First Horizon Corp (FHN) 2007 Q2 法說會逐字稿

Well come to the First Horizon National Corporation's second quarter earnings conference call.

Today's call is being recorded.

In addition, you can listen simultaneously at www.fhnc.com at the Investor Relations link.

Hosting the call today from First Horizon National Corporation is Jerry Baker, Chief Executive Officer, and Bryan Jordan, Chief Financial Officer.

They are joined by Dave Miller, Director of Investor Relations for First Horizon.

At this time, all participants have been placed in a listen-only mode, but the floor will be opened for your questions.

Mr.

Miller, you may begin.

Thank you, operator.

Before we begin.

We need to inform you that this conference call contains forward-looking statements involving significant risks and uncertainties.

A number of factors could cause actual results to differ materially from those in forward-looking information.

Those factors are outlined in the recent earnings press release, and more details are provided in the most current 10-Q and 10-K.

First Horizon National Corporation disclaims any obligation to update any forward-looking statements that are made from time to time to reflect future events or developments.

Also, please remember that this audio webcast outline our website at www.fhnc.com is the only authorized record of this call.

Now I would like to turn it over to our CEO, Jerry Baker.

Thanks, Dave, and good morning, everyone.

As you saw from our earnings release, we reported earnings of $0.17 per share this quarter.

It is important to note that this include something significant one-time charges.

We were not helped by the operating environment, and we are far from satisfied with these results.

Bryan is going to go through the details of the quarter, and I'll be brief this morning and as clear as possible.

My commitment when taking over as CEO was to get First Horizon back on track by systematically reviewing our businesses, refocusing using our strategy, improving productivity and efficiency, making sure we had actionable performance metrics and approaching each business objectively regarding shareholder value creation.

Over my first quarter we have accomplished much but have more to do.

We have refocused our strategy on Tennessee, channelling investments into this important market as we move forward, while emphasizing specialty banking nationally and not brick and mortar.

We have increased focus and resources on managing asset quality, as the housing market deteriorated, and we are continuing to make adjustments to return mortgage to profitability.

We have worked to deliver cost reductions in all business areas beyond the $90 million target we communicated last quarter.

And we expect to have these completed by year-end, and incorporated into our first quarter 2008 run rate.

As a part of these efforts, we exited some underperforming business activities that had little or no long-term potential, reduced facilities costs, and took severance and related one-time charges totaling $39 million in the second quarter.

In total, we expect to improve future annual earnings by $125 million or more going forward.

That said, we are not done and believe we need to and can deliver more.

To that end, we are now evaluating fees, margins, and returns for individual businesses, delivery channels, and products, in a detailed assessment that will further improve performance.

I expect that the result of this review will be to exit several additional business areas in the third quarter.

We have already made the decision to curtail our national retail banking strategy, reduce our exposure to mortgage servicing, and other actions beginning this quarter.

I would expect to announce these actions and provide more detail after they are finalized.

I believe we are making the right changes and business adjustments,, and I see the underlying progress in the second quarter.

While the bank's loan volume was at and in some cases above expectations, there was more margin compression than expected.

We also provided more reserves for potential loan losses, given the national real estate environment, and at the same time invested in marketing and people for the Tennessee market that had previously been deferred.

I was pleased to see the mortgage -- in mortgage that loan volumes were stronger than expected, and there was some improvement in hedge costs but margins in the prime market tightened more than we expected.

I was also pleased to see continued improvement in capital markets, even though the interest rate environment has not yet approached the point where we would expect much improvement in our fixed income business.

Notwithstanding this progress, there is more work to do, and it will take the balance of the year to implement the changes necessary.

Now I would like to turn it over to Bryan for a review of second quarter results, and I'll be back to help answer your questions.

Thank you, Jerry.

Good morning, everyone.

I'll begin by reiterating a point Jerry made, there is tremendous opportunity for shareholder value creation and growth in this franchise.

In my first month with the organization I have seen firsthand the commitment this management team has to identifying those opportunities and making the changes necessary to improve results across the board.

Our reported earnings this quarter were $22 million, or $0.17 per share, reflecting the impact of a number of unusual items including charges of $39 million related to various restructuring, repositioning, and efficiency initiatives.

Each of these charges is recorded in the corporate segment, and we have provided a schedule in the financial supplement outlining the impact of these charges had on the income statement.

