First Horizon Corp (FHN) 2014 Q2 法說會逐字稿

Good morning and welcome to the First Horizon National Corporation second quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Aarti Bowman, Investor Relations.

Please go ahead.

Thank you, Andrew.

Please note that the press release and financial supplement which announced our earnings as well as the slide presentation we will use in this call this morning are posted in the investors relations section of our website at www.firsthorizon.com.

In this call we will mention forward-looking and non-GAAP information.

Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly reports.

Our forward-looking statements today reflect our views today, and we are not obligated to update them.

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

Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan; and our CFO BJ Losch.

Additionally are Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions.

I will now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone, and thank you for joining our call.

Our second-quarter results demonstrated that we're making progress in building franchise value, improving economic profitability and resolving legacy issues.

Our core businesses are showing solid performance, and I'm encouraged by positive balance sheet trends.

I am particularly pleased with loan growth in the bank in the second quarter.

Year-over-year, average asset based lending was up 14%; mid-Atlantic increased 12%; and middle tenancy loan growth was up 8%.

Commercial real estate grew at 19%, driven by opportunities with new and existing customers.

We're also starting to make loan commitments in our newest markets such as Houston, Charleston and Jacksonville.

Our specialty lending businesses and entrances in the new market are centered on improving economic profitability.

Our approach in the new markets is to develop full customer relationships with disciplined underwriting and profitable risk-adjusted returns.

We've developed a new strategy by hiring experienced, talented, local, like-minded lenders who are focused on areas such as C&I, commercial real estate and private client wealth management.

We are not building a traditional retail branch network in these markets.

We view this focused, lender expansion approach as a prudent, profitable way to deploy capital.

FTN Financial, our Capital Markets business, contributed significantly to our overall fee income and continues to be a high return business for us.

Due to market conditions, we're still seeing lower average daily revenues in fixed income and anticipate this trend to continue over the next year or so.

We are continuing to invest in our FTN Financial businesses, adding several experienced people to our public finance area in the second quarter.

As you know, cutting costs and improving operating efficiency is a major focus for us as well as the overall industry.

Consolidated expenses are down 7% year-over-year second quarter, excluding the settlement recovery.

We are streamlining processes, using technology to become more efficient and right-sizing occupancy and staffing levels.

At the same time, we are significantly investing for the future.

We have opened new offices, hired additional talent and upgraded systems and digital platforms.

With our recently announced branch acquisition agreement, we will acquire new customers and gain deposits in Tennessee, more effectively leveraging our capabilities.

We will continue to find ways to lower-cost, but as I have said previously, we want efficiency to be a way of doing business every day, firmly ingrained in our culture rather than setting up one-time expense targets.

The wind down of the non-strategic segment is on track as we continue to work to put legacy issues behind us.

Our non-strategic average loans declined 17% from last year's second quarter, and make up less than 19% of our loan portfolio.

GSE put backs are largely behind us, and we've settled with the FHFA in April, taking another major step toward resolving legacy mortgage problems.

Asset quality continues to show stable trends.

Year-over-year second quarter non-performing assets declined 21%, and net charge-offs decreased 53%.

The reserve to loans ratio was 1.54% at the end of the second quarter 2014.

I am pleased with our results over the first half of the year.

We're rolling out economic profit data and tools to better help our employees improve profitability.

We believe these efforts will ultimately help us achieve our long-term bonefish targets.

I'll now turn the call over to BJ with more financial details about the quarter, and then I'll be back with some closing comments.

BJ?

Thanks, Bryan.

Good morning, everybody.

I'll start on slide 7 with our consolidated financial results.

You see net income available to common was $77 million or $0.32 a share, and as you will see in a minute, the regional bank had a particularly great quarter.

And in addition, consolidated earnings were favorably impacted by two significant items which you'll see on the next slide.

And as we look at that slide, slide 8, first we booked a $47 million pretax litigation settlement recovery.

This is related to a security product lawsuit involving the Sentinel Group that we've settled, you might remember, in 2011.

Approximately $38 million of the insurance settlement was recorded as a contra expense in the litigation expense line.

And we also received about $9 million to cover legal costs which shows up as a contra item in legal and professional fees.

The other significant items was a favorable $8 million pretax adjustment related to the mark primarily on nonperforming loans in the held for sale portfolio.

