closer look at 2 core operating business, the regional bank. The regional bank posted 6% higher pretax income than a year ago, benefiting from 6% average loan growth and 4% gain and average core deposits and an 8% drop in expenses.
Total revenue was down only modestly. Our other core operating business, capital markets, continues to provide steady fee income and higher returns, with fixed income average daily revenues of $1.13 million in the first quarter and an annualized return on assets of approximately 2%.
As anticipated, asset quality trends remained favorable. Year-over-year, nonperforming assets decreased 18% and net charge-offs declined 42%.
Our loan portfolios continue to stabilize and improve. The allowance to loans is 167 basis points, down 50 basis points year-over-year, but steady versus year end 2012.
Total expenses declined 25% from a year ago. The improvement was driven by our efficiency efforts, lower pension expense and no mortgage repurchase provision.
We are on track to reach our targeted annualized run rate of expenses of approximately $925 million by year end 2013. As BJ will discuss in a couple of minutes, consolidated net interest margin fell short of our expectations in the first quarter.
In our view, the interest rate environment is likely to remain challenging for the foreseeable future. As a result, our ability to control cost is essential to improving near-term profitability, but we're also committed to cutting costs without impacting our revenue sources.
We're building a platform that will enable us to grow and deepen the customer relationship over the long term. Over the past couple of years, we've hired roughly 25 relationship managers in lines of business, such as private client, business banking, commercial banking, CRE, commercial real estate lending, asset-based lending.
We also recently expanded our business activities in North Carolina, South Carolina and Virginia by selectively expanding product and service offerings in these markets. We've had teams of lenders in those geographies for several years and now plan on building on their success with a stronger focus in those markets.
We're also seeing growth on the retail side. Fees in our trust services and investment management business were up 9% year-over-year, driven by new hires and client referrals in our wealth management area.
Our registered investment advisors, FTAS, surpassed $1 billion in retail assets during the first quarter and now manages over $3.4 billion in assets, reflecting the 35% increase year-over-year. We're adapting to customer preferences.
We're also best-in-class mobile technology. We're rethinking our branch network from both a number and a size standpoint as we determine the right delivery channel mix to best serve our customers.
We're upgrading the existing branches through a combination of technology and staff. And we've recently introduced a new branch prototype that is staffed by universal bankers who are trained to provide a wide range of services so we can differentiate our customer experience while being more productive in the process.
With our efforts in growing our business and the eventual stronger economic recovery, we remain confident that we can reach our long-term Bonefish goals. In summary, on Slide 4, we are continuing to make progress and remain optimistic about First Horizon's future.
We're optimizing our business mix to grow selectively and profitably. We position our balance sheet for sustainable growth.
We're focused on return-oriented business that delivers solid economic profits. These efforts, along with leading market share, our strong fee income mix, significant asset sensitivity and our meaningful excess capital position us well for higher returns over the long term.
BJ will now take you through the financial details of the quarter, and I'll be back for some closing comments. BJ?
William C. Losch
Great. Thanks, Brian.
Good morning, everybody. I'll start on Slide 6.
Net income available to common shareholders for the first quarter was $41 million. Diluted EPS was $0.17 a share.
Pretax, pre-provision net revenue was up significantly, both linked quarter and year-over-year, as we continue to manage what we can control to improve operating leverage. Total revenues, you'll see, we're stable with higher capital markets revenue, offsetting lower net interest income.
And expenses were down 11% linked quarter as we continue to see the benefits of our efficiency efforts, with salaries down 7% linked quarter, and pension expense down significantly as expected. Loan loss provision was flat to last quarter's level at $15 million, as the credit quality continues to be strong and improving.
Moving to segment highlights on Slide 7. Our core businesses continue to show solid performance.
And as Brian mentioned on the Slide 4, our core businesses delivered a 12.6% return on tangible common equity and a 1.08% ROA for the quarter. In the regional bank, our net income rose 5% on a linked quarter basis.
Revenues in the bank were down 6%, driven by a decrease in net interest income and from seasonal declines in NSF fees. But expenses in the bank also decreased 11% linked quarter, driven by our efficiency efforts.
Salary expense was down 4% in the bank and the lower pension expenses there were the most significant drivers again. In the capital markets business, our net income was steady at $12 million.
Fixed income average daily revenues was up slightly at $1.13 million in the quarter compared to $1.09 million in the fourth. Expenses were up 7%, reflecting higher variable comp and a FICO reset that normally occurs in the first quarter.
Net loss in the non-strategic segment narrowed to $10 million in 1Q '13 compared to $15 million in the fourth. Pretax pre-provision net revenue, you'll note, was breakeven, a milestone that we've been working towards for several quarters.
Revenues were up 30% linked quarter and included a $2.4 million gain related to a LOCOM reversal on a TRUP loan that paid off. Expenses were down $1 million or 3%, even as we added $5 million to our litigation reserve for some existing matters.
As expected, our mortgage repurchase provision expense was 0 for the third consecutive quarter and our loan loss provision in the non-strategic segment was relatively flat at $17 million in 1Q '13. Turning to Slide 8.
As Brian mentioned, our net interest income and our NIM was under pressure this quarter. Our net interest income decreased 5% linked quarter and the margin was lower than anticipated at 2.95% in the quarter compared to 3.09% in the fourth.
There are several moving parts in the results this quarter, some of which were expected and some of which were larger than anticipated. As expected, fewer days in the quarter, a seasonal decrease in loan fees, lower reinvestment rates in the securities portfolio, partially offset by continued declines in deposit costs, led to about a 4-basis-point decline in aggregate linked quarter for those factors.