Another significant item impacting this quarter's reported earnings was the negative effect of $5 million of litigation settlements in two of our businesses.

Let me talk in more detail about a key area Jerry mentioned that is driving improvement -- efficiency.

Management has taken meaningful action to identify opportunities for gaining efficiency and productivity.

These efforts will better position First Horizon for growth and should demonstrate that we are serious about turning the corner towards sustained profitability.

As we told you last quarter, our goal was to achieve $140 million in annualized cost reductions via three phases of efforts undertaken in 2006 and throughout 2007.

In phase 1, we achieved $50 million of improvements in 2006.

This is evidenced by the fact that excluding the legal settlement this quarter, expenses in the bank, mortgage company, and capital markets were flat or down compared to a year ago.

In phases 2 and 3, we committed to $40 million more in savings in 2007, plus an additional $50 million in our run rate by the end of this year.

After a thorough review over the last 90 days, we have identified a series of initiatives that should enable us to exceed our $90 million goal for phases 2 and 3.

We expect to achieve at least $125 million in incremental pretax benefit with minimal impact to revenue for a total of $175 million for all three phases.

The initiatives in the second and third phases encompass four general categories.

Organization and compensation changes, such as consolidating functional areas, improving managerial span of control, and further rightsizing mortgage and capital markets.

Further procurement, centralization and multi-sourcing of back office functions.

Repositioning noncore businesses, such as our redesign nonprime operation and coin merchandising, which we exited this quarter and other efforts including facilities, consolidation, and the sale of nonstrategic loans.

As of the end of the second quarter, approximately $24 million of annualized benefit from phase 2 and 3 initiatives has been realized in our run rate.

The remaining approximately $100 million of annualized benefit, or $25 million quarterly, is expected to be realized throughout the third and fourth quarters.

It won't fully be realized in our run rate until first quarter of 2008.

We have provided a page in the financial supplement outlining how we expect these cost savings efforts to impact each of our business lines in the next few quarters.

Please refer to this schedule for a more detailed an assess of expected savings by segment and category.

As you know, there are one-time costs associated with the implementation of these initiatives.

We incurred charges of $39 million in the second quarter related to these efforts, and would expect total additional charges of $50 to $60 million over the next two quarters.

Jerry referred earlier to other actions we may take to evaluate our businesses.

As the process continues to unfold, additional benefits and one-time charges could result.

All of these efforts are intended to aid First Horizon in becoming a more agile organization, and we will remain focused on blocking and tackling to improve returns.

Now I'll move on to business highlights and outlook.

First, in retail commercial banking, pretax income declined sequentially to $82 million in the second quarter from $100 million in the first quarter, driven by increased provision expense, and pricing compression in our national consumer and construction lending business.

Our focal point for banking expansion, First Tennessee, continued to perform well as pretax contribution increased sequentially and year-over-year.

In addition, we recently completed our annual market share review which showed that we continue to gain share, throughout the past year, with an 80 basis point gain in the business market, and a 17 basis point gain in the consumer market.

The share gains continue to be driven by our emphasis on creating loyal customers through a differentiated value proposition focused an convenience, advice and service.

n fact, J.D.

Power and Associates recently recognized First Tennessee as among the best in the Southeast in overall retail customer experience.

During the second quarter, we added to our sales force in Tennessee by recruiting top talent from competitors.

While these increased investments in sales force combined with others in marketing and targeted deposit pricing slowed sequential earnings growth in the bank, they position us to further build our leadership position in Tennessee.

While flat sequentially, deposits in retail commercial bank grew 3% year-over-year, driven mainly by healthy business growth, business deposit growth.

Loans grew 1% sequentially and 4% year-over-year.

That interest margin declined 21 basis points to 3.89% in the second quarter sequentially, driven by increased demand for fixed rate consumer and construction loans in our national markets versus more profitable floating rate loans, additional nonaccrual construction loans and higher deposit rates in Tennessee.

The margin was also unfavorably affected by 7 basis points, resulting from an adjustment of loan origination deferrals.

Benches in the bank were down 4% year-over-year, reflecting our continued focus on efficiency.

In the mortgage business, pretax income in the second quarter declined $5 million sequentially to a loss of $16 million, but this included an $8 million legal settlement accrual related to the settlement of the McClain class action lawsuit from 2006 as a higher number of actual claims were received than projected.