Not included on this side -- on this slide, we also various other items that had a net negative impact of about $0.01.

Our effective tax rate in the second quarter was 28%, which reflects forecasted taxable income per year and includes the benefit of permanent tax credits.

For the remainder of 2014 based on our current estimates we would expect the effective tax rate to be in that same 28% range.

Turning to segment highlights on slide 9, second-quarter earnings were strong with particularly good performance in the banks fee income and net interest income from strong loan growth.

Our core businesses contributed $70 million in net income available to common, and I'll go into the details for the regional bank and Capital Markets results in a few minutes, but let me briefly get the non-strategic segment first.

Net income in that segment was $7 million compared to $12 million in the first quarter.

Recall that the first quarter included a $20 million servicing gain, and the second quarter included that $8 million dollar valuation adjustment relating to MPLs in the held for sale portfolio.

Loan-loss provision in the second quarter was a $3 million credit reflecting lower loan balances and ongoing stable credit trends.

Expenses in the non-strategic segment were relatively flat at $16 million in the second quarter compared to $15 million in the first.

And again we had zero mortgage repurchase provision expense in the quarter.

Turning to regional bank trends on slide 10.

Again, the regional bank delivered an especially strong quarter with net income of $47 million up 30% linked quarter and pretax pre- provision net revenue up 18%.

Net interest income increased 5% driven by higher loan balances, fee income was up 10% with growth in almost all key line items.

We saw a 5% linked quarter increase in deposit transactions and brokerage fees, trust fees grew 8% while expenses held steady.

Loan-loss provision in the bank was $8 million in the second quarter compared to $13 million in the first with the decrease reflecting continued stability in credit trends.

On slide 11, looking in more detail at the loan growth in the regional bank you can see the broad-based strength across various businesses.

Linked quarter our average loans were up 4%, our calling efforts and execution of our plans in our specialty lending areas and focused markets are paying off with commercial loans up 5% linked quarter.

Loans to mortgage companies, one of our most economic profitable businesses were up significantly linked quarter, reflecting a seasonal rebound from first quarter's lower levels.

Asset-based lending was up 2% primarily driven by new customer growth.

CRE loans were up 11% linked quarter from growth in areas such as multifamily and office.

And growth areas in our markets included thee key growth markets of the mid-Atlantic which was up 4% and middle Tennessee where loans increased 9%.

We saw some consumer strength as well as our private client wealth Management loans grew 2%.

We're successfully executing on our retail lending strategies with targeted lending to niche customers, the hiring of specialized lenders, and expanded product offerings.

We are still facing a highly competitive environment, but our bankers are staying disciplined on pricing and prudent underwriting to maintain profitability.

Net interest spread was up five basis points reflecting slightly higher loan yields from the increase in loans to mortgage companies and lower deposit costs.

We'll continue to focus on the specialty lending areas and expansion markets that have strong opportunities, higher returns and better economic profitability.

Turning to our Capital Markets business on slide 12, pretax income was $50 million in the second quarter which included the $47 million expense credit I mentioned earlier.

Linked quarter fixed income average daily revenues declined to $642,000.

ADR levels continue to be under pressure due to low rates, low volatility and uncertainty around monetary policy.

The fixed income environment in the bank remains very muted given the low volatility, low growth range downed environment we're experiencing.

We believe it's likely that fixed income activity will continue to remain at lower levels for the next several quarters, most likely approximating the ADR ranges we've seen over the past few quarters.

Keep in mind as shown on the upper right of slide 12, our business model is unique and highly flexible in various market conditions.

As the revenue opportunity moves up or down, the highly variable expenses in the business move in tandem.

This results in better, less volatile P&L performance relative to others in the industry, who did not have the variable expense flexibility and breadth of relationships FTN does.

We are pleased with how this business is performing in this challenging environment.

Turning to slide 13, we will look at consolidated balance sheet and margin trends.

On a linked quarter basis average total loans were up 2% while average total assets remain stable at about $24 billion due to lower excess balances kept at the Fed.

Linked quarter consolidated net interest margin was up nine basis points at 2.97%.

The increase was primarily due to those lower amounts of cash balances at the Fed.