Three additional factors, totaling about 10 basis points, led to the greater-than-expected NIM contraction in the quarter. First, commercial customer deposit inflows, which were then held as excess balances at the Fed versus buying securities were much stronger than forecasted, resulting in about a 2-basis-point impact on the NIM; second, changes in our capital markets inventory hedging versus 4Q resulted in a 3-basis-point reduction; and third, lower loan yields, mainly driven by a larger-than-expected quarter-to-quarter decrease in loans to mortgage companies, led to a 5-basis-point reduction.
As I look at it from a fundamental perspective, we continue to believe that we are managing our balance sheet appropriately for the long-term. If you look at the chart in the upper right, it shows our net interest spread, our loan yields minus deposit costs declining at a modest rate.
Though competitor pressures continue to drive loan pricing and yields down across the industry, we believe our bankers are maintaining good discipline on both price and structure. The quality of credits we are putting on the books versus what is running off is better, though the yield differential is and will be a challenge near-term.
Our pipelines are strong and we're taking share, which will serve us well over time. And our loans to mortgage companies will ebb and flow based on industry mortgage origination volumes and movements in loan rates.
As one of our higher-yielding loan portfolios, it may have a meaningful impact quarter-to-quarter on net interest margin or loan growth, but the profitability metrics continue to be very attractive. Over the long-term, we continue to be positioned very well for rising rates and our asset sensitivity will drive meaningful revenue over time.
While this positioning may cause pressure in the near-term, we do not foresee making significant changes near-term to change our sensitivity profile. Sitting here today, our forecast for the rest of the year calls for a quarterly net interest margin in the range of 2.85% to 2.95%.
Some key underlying assumptions on that range are: No material changes in key macro rate assumptions; continued modest loan yield declines due to competitive pressures; loans to mortgage company balances remaining at roughly 1Q levels; limited incremental securities buying with continued lower reinvestment rates; lower excess balances at the Fed; and similar capital markets inventory dynamics. In addition, we expect our consolidated loan portfolio to remain flat as regional bank loan growth offsets runoff in the non-strategic portfolio.
Turning to Slide 9. The regional bank balance sheet trends were stable during the first quarter.
Average core deposits were up linked -- 1% linked quarter. Our average loans were relatively steady, where we saw growth in areas like asset-based lending, which was up 2% and consumer loans, which were up 1%, offsets again with loans to mortgage companies declining, and we are still seeing elevated levels of loan payoffs.
On a linked quarter basis, our net interest spread in the bank declined 7 basis points due to the continued competitive, low-interest-rate lending environment. Our loan pipeline remains solid and was up 33% linked quarter.
Our bankers are making a lot of calls and are making high-quality, relationship-oriented loans. We're focused on booking appropriate risk-adjusted returns on all of our deals.
We received third-party validation on a quarterly basis related to our pricing and we remain competitive and disciplined. The fundamentals of our balance sheet remains strong and we're well-positioned for solid returns on both assets and capital.
Turning to Slide 10, our mortgage repurchase trends. Our provision expense was 0 for the third consecutive quarter, as I mentioned earlier.
Linked quarter, our repurchase pipeline declined 22% to $259 million. And our ending reserve was down 21% to $184 million.
We saw favorable metrics in the first quarter versus key assumption metrics related to our expectations that you can see in the upper right-hand corner of the slide. Our rescission or our success rate is trending higher.
Our loss severity is right in line and our mix is more weighted to expanding where we have better detail and insight into our exposure. Although we saw a linked quarter increase in new requests, based on discussions and information provided by Fannie, we believe Fannie is accelerating, not expanding, it's review of our portfolio to reach substantial completion sooner.
Bottom line, we still expect any ongoing ZFE [ph] related provision to be immaterial. We've not been named in any lawsuits, new lawsuits related to our private securitization since October 2012.
And we had no loan repurchase requests from our first lien private securitizations. At this time, based on our private securitization origination mix, deal, size, age and performance, we continue to believe that if any losses occur, they should be significantly less than our GSE experience.
Turning to expenses on Slide 11. Our positive story here continues.
Our total expenses declined 11% linked quarter, as we discussed. Excluding 4Q '12's restructuring charges of $19 million, expenses were down 5% and our operating efficiency ratio improved more than 250 basis points.
We're seeing lower personnel costs from lower salary expenses and a decrease in headcount and from freezing our pension program. Additional expense items that declined included FDIC premiums, software, advertising and sponsorship costs.
Our companywide efficiency efforts are paying off, and we believe we're on track to implement $50 million of targeted efficiencies and achieve our annualized target expense level of approximately $925 million by the end of 2013. Moving on to asset quality on Slide 12.
First quarter loan loss provision, as discussed, was $15 million, flat to the fourth quarter. Net charge-offs were $27 million compared to $20 million in the fourth quarter.
You might recall that 4Q '12 charge-offs included a $7 million and $9 million favorable adjustment for lower loss estimates for discharged bankruptcies. On a linked quarter basis, reserves decreased about $12 million, and the reserve-to-loan ratio remains stable at 167 basis points.
Total nonperforming loans were up due to the health for sale loan portfolio, which includes repurchased mortgage loans, and nonperforming assets declined slightly from last quarter. Wrapping up on Slide 13.