We are focused on increasing sales force productivity and building retail prime originations.

Success on this front is demonstrated by this quarter's 28% sequential increase in originations to over $8 billion, driven by continued refinance activity, our focus on more attractive traditional fixed rate products, and growth in our sales force.

I would note that this growth is well above the current MBA forecast in sequential growth of 12% and since much of our increase origination activity occurred during the latter part of the quarter and was not fully reflected in this quarter's loan sales of $7 billion, delivery volume should remain strong in the third quarter.

Most importantly, our mortgage business continues to provide a strong flow of new customers, adding more than 50,000 new relationships during the first half of this year.

Gain on sale margins declined from 92 basis points in the first quarter to 76 basis points in the second, due to continued price competition, channel mix, remaining nonprime deliveries, an unusually large lower cost of market activity.

Although unusually low this quarter, the margin is expected to average around 90 basis points for the remainder of 2007.

Net interest income increased $24 million in the second quarter, versus $17 million in the first quarter.

During the quarter, we modified pooling and servicing agreements on private securitizations to segregate the retained yield from the master servicing fee, treating our private label products consistently with our agency's securitization in reducing capital utilization.

As a result, $175 million of MSR at fair value was reclassified to a trading asset interest only strip with no impact to net income.

Service fee income was reduced by approximately $12 million this quarter, offset by approximately $6 million of increased net interest income and $6 million less runoff expense.

Runoff was relatively unchanged in the second quarter as the anticipated seasonal increase in prepayment rates was offset by the aforementioned smaller mortgage servicing assets.

Net hedging losses remain high relative to historical levels, but improved $5 million sequentially to a loss of $15 million in the second quarter, as improvements in some factors like MSR seasonality were partially offset by continued tightening of mortgage swap spreads.

In capital market segment, pretax income improved to $13 million in the second quarter, up significantly from $3 million in the first quarter, as we focused on productivity gains and continued expansions of products like structure finance and M&A.

Other products continue to represent nearly half of product revenues in the second quarter.

Additionally, we began staffing our first international offices quarter in Hong Kong.

This location, coupled with the planned office in Tokyo will enable us to improve and expand relationships with foreign fixed income clients.

Fixed income revenues improved 4% sequentially to $48 million in the second quarter, due to investment portfolio restructuring from our institutional clients.

Other product revenue was flat sequentially at $42 million, including a $3 million benefit from the resolution of a litigation matter.

For the 5th straight quarter, capital markets completed a pool trust preferred transaction in excess of $900 million.

While revenues from other products will continue to be subject to timing and execution fluctuation, growth is expected in the second half of 2007.

Expenses in capital markets fell $6 million sequentially as a result of the impact of efficiency initiatives and expected seasonal decreases.

As I mentioned earlier, the corporate segment incurred charges of $39 million this quarter from restructuring, repositioning, and efficiency initiative charges related to phases 2 and 3 of our efficiency initiatives.

Approximately $8 million of this impact appears as provision for loan losses with the remainder as non-interest expense.

Turning to our consolidated results, corporate net interest margin declined from 2.84% in the first quarter to 2.79% in the second quarter, as improvement for mortgage servicing rights reclassification and warehouse spread was offset by compression in the retail commercial banks margin, driven mainly by national consumer and construction spreads.

Average deposits grew 2% sequentially, and average loans grew 1%.

And with a $300 million on balance sheet securitization this quarter, our loans to core deposit ratio remained at 1.57 -- 157% at the end of the second quarter.

Overall asset quality remains good, with some deterioration from near record quality levels driven by our national real estate portfolio.

Residential construction lending to individuals, known as our one-time close portfolio, has shown some deterioration related to the general downturn in the housing industry, particularly in specific markets such as Florida, California, and Arizona.

We implemented a number of product and process changes about a year ago, aimed at mitigating credit and fraud risk, including enhanced underwriting and due diligence, raising minimum FICO score and equity requirements, and eliminating certain product structures.

The bulk of the current problems were originated prior to these changes.

Our portfolio of residential construction loans made to builders and developers has also been impacted by housing industry trends and while we're not immune to market cycles, we continue to believe that our underwriting standards, people, and processes, are strong in this business.

The balance of the portfolio continues to perform well.

We are particularly pleased with home equity portfolios performance and attribute its steady results to high borrower quality.