Sitting here today we expect second half 2014 net interest margin to be in the 2.90% to 2.95% range.

Our assumptions include rates staying at current levels or modestly rising, loan yields declining modestly, loans to mortgage companies staying relatively stable to second quarter's levels.

New investment securities yields being flat to modestly accretive to current yields in the portfolio, and excess Fed balances remaining below the levels that we saw in the first half of the year.

Our balance sheet remains highly asset sensitive as you can see, and a 200 basis point rate rise scenario net interest income would it increase roughly 10% and add almost 30 basis points to the net interest margin.

Turning to expenses on slide 14.

You can see since second quarter of 2011 our run rate of consolidated annualized expense including the Sentinel -- excuse me including the Sentinel litigation and GSE repurchase provisions has declined 25%.

Linked quarter excluding this quarter's litigation recovery consolidated expenses declined another 4% with decreases in categories such as occupancy, operations, foreclosed real estate and FDIC expenses.

We've improved efficiency in our core businesses as well.

In fact, our regional bank efficiency ratio improved over 370 basis points for us first to second quarter to 62%.

As Bryan discussed earlier, while we're always looking for ways to cut costs and become more efficient, we are also continuing to heavily invest in our future.

For example we're continuing to upgrade systems and enhance our technology, invest in additional talent, products and markets.

Most importantly we're absorbing these costs yet still reducing overall expenses meaningfully.

Our ongoing focus on expense control along with our carefully targeted investment spending will enable us to ultimately achieve our bonefish efficiency goal.

As you can see in the bullet points, we don't believe we've run out of opportunities to gain more efficiencies.

We believe we continue to have multiple levers to pull on the expense side to lower the numerator of our efficiency ratio.

Turning to slide 15, asset quality trends remain very strong.

Linked quarter net charge-offs declined 48% to $9 million, and are non-conforming assets declined 2%.

And we're seen ongoing positive grade migration in our commercial portfolios.

In addition we remain pleased with the discipline our bankers are demonstrating in a highly competitive environment, and we're comfortable with the pricing and structure we're putting on the books.

In the non-strategic portfolio, loan balances are running off at a steady pace, and credit trends have generally stabilize.

We also sold one truck loan that was on interest deferral and we're actively monitoring our consumer portfolios for any performance issues related to home equity lines nearing the end of the draw period.

And we're proactively reaching out to those borrowers early in the process.

While second quarter will likely reflect a bottoming out of net charge-off levels, we do expect continued stability in asset quality trends.

Wrapping up on slide 16, our core business trends are a solid, and we're particularly pleased with the regional banking results this quarter.

FTN Financial's flexible business model remains a strong key generating business that uses capital efficiently.

The bank's specialty lending areas and expansion markets are driving profitable loan and relationship growth.

We'll continue to work on expense efficiencies, and our asset sensitivity will, over time, help our overall returns.

Lastly, our focus on economic profit continues to help guide our actions and focus areas to improve our return profile over time.

These actions are all aligned with our focus on achieving our bonefish targets.

Now, I'll turn it back over to Bryan.

Thank you, BJ.

Our core businesses have shown solid performance in the first half of the year.

We will continue to achieve our key priorities, further strengthening our balance sheet, enhancing productivity and winding down the non-strategic businesses.

With our focus on improving economic profit, we should make additional progress toward reaching our bonefish targets and further build our franchise value.

Finally, the hard work of our people and the celebration of our 150th anniversary across our footprint is generating positive customer momentum contributing to the opening of more than 17,000 new checking accounts reflecting 14% net growth year-to-date.

Thank you to our First Horizon employees for all that you do to build our business and serve our customers each day.

Andrew, with that, we'll now take questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Steven Alexopoulous, JPMorgan.

Maybe I will start just following up on BJ's comments on ADR, are you thinking like $650 million to $800 million, BJ, over the next few quarters?

Yes, could be there, could be a little bit lower, could be a little bit higher but probably in this range.

Okay.

And I know, even though we focus on average daily revenue for the quarter, that there's quite a bit of variability actually each day.

When you guys analyze the $640,000 with us more a function of just not having as many $1 million plus days as you would typically need to bring up the average?

Or is revenue you are seeing just down across the quarter?

Steve, this is Bryan.

It's a combination of both.