We'll continue to be opportunistic in pulling the levers we need to, to control what we can control, to continue to improve our profitability and returns over the long-term. We've done a good job improving our operating leverage with significant expense efficiencies, more than offsetting revenue challenges, and we'll continue to look for ways to do so.
Our core business returns are encouraging, with annualized core ROA at 1.08% and our core return on tangible common equity at 12.6% in the first quarter. The solid returns in our core operating businesses of regional banking and capital markets demonstrate the progress we're making towards our long-term goals.
And with that, I'll turn it back over to Bryan.
D. Bryan Jordan
Thanks, BJ. I'm pleased with the progress we've made so far in 2013.
Focusing on our higher-return core businesses, differentiating our customer service, improving our productivity and efficiency and returning capital to our shareholders. We're positioning our company to take full advantage of the opportunities that will result from any strengthening of the economy.
Meanwhile, we will continue to work towards improving profitability, reducing the overhang of our legacy businesses and moving forward to achieving our long-term Bonefish targets. One side note.
We're planning on hosting an analyst day in the fall of this year. We'll have additional details coming out later in the second quarter.
I hope that you will be able to or at least strongly consider joining us for that. Finally, thanks to the First Horizon employees for their commitment and hard work.
With that, operator, we'll now take questions.
Operator
[Operator Instructions] Our first question comes from Matt O'Connor of Deutsche Bank.
Robert Placet
Yes, this is Rob Placet, on Matt's team. Just as far as -- on your outlook for the year, I was just wondering if you could help us think about the trajectory of the NIM, kind of over the course of the year?
William C. Losch
Yes. It's BJ.
That 2.85% to 2.95% range, any of the 3 quarters could be anywhere in that range. I would generally expect that it would come down modestly.
But as you've seen, there is volatility from what we're seeing in the marketplace in terms of both macro [indiscernible] movements and what we're seeing from competitive pressures. So generally speaking, I think, each of the 3 quarters will be similar in that range.
Robert Placet
Okay. And I was just curious if you could kind of paint the scenario where you'd have kind of a flat NIM or even a higher NIM for the rest of the year?
I mean, obviously, it's going to be loan growth and rate-driven, but just curious what your thoughts are in terms of achieving the high end of that range for the rest of the year.
William C. Losch
Sure. I think if you look at the slide that we put out, that kind of walk forward, if you will, what we saw in the quarter, certainly, I think loan fees come back after their seasonal declines.
We do have incremental opportunity, though it's obviously getting smaller, from lower deposit costs, which can benefit us. If some of the key macro rates move, such as LIBOR, 1 month LIBOR has been trending down.
If that stays flat to going up, that's incrementally helpful to us. The tenure, in terms of our loans to mortgage company business, in particular, if that continues to stay at lower levels or come down a bit more, that could certainly help us, but we're staying fairly conservative on our outlook related to those.
But those could certainly help us get towards the higher end.
Robert Placet
Okay, great. And then as it relates to your mortgage warehouse portfolio, I was just curious, could you just talk to the meaningful drop in balances this quarter, what specifically drove it and kind of where you see balances trending for the year and kind of how you think about that portfolio on a normalized basis over time?
William C. Losch
Yes. I think our outlook for -- again, I will reiterate, I think our outlook for that portfolio is roughly in line with where we're at today.
I think we ended the quarter at an average balance of $1.1 billion, and that's going to move. I did mention that there was probably a larger-than-expected drop.
We had ended the year last year at $1.8 billion period end, and we will probably, in the $1 billion range or just under it, period end for this quarter. So it was probably a larger-than-expected drop.
Two primary reasons for that were again: The first quarter is seasonally soft in terms of mortgage originations, which is obviously where that business is going to ebb and flow; and the second, the rate dynamics that we saw on the long end related to refis was not as conducive. So both of those factors contributed to a larger-than-expected decline.
I would point out though, that if you look at year-over-year, our loans-to-mortgage company balances are roughly the same as what they were in 1Q '11. So what we had seen throughout 2012 was significant strength and growth, and it just came down a little bit faster than I would have anticipated.
That portfolio, again, as I mentioned, is very attractive from a profitability and return and risk perspective. It's also one of our highest-yielding commercial portfolios, with yields in the $4.80 range.
So I think that's going to have a bit of a disproportionate impact if it moves as much as it did this way -- or this quarter, excuse me.
Operator
Our next question comes from Steven Alexopoulos with JPMorgan.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
I just want to follow-up with a few questions on the mortgage business. In 1Q, what was the split of purchase and refi?
D. Bryan Jordan
I'd probably say, Steve, it was in the 80%, 20% range, refi versus purchase.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Okay. BJ, in the past, I think your balances were somewhere between $400 million and $800 million, in that ballpark.
Do you have more capacity that you plan to maintain as volumes fall? I'm trying to get a sense if we go back to that range or, for some reason, we should stay above it.
William C. Losch
Yes. I think, Steve, if my memory serves me right, the lowest that portfolio has gotten in recent memory was $330 million, something like that.
We would expect it to stay at these kind of levels over the rest of 2013. It's kind of hard to gauge where it goes beyond that.
As you can see, it can move quite a bit in any particular quarter. But there are a couple of things that we have done in that business where we believe we've gained share, such that over time, we think the lows are not as low as what they would have historically been.
I would see it more in the $500 million to $1 billion range would be more of the lower end as opposed to what we would've seen previously. But again, our current expectations, based on the rate outlook and what our bankers say in that business, we think it's $1 billion to $1.2 billion range for the rest of the year.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
But I guess, BJ, we need refi activity to stay very strong, right, if you're getting 80% of this business from refi?