The C&I portfolio is also performing well.

We remain watchful, however, on both portfolios.

Home equity, due to its direct tie to housing trends and C&I due to components of this portfolio that are impacted in some manner by housing.

As we had expected, charge-offs decreased from 48 basis points last quarter to 41 basis points this quarter.

Non-performing assets increased sequentially from 56 basis points to 81 basis points in the second quarter, driven by deterioration in both national residential construction portfolios.

It is important to note that approximately 30%, or 25 basis points of our nonperformers were one-time close loans that have either been charged down to their value or less, or reserved at a level so that significant future provisioning not expected from this pool of problem loans.

Provision expenses increased sequentially to $44 million, but it's worth noting that this did include $8 million of additional provision associated with the sale of approximately $120 million of loans to single relationship national borrowers.

We have previously provided $4 million for these loans, so the sale is reflected in a $12 million transfer out of the loan loss reserve.

For the quarter, we built our our allowance for loan losses to $230 million, or 103 basis points of total loans.

Net charge-offs totaled $23 million, versus provision of $36 million, excluding the additional amount associated with the sold loans.

Going forward, we expect to see increased pressure on non-performing asset levels.

Extent of this increase will be driven largely by the length of the housing market cycle, and by the time to resolve the relatively small individual OTC assets.

We expect charge-off levels to remain close to current levels as a result.

As I conclude, earnings and earnings growth must be discussed in the context of the environment in which we are operating.

Yield curve remains a challenging overhang.

Housing inventories continue to climb, and credit contraction has reduced the number of buyers positioned to consume this access, and pricing pressures in mortgage and construction business persists.

We know we can't count on the environment to improve, so we are focusing on what we can control, maintaining our asset quality, successfully executing our planned cost reduction initiatives, evaluating and refining our strategy, and reviewing returns across all of our businesses.

As Jerry said earlier, we will be very aggressive over the next several quarters in driving cost efficiencies and evaluating and rebalancing our businesses to drive long-term shareholder value creations.

None of these efforts is a silver bullet, but with persistence and patience, we should produce meaningful results.

First Horizon is a company in transition.

Change is never easy but often necessary, and the entire management team is committed to doing the right things needed to improve profitability and return to growth.

We all firmly believe the opportunities exist.

With that, I'll turn it over to the operator to open the call for Q&A.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Alex Lopez with Portales Partners.

I was wondering if you can provide some additional color on the rise in non-performing loans.

You mentioned California, Florida and Arizona.

I was wondering if you could kind of talk about that further.

I'll let Bryan do that, and then I'll fill in any color that's needed after that.

The bulk of the nonperforming loan increase that we saw came in our OTC or one-time close product, about half of it, another 25% or so of the increase came in the homebuilder finance.

Those nonperforming loans tend to be smaller in size, average size is -- on a one-time close is in the $400,000 range.

They're geographically dispersed.

We don't have a significant concentration in any one market, but as you would expect, some of the portfolio deterioration is occurring in parts of the market where you read more publicly about housing troubles, and that would be California, Arizona, in the Southeast, in the Florida areas.

But -- go ahead.

I might add that there's about a hundred and, oh, fourteen, fifteen nonperformers that we're tracking.

These are situations where the borrower might not be able to sell the property that they have.

They are having difficulty transitioning from their existing them to a new home, but we're following those very carefully and closely on a product by product, borrower by borrower basis.

It's important -- this is Bryan again.

It's important to note on the one-time close portfolio that that has a very high average FICO score.

In fact, about 60% of the portfolio has a FICO score greater than 700, so it's high-quality portfolio, but it is suffering under the housing market a little bit right now.

Okay.

Any significant additions to the watch list this quarter, or?

The watch list did not increase significantly this quarter.

You had some inflows and outflows.

It tended to grow a little bit over the first quarter and into the second quarter, slowed down towards the end of the second quarter, but we're sort of expecting that it could tick on little bit again in the next couple of quarters before it subsides later in the year.

I might add -- this is Jerry -- that I think we've done a good job on our homebuilder finance portfolio.

We've corralled that pretty well.

The OTC is sort of a market by market and borrower by borrower basis as I've said before, so we'll need to continue to monitor both of these closely, but I would expect, depending on the housing market, probably some upward pressure on the OTC side, but we feel pretty comfortable in the aggregate that we've preserved properly across the total portfolio.