William C. Losch
Yes. That would be a good assumption.
D. Bryan Jordan
That helps, Steve. This is Bryan.
We think -- and Susan can talk about the portfolio limits. As BJ reiterated, we work to broaden and deepen our relationship with our mortgage banking customers.
We think we have, as BJ said, gained market share. And we think that we're working really hard to be the first line used and increased utilization.
And we think we will benefit incrementally, if actual purchase money does pick up as the housing recovery builds. So we're optimistic that we have gained share, it would be a bigger business.
As we highlighted the obvious, this morning, there's more volatility around that business, but we think we get paid very well for the service that we provide there. And we have good solid, deep relationships and like the business.
Susan Springfield
Yes. This is Susan, Steven.
To reiterate what Bryan said, we have taken the opportunity with some of our larger, longer-term clients to increase the lines that we offer to them in the mortgage warehouse business. And also, as both BJ and Bryan said, added market share by adding some additional clients as well.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Okay. And I just had one question on capital.
It looks like you paid out just over 100% in net income in the quarter by the dividend and buybacks. Bryan, is that how we should be thinking about capital deployment going forward?
D. Bryan Jordan
I think, in the short run, Steve, that's probably a good way to think about it. If you look at the dynamics of our balance sheet, with a continued runoff in the non-strategic portfolios, as we expect, and you see fairly limited opportunities for loan growth in a slower growth economy, I would expect that we would anticipate the return of a significant amount of capital to shareholders.
We don't think we need to build our capital ratios at this point. And we're very comfortable using the combination of the dividend.
It's now a $0.05 a share and the buyback where we bought $30 million this quarter, returning that capital to our shareholders in the near-term.
Operator
Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
Just one kind of near-term question on reserve releases. With the reserve ratio getting down to where it is now, are we getting kind of closer to what you view as the new normal?
Should we expect the declining pace of reserve release in the future? Or maybe limited or no releases going forward?
And then more of a bigger picture question, Bryan, for you, on M&A or just expansion generally. You mentioned the new mid-Atlantic region, which is building on some of the presence you've had there before.
How do you see that expansion playing out? Are there M&A opportunities out there, you think, could play out for you?
Is it more maybe a de novo, or just putting teams on the field for right now? Just -- if you can just give us a sense how fast that could play out?
D. Bryan Jordan
Okay. Thanks, Kevin.
I'll let Susan talk about reserve releases and then I'll come back on your M&A question.
Susan Springfield
Hey, Kevin, this is Susan. As it relates to our reserve methodology, we continue to use our ALLL model on our various portfolios, then we layer in expert judgment when we feel like there might be a component that's not picked up in the quantitative model.
So we just -- we continue to look at the mix in the portfolio, as well as the economic outlook.
D. Bryan Jordan
So, Kevin, on the M&A question, I guess you might infer from our response to Steve on capital repatriation, we think that we've got the excess capital that if the right kind of opportunity came up from an M&A perspective, we would be interested. We think it's vitally important that we be disciplined, that we be good stewards of that capital, we put it to work in a way that produces strong returns for our shareholders.
As you mentioned, the mid-Atlantic markets. And then opportunities to fill in here in the state of Tennessee would all be attractive to us.
But we're going to be disciplined in the way we do it and we'll continue to keep our eye on the landscape and look at opportunities as we have the opportunity.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
Bryan, are there any key markets within Carolinas and Virginia that you would be kind of higher up on your radar screen, or any size of company that it would have to be to make it worth it to look at such an opportunity?
D. Bryan Jordan
Yes, Kevin. Our biggest presence today is in the Winston-Salem/Greensboro area.
We've got a small presence and building in Raleigh, a small presence and toehold and some folks in Richmond Virginia, to name a few, but if it were in one of the towns in the Carolinas. As we've tried to relay over the years, we're very comfortable in doing businesses that have sort of the demographics or the feel of the major markets that we serve in Tennessee, where we can, over time, build a top share that we can have local leadership and compete in a way that is similar to the way we've built out our business in the State of Tennessee.
So there are a number of those opportunities. With respect to size, there's really no magic number in that regard.
Clearly, there's some scale benefits to, if you're going to do M&A, to being larger than smaller, but there's also the flip side, which is being focused in markets and being concentrated is very important. And so when we look at, we don't focus first on size, we focus on what is the makeup of the customer business, what does the organization look like, how are we going to be able to integrate our products and services, what does it do for us in terms of bringing talent onto our platform.
So we're not really bounded by size so much, but more focused on what does it do in terms of accretive nature to the franchise.
Operator
Our next question comes from Erika Penala with Bank of America.
Unknown Analyst
This is Ibrahim on behalf of Erika. Just a couple of questions.
Well, first on expenses. I think it's quite clear in terms of your guidance in terms of where you want to be at the end of the fourth quarter, the $925 million annual run rate.
When we look out, should we expect that, that could go lower, given if we stay in this revenue environment? Or should that be sort of stable to higher, given the investments that you are making in some of the mid-Atlantic markets that you talked about?
D. Bryan Jordan
Yes, this is Bryan. Assuming steady state, is that anything in terms of expanding the franchise through M&A alter the site?
That expense base would have some natural downward bias and it's just by virtue of the continued runoff in the nonstrategic portfolios and the costs that are associated with that. So we don't set a $925 million target as a target any more than we set the $1 billion that we talked about last year.
We're constantly looking at that cost structure and looking for ways to get more efficient in the way we deliver products and services. So I would say, in combination of what we think is happening in terms of the makeup and structure of the branch network, the use of technology, the runoff in the nonstrategic portfolios, there continues to be some amount of downward bias over time in that number, if you would, in sort of the current type operating environment.
So we'll be focused on it in that regard.
Unknown Analyst
Got it. Thanks a lot for that.
And just one follow-up. Thanks for the detail, BJ, on the margin.
I was just wondering if you could give us some more color in terms of the decline in the security wheels. You talked last quarter about, yes, it is an MBS heavy book, which is pricing lower.
Should we see the rate of declines sort of moderate as we go forward, to sort of thinking with your margin guidance that quarterly NIM should not fall below 2.85%, at least?
William C. Losch
Yes. So we're not doing anything different with buying in the securities portfolio, either in terms of mix or growing it particularly.
You would've seen it relatively flat this quarter. Our yields have been coming down in that portfolio in the last couple of quarters anywhere between 12 and 20 basis points.
And so I think you should probably assume that we'll see similar reductions in that yield over the course of 2013.
Operator
Our next question comes from Jefferson Harralson with KBW.
Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division
A capital question. With the dividend increase and the increased authorization, was there some kind of stress test that you had to do to make those happen?
And can you comment on how that works?
D. Bryan Jordan
This is Bryan. We regularly do stress testing and we provide that to our regulators both at the OCC and the Federal Reserve.
We've had a number of capital actions where we would have submitted that kind of information as part of that process, whether it's TARP repayment or beginning the buyback. As we talked about in the past, we think it's appropriate to approve these authorizations in a modest -- somewhat modest steps and continue to look at capital and continue to stress test.
So there's nothing new about the stress testing that we have done or have been doing. As you know, the provisions under Dodd–Frank have stress testing and ultimately, public disclosure that stress testing for all executions, I think, greater than $10 billion.
The OCC and the fed have been rolling out those requirements for that stress testing, so we're focused on that process, which will begin later in 2013 and continue for -- will continue ongoing. But there's nothing new or different in terms of stress testing that we've been doing.
Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division
All right. And the $100 million NCPP you did this quarter, I'm assuming that's going to replace the $200 million trough you have, I haven't seen any announcements along those lines.
Is that -- $100 million seems extreme if you're not replacing the $200 million?
William C. Losch
I think, Jefferson, it's BJ, what we did was a couple of things on the preferred, one was we saw an opportunity to lock in very historically low rates on a piece of the capital structure that we had that we wanted to eventually add to. And so we thought we did a pretty good job timing the market and doing that.
Yes, over time, we will use it to opportunistically retire other parts of the capital structure as appropriate, but you could assume that it was a little bit of a pre-funding effort but one that we think over time was a smart move for us.
Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division
All right, Thanks. A final follow-up is on that.
If you could just give a little more color on that, the increase or the size of that reduction in the mortgage warehouse business, it just seems like a big number for a quarter where -- it was just a lot bigger than we had refinanced this fall during the quarter. So I guess, can you talk about the $700 million?
Is there 1 or 2 big clients that really came down or just maybe pulled some credit from somebody, or is it just that volatile?
Susan Springfield
This is Susan. It's not embedded in any 1 or 2 clients.
It's really based on the economic environment of low activity. And again, there is seasonality to it.
We were at almost the exact same level, this time, 3/31/12 as we are 3/31/13.
Operator
Our next question comes from Todd Hagerman with Sterne Agee.
Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division
Brian, I just wanted to drill down a little bit more in terms of the loan pipeline in the funding side. As you mentioned, your expectation, the mortgage warehouse is to stay relatively steady over the course of the year.
But what catches my attention in both the pipeline, as well as in the capital markets business is it seems like there was some amount of pull through in Q4. And then I'm just curious in terms of the mix with the pipeline build now in the first quarter in C&I, what is the shift there from quarter to quarter, if you will, and kind of the dynamics between the 2 quarters?
D. Bryan Jordan
Yes, I'll start and then Susan can talk more particularly about the details. Clearly, the pull through in the fourth quarter was good.
You may recall, we mentioned, there is a fair amount of tax-motivated things that occurred in the fourth quarter. Our pipelines were a little lower at the fourth quarter.
We saw a natural build and there's some seasonality around closings in any given year. The pipelines, as we measure them, the growth is pretty broad based.
We see strength in a number of asset classes. In fact, there's some asset classes that we're surprised at how strong they are and particularly, in areas of commercial real estate at this point.
So it's pretty broad based. We feel good about the makeup and the customer mix in there and are optimistic based on what we've seen to date that we're going to have pretty good pull through on that.
Susan, anything you want to...
Susan Springfield
Yes, one of the things that BJ mentioned, too, is we have seen some growth in our asset-based lending business. We continue to see opportunities there.
And then just in our core markets, our core C&I, not a lot of organic growth in terms of companies doing a lot of expansion, but with the calling efforts of our relationship managers, those long tenured and some of the ones we've brought on, we continue to have some success in terms of taking long-term business away from competitors.
William C. Losch
If you look at the first quarter, we had good success all across the state in terms of the business that we won. We had strength in the East, we had strength in the middle, we have strength in the West.
It's pretty broad based but as Susan said, there's not a whole lot of incremental borrowing when there's a lot of moving market share around and we like our prospects of that, and our folks are working hard to grow that business.
Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division
That's helpful. And then just kind of a follow-up.
I'm assuming then, also, the commitments have also meaningfully trended higher as well. Just with respect to that pipeline.
Susan Springfield
Yes, we've seen an increase in those commitments as well. Although, in terms of existing commitments, there's still some pressure on utilization as customers are -- we still have some customers deleveraging.
Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division
Okay. And then if I could, just lastly, just in terms of the capital markets, just in terms of the quarter to quarter, some of the other competitors saw a little bit better strength in Q4, again, because of the fiscal cliff and everything else.
But your activity levels in the quarter, again, kind of, at the lower end of your guidance, but I'm just curious in terms of what you're seeing in terms of the customer flow Q1 going forward in terms of that pipeline. Again, with a lot of the political noise that occurred between Q4 and Q1, how that may be affecting kind of your outlook on the average daily revenues in the business now going forward?
William C. Losch
Yes, yes. Our expectation is that will be pretty steady.
We expect to be in the lower half of $1 million to $1.5 million average daily revenues, based on what we see as a sort of catalyst for our customers buying in this environment. The biggest driver of volatility is going to be expectations about the direction of rates.
If you look at the last 75 to 100 days, you've seen a lot of volatility in what people are thinking about rates. Now, we feel very good about the fundamental makeup of the customer base, the products that we're adding, like the general issue, general market issue, the municipal expansion that we've been building out and we think it will be a pretty steady business.
Our business is a distribution-oriented business. We don't position for proprietary trading and we think it will be steady as people have cash flow to continue to reinvest, volatility will come in from movement in the direction of rates but generally, we have a pretty positive outlook over the remainder of 2013.
Operator
Our next question comes from Marty Mosby with Guggenheim.
Marty Mosby - Guggenheim Securities, LLC, Research Division
On the mortgage repurchase. If you look at the reserves that you have, and you kind of take out the impact of what you already have in the remaining pipeline, it would look like the new demands at the pace that they were at this quarter, you could cover about 3 more quarters, which, in my mind, given your kind of guidance so you don't need any more reserving or any meaningful increase, it looks like these activities, as we get closer to year end, would actually be behind us.
So I just wanted to confirm that, that timeframe looked right.
William C. Losch
It's BJ. Yes, in my initial comments, I did talk about that Fannie seemed to be accelerating requests but, in our discussions with them, not expanding them.
So that would naturally mean that they're trying to get through the pipelines faster and that's obviously a benefit for us. So again, what we watch more closely than quarter to quarter requests is the conversation and data that we get from them about aggregate exposure and terminal exposure, and we feel very comfortable with where that's at.
We'd obviously want it to be resolved sooner rather than later as well.
Marty Mosby - Guggenheim Securities, LLC, Research Division
Yes, if you just kind of fly through the map, it looked like you got 2 or 3 more quarters at the rate that they were at and then it would be kind of behind it. The other thing, BJ, I want to ask you about was the capital markets inventory impact on the net interest margin.
It looks like that's kind of coming through the securities, kind of the repo line where you're putting maybe more of that hedging on the balance sheet. Do you think that, that's a permanent 3 basis points, or is there some opportunity that maybe you would kind of go back to how maybe some of that's more off balance sheet and you get that 3 basis points back in the near term?
William C. Losch
Yes. Yes, you're exactly right in terms of what the dynamic was this quarter.
It's all dependent on what we're trying to hedge from a loan position perspective. It just so happened that in the first quarter, we had more on balance sheet hedging, which shows up, as you know, in your trading liabilities and on the asset side of the repo.
You know that could change next quarter, it could stay where it's at. So what my more conservative assumption is, is that it stays where it's at.
But again, as you know, that's not where we make money in that business, that we use the balance sheet to facilitate the fee income side and the distribution side of our business. So it's going to have a disproportionate impact on the NIM, but a very modest impact on NII.
Marty Mosby - Guggenheim Securities, LLC, Research Division
Yes, I was just kind of looking at it, it wasn't the inventory getting bigger it was just the hedging activities, and if that was a shift back, that would at least put some upward movement on the margin, at least when we recaptured that part of it.
William C. Losch
That's right.
Operator
Our next question comes from Nicholas Karzon with Credit Suisse.
Nicholas Karzon - Crédit Suisse AG, Research Division
I guess the first question that I wanted to start out with was the noninterest expense in the nonstrategic segment. And it looks like it actually ticked up quarter-over-quarter, if you exclude the legal accrual on the fourth quarter.
I was wondering kind of when we should start to see this come down. I mean, it's roughly $130 million kind of on a run rate basis, kind of when that starts to come down and kind of what portion of that is variable versus fixed, over the next couple of years?
William C. Losch
It's BJ. I actually think that on a linked quarter basis, in aggregate, expenses were down $1 million and if you exclude that litigation reserve they had at $5 million was actually down 6.
So what is really in that is continued credit-related costs to managing our nonstrategic portfolio, which continued to float down over time as we work out those assets. And generally less expensive as our MSR portfolio comes down, the self-servicing costs will come down commensurate with that.
So I do think it's coming down appropriately. Do you see that on Slide 7.
Nicholas Karzon - Crédit Suisse AG, Research Division
Okay, got it. And then on the tax credit, it was a little bit low, I think at $6.2 million this quarter than it's been in the last couple of quarters.
I know that moves from quarter to quarter, but what's kind of a normalized level to think about that?
William C. Losch
About $6 million to $7 million a quarter.