We'll take our next question from Christopher Marinac with FIG Partners.

Chris, good morning.

Hey, good morning, Jerry.

Good morning, Bryan.

I wanted to ask about the level of deposit growth that you envision going forward, particularly on the core side.

Do you think that this quarter's trend is indicative of the future, both on the positive on savings and others, or what would you guide us to?

Well, deposit growth has been slowing across the industry for a while.

We're seeing good trends in the core Tennessee banking franchise.

That is we're seeing good numbers of account openings, balances should start to grow.

There's some seasonal affect in the second quarter.

So I would -- I would expect something in the low-to-mid single digits at the high end over the next several quarters as we start to see some of these play out.

That will be somewhat offset by actions that we take in our national markets and the deposits associated with those will probably decline as we work through that process.

Chris, I might add one other thing, and that is over the last year or so, I don't believe we've invested as we need to in our Tennessee market, both in marketing and in our pricing strategy, and so you would have seen an increase in expenses a little bit in our bank in Tennessee in order to overcome that past deferral of activity.

And I -- it -- I believe, based on certainly the trends that Bryan alluded to in terms of increased account openings, and the momentum that we have and potentially as consolidations occur in Tennessee, even more momentum.

So I feel pretty comfortable that the Tennessee bank can continue to show growth on the deposit side.

Then Jerry, I guess my follow up is for the banks that are not in Tennessee, do you have any expectations on when they'll create a profit, or are there changes in staff and others that are part of the efficiency you outlined?

Well, Chris, the decision that we had made with our banks out of Tennessee, which is certainly a difficult one for me, because of the people that are involved in the hiring of those managers who are extremely professional, I think overall have done a good job, is that we are going to close or sell or exit those 34 branches we have in those markets, Chris, we'll have to do that as smoothly as best interests of both our customers and employees as possible.

At the end of the day, our investment dollars are precious.

I need to make sure they are in the markets with the highest results, highest return for our shareholders, and so we have made that decision to do that over the next quarter or so.

And we'll go next to Eric Wasserstrom with UBS.

Thanks, good morning.

Good morning.

Just to follow up on that point.

I think last quarter you initially indicated that you were slowing the investment growth to those markets, but stopped short of indicating an interest in exiting, so I'm just interested to understand what the evolution of that was on your thought process over the quarter.

I think Bryan mentioned are looking out all of our businesses and activities and seeing which have the greatest potential to deliver shareholder value, and so one of the ones that we wanted to look at were our national banks.

And so as we looked at that over the last quarter, we realized that the best decision for us to make here for the near term was to exit those markets and redirect those investment dollars.

So it was a thoughtful review process to see where we could best leverage our investment dollars to get the greatest return.

And where are you -- where are you in that review process with the other businesses?

We need to work through that for the rest of this quarter.

A lot of things have been teed up.

One of the things I think you may have heard me say in the past is that there are no sacred cows.

We are looking at every opportunity we have.

And so it will unfold as we go through the rest of this quarter and as we come to those decisions, we will make the appropriate announcements about that.

Great.

Thanks very much.

You're welcome.

We'll go next to [Fred Kim] with KBW.

Hi.

Thanks and good morning.

On the cost side, I note that the year-over-year non-interest expenses were essentially flat, you know kind of despite the cost savings initiatives that we've seen, and obviously you're making -- you had some expense growth that offset some of those.

I was wondering if you could give us a little guidance.

A year from now, should we think that expenses can actually be down on a year-over-year basis, or are the -- kind of the underlying growth and expenses outside the cost initiative going to to kind of eat that up?

Fred, this is Bryan.

I would expect that expenses year-over-year, a year from now, will be down.

There will somebody modest inflation, but the incremental cost savings that we have to put in the run rate, roughly $100 million ought to more than offset that.

Now, the one caveat that always is is market sensitive revenues, particularly around capital markets in the mortgage business.

But my expectation is that should not change all that significantly, so I would expect them to be down.

Great.

Good to hear.

And I was just wondering, there's been a fair amount of movement in your tax rate.

I was wondering if you could explain what was going in taxes this quarter and what we might expect moving forward.

There was nothing particularly unusual in taxes this quarter that the typical permanent differences that you would see affect the tax rate a fair amount.

That's low-income housing tax credits, preference items like company-owned or bank-owned life insurance, and then there was a settlement of a number of audits that occurred that was about in the $3 million range.

The effective rate is more distorted by those preference item on this pretax level of earning as it relates to the statutory rate.

Fred, there's one other thing, if I might add to your first question that Bryan answered.

And that is in the area of cost reductions in our efficiency and productivity initiatives, I'm very sensitive and mindful of the need that we need to be very specific about what we're doing.

And these initiatives we have tracked to some 66 or so individual products -- projects in areas, track the individual units and departments with time schedules and accountability.

And so I feel very good about our ability to get those done and get them into the run rate, as we get into the first quarter of next year.

Okay.

Excellent.

And just finally, Jerry, obviously with this -- the quarterly results, your payout ratio went to kind of well over 100%.

I was wondering if you had any comments on your current capital management and how we should think about that dividend policy?

Well, we think the dividend is important.

I think this was our 440th consecutive dividend.

We are mindful that we need to continue to improve revenues and get our profitability up.

I don't see any change in that payout ratio certainly over the next number of quarters or so, but we're going to continue to drive up that revenue and I think we feel comfortable with our capital adequacy.

One of the things that Bryan and I are working hard to do is make sure that we are using that balance sheet as effectively as possible and getting the best yields and returns from what we are putting on the balance sheet.

So balance sheet management is something that is very much on the top of our minds.

Fred, this is Bryan.

It would be our expectation that as we drive through the efficiency initiatives and the other things that we're working on that that payout ratio ought to drop as we see some improvement in the markets in our operating businesses, particularly capital markets in the mortgage business.

Banking will continue to perform well, we think.

So we think that payout ratio ought to decline over time.

I would expect that, in terms of capital management, we'll free up some capital as we look at the balance sheet and evaluate the utilization of the various portfolios and how we're using that, so we should free up some capital for that.

So we know it's important.

It's important to us and it's important to shareholders, our dividends.

We'll take our next question from Heather Wolf with Merrill Lynch.

Heather, good morning.

Good morning.

I'm wondering if you could run through the thought process behind your comfort in having sort of stable charge-off levels from here?

Yeah.

It's -- as we look at the -- what's happened in non-performing assets, our watch list growth slowed as we went through the second quarter.

We're prepared possibly for a little uptick as we get later in the summer season.

Most of the increase in non-performing assets, as I tried to point out earlier, came in particularly the home builder finance, and in the one-time close product.

We actually saw improvement in C & I past dues.

And our home equity and other consumer portfolios continue to perform well.

So as we look at those two portfolios in particular, we're -- we think that we have got a good handle, or been aggressive in getting a handle around the watch list loans and the portfolio as it stands today.

We are very much focused on managing those portfolios day-in and day-out, and have a lot of resources focused on managing that.

Clearly it's a high -- on average, it's a high-quality borrower, it's a situation in the market where housing prices are under some pressure.

So as we look at it, we don't expect it to recede, but at this point, we don't expect it to increase significantly.

Okay.

And have you guys gone through a sort of reappraisal of the underlying properties for both portfolios?

We have not reappraised all of the properties.

When we bring it into the nonperforming or put it into the nonperforming portfolio, we typically write it down to the lower of cost or appraised value.

So we think we've take a pretty aggressive approach in charge down, at least a conservative approach to take it to that cost or appraised value.

And we'll go next to David Stump with A.G.

Edwards.

Good morning, gentlemen.

Bryan, think you may have mentioned this in passing, but in terms of the restructurings and expense initiatives that you detail in here, is there -- should we be thinking about any potential revenue impact?

I know a lot of these national branches, for example, probably were losing money, but obviously had some revenue associated with them, and then, of course, as you go through some of the other areas, have you considered that in the amount of savings you're talking about, or the earnings impact, or do you think it's going to be real negligible?

Yes.

Dave, what we've -- the $175 million in the three phases that we've talked about in cost savings does not contemplate the savings or the improvement in run rate we would expect to receive from either selling, closing, or consolidating the 34 branches in the national markets that Jerry talked about.

The revenue associated with those, sort of benchmark it in terms of balance sheet, it's roughly $600 million in loans or so, and about $500 million or so in deposits.

The net interest margin is in the low 2%, 2.3% range.