Operator
Our next question comes from John Picard with Evercore Partners.
Unknown Analyst
Could you talk about the trend in the file requests on the private label side in the quarter? I know you sound pretty confident still on the lost content there that will be manageable.
But just wanted to get a little bit of color around how the file requested trended on that side and through the quarter?
William C. Losch
John, when you say file request, what are you thinking about?
John G. Pancari - Evercore Partners Inc., Research Division
Well, I think you have indicated before and last quarter that full file request had started to pick up where you've had some requests on the private label side and I know that could portend any full repurchase requests, But you haven't seen that yet, but I'm just curious if you are seeing incremental inquiries on the file request side at all.
William C. Losch
John...
Susan Springfield
No. We see no reason for clarification in our appendix in the bulletin about that.
It's really not a bad request, but we really haven't seen a lot of movement there either quarter to quarter.
Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division
Okay. All right.
So no real change through the quarter on private label side in either direction to free the -- to have any incremental return on that side.
D. Bryan Jordan
That's right. John, this is Bryan.
It was very quiet in the private label space in the first quarter, nothing really substantiated this change since, I'd say, early in the third quarter, I think BJ mentioned in October, but very quiet in the first quarter.
John G. Pancari - Evercore Partners Inc., Research Division
Okay. All right.
And then in your core loan portfolio, outside of the mortgage warehouse, can you give us a little color on what yields are you originating new money on your loan book, particularly in C&I, x warehouse and commercial real estate, just so we can get an idea of the ultimate seasoning of that portfolio as rates remain low?
William C. Losch
John, generally speaking, I'll give you a little more color than just the yields. But our new originations are predominantly floating rate on the commercial side.
About 80% of what we're doing is floating rate. In terms of core C&I, the yields that we're seeing are in the LIBOR plus 2 50% range, something like that and on the commercial real estate side, they're roughly in line with that, maybe a little bit better.
So when you combine floating rate assets coming on the balance sheet in a competitive environment, that pressures your yields, in terms of what you have on the portfolio versus what is coming on. What I would say is well though, is that the new business that's coming on is very clean.
So when we run risk-adjusted return on capitals for individual credits, we're seeing very good risk-adjusted returns and future economic profit associated with that. So our credit quality's stellar, we're getting full costumer relationships, we're picking up share that we want to see.
But in this environment, those yields are -- are going to be pretty competitive.
Operator
Our next question comes from Ken Zerbe with Morgan Stanley.
Ken A. Zerbe - Morgan Stanley, Research Division
First question, just in terms of the legal accrual, this is the second quarter in a row that you've taken an accrual, looks like it ticked up a little bit. Is there anything there that we should be -- that we should know about?
William C. Losch
I don't think so, Ken. They were just for existing litigation matters.
In our Q, you'll see that we regularly disclose what the reasonably possible lawsuits would be and what kinds of lawsuits we have. And so every quarter, we're going to get new information that will determine whether or not we need to add the litigation reserves or not.
On some existing matters, we felt the need to do so.
D. Bryan Jordan
This is Bryan. I'll add to it.
As we talked about in the past, most of the accrual process for matters like litigation or for that matter, mortgage repurchase, are all driven by probable and estimable. And as we get, as BJ said, more information, that gives us the ability to establish accruals based on probable and estimable standards.
We will accrue those when we have that ability and so, we don't talk specifically about individual matters. As BJ said, we put as detailed a disclosure as we think we can in the Qs and Ks.
And as opportunities and information come up for us to set up appropriate reserves for those matters, we take that step.
Ken A. Zerbe - Morgan Stanley, Research Division
And was the $5 million related to a private label this quarter?
D. Bryan Jordan
No. As we said, we have not had any private label repurchase requests, and I'll just use that as a reference point because until we have requests, it's not -- we don't have the ability to make accruals for it.
Ken A. Zerbe - Morgan Stanley, Research Division
No, perfect. And then just one question, in terms of the pace of the expenses, if we take what you reported this quarter, the 2 41, we back out the $5 million of legal accruals, we're are at 2 35, looks like up by 4, basically you're at 9 40, the 9 41.
So based on this quarter's number, you're sort of already within your 9 25 to 9 50 range. Is that the right way to think about it?
Is there going to be -- I mean, do we see a tick up in expenses then coming back down again? Because it seems like you already, if we carry this out, you're already within your targeted expense guidance?
William C. Losch
I think, Ken, we've talked about 9 25 this time as our target or goal for our annualized run rate by the end of the year. So I think we're still a little bit above that by your math, and we expect to continually bring that down as some of the further efficiency efforts flow through our numbers.
So for instance, some of the actions that we took in the fourth quarter, many of those employees were still on the payroll in the first quarter. So they'll come off in terms of salaries throughout the rest of the year.
So as Brian said and as I've said, in this environment, we're going to kind of continue to bring down our expenses appropriately without sacrificing the revenue and so you should see that continue to glide down.
Operator
Our next question comes from Kevin Reynolds with Wunderlich securities.
Kevin B. Reynolds - Wunderlich Securities Inc., Research Division
Bryan, could you talk about the dynamics of the competitive environment and whether there's been any change this quarter versus, say, fourth quarter in terms of how big banks are acting with respect to structuring price and I guess, the small banks as well. And if there's any noticeable difference, how do you think that continues to play out over the course of this year?
D. Bryan Jordan
Yes, good morning. We continue to see competitive pressures to being very intense.
It is, there's probably no remarkable change in the first quarter, just sort of a continuation of this trend line. As I commented earlier, the opportunity that we -- and I think most people are seeing, are opportunities to gain market share or move relationships around.
In a lot of cases, you would assume, by definition, that that's improved price to structure, and so you'd see that, that continue to play through. We are not seeing a whole lot of difference in the behavior of large or small competitors.
It's, as I've said in different times in the past, we tend to see better pricing and structure on larger, more significant deals simply because there's not as much as competition for those deals. On smaller deals, there is an awful lot more competitions.
So it's a bit dated, but we see deals where a borrower may get 15 term sheets on a deal. So that's not -- that didn't create the best dynamic for competition.
And that's one of the reasons that we are focused on the more specialized type businesses at the margins. BJ mentioned the growth we had in ABL, we've talked a lot about the contraction we saw in warehouse lending, but that's -- those are the kinds of businesses where we think we have a specialized product set, we have a specialized capability and we have the ability to create attractive returns and provide valuable service to our customer base.
And so we're really looking at the business to be competitive in the core C&I and corporate business, as well as commercial real estate, but also to expand our purview of those specialized opportunities to grow business, healthcare is another example. So that's a long way of saying the dynamics haven't changed an awful lot in the last quarter.
It's still a very competitive environment. Borrowers are not doing a whole lot of incremental new money borrowing.
It makes it a challenging environment for everybody in the industry to show incremental loan growth. And so we'll stick to our discipline and try to win good, solid customer relationship business and grow the business very patiently with our eye towards the long term.
Albert H. Savastano - Macquarie Research
Our next question comes from Mike Turner with Compass Point.
Michael Turner - Compass Point Research & Trading, LLC, Research Division
Just curious what your expectations for the securities portfolio size will be going forward? And then also, just what the reinvestment yields are in that portfolio?
William C. Losch
Yes. So we would expect that the securities portfolio size would be, essentially what it is here, give or take a couple of $100 million each way, so not any significant change in buying patterns or activities.
And then our yields would continue to float down in the 10- to 15-basis point range a quarter. Eventually, they're going to flatten out but they're still on a downward trajectory.
Michael Turner - Compass Point Research & Trading, LLC, Research Division
But what are the yields of your repurchases right now?
William C. Losch
Well, what we're putting on in terms of security, reimbursing.
Michael Turner - Compass Point Research & Trading, LLC, Research Division
Yes, yes.
William C. Losch
We're really in the 1 50 range, something like that.
Operator
Our next question comes from Emlen Harmon with Jefferies.
Emlen B. Harmon - Jefferies & Company, Inc., Research Division
BJ, maybe kick it off with you. You talked about, in your prepared remarks, talked a little bit about continuing to look at the branch structure.
Can you help us identify kind of, or can you help us think about kind of where the greatest opportunities are for say, the areas of real estate or personnel, and just kind of what are the opportunities as you think about, from an expense perspective, as you think about just the infrastructure longer term?
William C. Losch
Yes. I think that, obviously, what we've already done in terms of our largest line item, anybody's largest line item in our industry of people.
We've taken a lot of those actions already and so we'll continue to see the benefit of that going forward. Our branch infrastructure is certainly one that we continue to look at.
Bryan mentioned that not only the number but the size as well, how do we right size the branch for the customer behavior that we're seeing to make our footprint smaller. From a real estate perspective, in aggregate, not just branches, but we have a particular focus on reducing the footprint, if you will, of square footage that we use as an organization to be more efficient, to move more into owned properties or long-term leased properties from elsewhere, so we continue to see opportunities to do that.
Our procurement group has done a good job working with our various businesses to renegotiate contracts. And when ones come up for renewal, taking costs out of the organization there, we'll continue to see that.
And what we're focused on a lot going forward, are things that we call horizontal opportunities. So things like looking at end to end processes and taking pieces and parts out of that to make our experience for our customers better and take cost out.
Most of what we've done already is what I'd call vertical cost reductions and these will be a little bit more processed than horizontal oriented.
Emlen B. Harmon - Jefferies & Company, Inc., Research Division
Got you. Okay, thanks.
And then, so, like we got away from the mortgage warehouse there for a bit, but I'll bring it back really quickly. Did hear from -- one of your competitors in that space this quarter, that there was kind of a pickup in competition.
Could you give us a sense of, in that business, specifically, what you feel like the competitive environment is, and have yields come under pressure at all there?
William C. Losch
Not particularly. I don't think our yields are still very strong in the $480 million range.
We have continued to pick up new incremental clients. We've gotten additional business from existing, but it's going to ebb and flow.
There are some large clients of ours that will do business with us primarily, but others, secondarily and vice versa. And so what we're continuing to work on in that business is becoming more and more of a primary relationship for as many as we can.
But we haven't seen any particular competitive pressures that would give us any cause for concern that I've heard of.
D. Bryan Jordan
Then, this is Bryan. I know this is a blinding glimpse of the obvious, everything we're doing right now is very competitive.
It's all relative, you have to keep it in that context. But it's a very competitive environment and we feel like we have to work hard to earn all of our customer business, and we haven't seen a big change in the mortgage business.
Operator
I'm not showing any further questions at this time. I'd like to turn the conference back over to Bryan Jordan for closing comments.
D. Bryan Jordan
Thank you, operator. Thank you, all, for joining us this morning.
We appreciate your time and your interest in our company. Please let us know if you have any questions or need additional information, and Aarti will be available throughout the day.
I hope you all have a great weekend.
Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.