We would expect that in terms of an an annual or a quarterly basis, somewhere in the neighborhood, annually, of about $30 million of lift from this, or about 7 to $10 million on a quarterly basis of lift, and that's in addition to the $175 million of cost savings that we've been talking about.

Okay.

So it's actually a net positive even beyond?

Yeah.

Okay.

Obviously you don't know yet and haven't announced whether you're -- how many you're consolidating, closing, and/or selling.

But it sounds like, Bryan, there may be enough there that there would be a gain -- potential gain associated with the sale of some of those branches, and if so would that be a partial offset maybe to some of the charges that you're taking?

Yeah, clearly the amount of charges that we will take and the offsets will be on whether we close or whether we sell, and how we package those branches in the process, so we don't know that today, but any gain that we did have from a deposit premium would be an offset to the charges we've talked about.

I will go back and point out again that the charges is that have been incurred to date and the $50 million to $60 million we have estimated do not include the impact of the First Horizon National full service branches.

Until we figure out the strategy around that, it was impossible to estimate.

And Dave, it's Dave.

One other thing I just wanted to add, too, is on the efficiency initiatives, it's been very much a bottom up approach.

We have gone through a painstaking review.

There's almost 70 individual projects that have really, I think, been taken -- oriented with an approach that does not damage customer service, that does not damage revenue.

We are taking advantage of opportunities to consolidate between businesses, adjust managerial span of control, the things and the opportunities we think we can take without materially crimping the top line.

So I think we feel good that the $175 million of productivity and efficiency efforts doesn't fundamentally change our value proposition.

It doesn't fundamentally change our ability to grow revenue.

And we have very detailed plans around them, and we're in the process of executing them.

Okay.

Thank you, guys.

You're welcome.

We'll go next to Bob Patten with Morgan Keegan.

Good morning, Bryan.

Good morning, Bob.

Hi, Bob.

Hey, Jerry.

Obviously, you guys were lot more proactive in June.

Did this really pick up momentum towards the second half of the month, I guess?

And the second question would be, you've obviously been drilling into stuff.

The decisions that remain to be made, most likely those would be done in the third quarter, you talked about the remainder of the year, but why would there be a delay into the fourth quarter, because you have all of the information in front of you at this point?

Well, Bob, yes, let me start with the first question.

The momentum really picked up through the month of June, as we continued to evaluate information and work through the process.

The things that lie in front of us and the decisions that we lie in front of us are things that require us to continue to work through.

How do we implement them?

What is the impact on our customer activity?

What is the impact on our associates, and how do we work through those over a logical time frame?

I would guess that the majority of it ought to be fairly evident by the end of the third quarter.

Some of it may trickle into the fourth quarter as we continue to work through it.

It's a very -- we're trying to do it in a thoughtful manner.

We're trying to do it in a way that creates value for the long term, and we're not in a rush to judgment.

We know it will take a while to execute some of these things.

Okay.

And then in terms of the business rationalization, that includes all three businesses, which as Jerry said, are no sacred cows, correct?

Yeah.

Jerry has been very clear from the very beginning that there are no sacred cows, and we're going through a very thoughtful bottom up process looking the kinds of returns we're making in businesses today, the kinds of improvements we ought to make to that, or if we can't make it, what are the alternatives for getting the portfolio right-sized.

And part of that, Bob, is looking at the balance sheet, how do we use the balance sheet, what are the constraints that we place on the balance sheet, and I think we'll have -- that will take us a little longer to work through, be more of a slow progression as opposed to a significant balance sheet restructuring, but we'll place a lot of emphasis on risk and return over the next three or four months.

Okay.

And last questions.

Have you looked at the valuation on the SLK purchase at this point in time?

That has not been an area where I've spent a tremendous a mount of time, Bob.

Okay.

Thanks, guys Guys.

You're welcome.

Thank you.

And there are no further questions at this time.

I'd like to turn the conference back over to Jerry for closing remarks.

Yes, thank you very much.

We appreciate your interest and your calling in.

We believe that we have our minds clearly focused on what we're doing.

We are going to act with a sense of urgency, but a sense of thoroughness as we go through the balance of this quarter and into the first of next year, and I believe we've got good people doing the right things and look forward to the progress that we make as we go through the balance of this in year and get ourselves prepared for growth as we get into the next year.

So I thank you very much for your interest and for calling in.

Thank you, everyone, for joining.

That concludes today's conference.

You may now disconnect.