The summer in and of itself is very unpredictable.

There's a lot of people that take vacations and that affects sort of the way the days flow.

Mondays and Fridays are slower than Tuesdays and Wednesdays.

We have very strong days, and we have some days that are very soft and as BJ said, we expect it to be in this range,

July has been a fairly slow to start.

It's been around that $600,000 range.

August is I said is seasonally slow, so things can change, things can happen in interest rates, we can get more volatility, whether it's statements by the Fed around monetary policy or whether it's world events.

Those things are going to drive the upside in the business right now, though, as we look at it we just think it's going to be seasonally slow for the remainder of this quarter and probably into the fourth quarter.

I'd also add, Steve, that I do think over the last couple quarters our daily range has been tighter.

That we haven't seen as many million dollar days plus because of what Bryan talked about the volatility and the five-year -- three and five year in particular being so range bound there just hasn't been a lot of opportunities for investment, so we've seen that range tighten over the last couple of quarters.

Okay.

Maybe if I could ask this as a separate question on the loan growth.

C&I was really strong in the quarter.

The HH showed a good April and a bit of a slowing in May and June.

Did you also see that step down, and how are you thinking about momentum carrying into the third quarter here?

Thanks.

Steven, this is Susan.

I'll take that question.

We actually had kind of a strong quarter each month in terms of loan growth and the bank as well as new relationships -- new commitments to existing customers, so we really didn't see the slowdown in the second two months of the quarter.

We're seeing businesses talk more to our bankers about expansion opportunities, but we are remaining obviously very disciplined as it relates to credits and pricing.

Steve, this is Bryan.

I'll pick up on that.

Pipelines, we went in the quarter with pretty strong pipelines, and we exit the quarter with pretty strong pipelines.

I think our bankers are doing a really good job in their calling efforts, and as Susan said they're having a lot of conversations that have a positive tone with our customers.

And I also think that our bankers are being extraordinarily well disciplined in terms of the loans that we're booking that fit within our risk appetite.

We're monitoring requests for exceptions and things of that nature, so we're spending a lot of time making sure that we are doing a good job executing in booking loan growth and that this is loan growth adds value and economic profitability as well as gives us the balance sheet that will perform consistently in up-and-down environment.

Bryan, sorry I missed it but how did line utilization change in the quarter?

Very small -- less than 1%.

It was up just marginally but less than 1% on the C&I side, not a whole lot of movement on the consumer side either.

Jefferson Harralson, KBW.

Thanks.

I wanted to dig down on the mortgage warehouse business or loans to mortgage company business a little bit, because the growth is so much greater than you're seeing in originations nationally.

Can you just talk about that growth and what's driving it?

Are you adding new companies that you are lending to?

Are you doing more jumbo or other things or expanding the business?

Can you just talk about what happened there this quarter and what's going on there in the big picture?

Jefferson, this is Susan.

I'll answer that question.

Related to the mortgage warehouse business, we did see strong purchase.

It was about a 63% of the volume was purchase activity.

So refinances continue to come down a little bit each quarter.

We have been very -- we've been in this business a long time and our clients even while some of them are reducing lines with potentially other lenders, we've been able to maintain strong lines and strong relationships with our mortgage lending customers.

All right.

And is there a jumbo -- what is the jumbo component of these loans to mortgage companies?

Is that a piece of what you're doing, or is it just basically more -- is this signaling greater originations in the future?

Jefferson, this is Bryan.

We don't -- most of the collateral that we lend against is conforming mortgages.

There's not a big component of jumbo, and I think the other factor that you're seeing in the performance in the second quarter is second quarter is seasonally stronger particularly as you get into the selling and the moving season following the school year.

So some of it is a bit of seasonal pickup, but we're encouraged by the calling efforts there as well.

And as Susan said we see good opportunities for us in that business.

And as we've noted in the past, it goes up and it will come down which it did in the intervening 12 months between this June and last June, and so we accept a little bit more volatility.

But we like the business.

We think it's a very strong and profitable high return business for us.

We're encouraged as we go into the third quarter, and we will must see what happens over the remainder of the year.

On my follow-up I want to ask about the one question on the bond business is the -- we're seeing good loan demand from the banks this quarter.

Is that a big thing that's affecting your bond business is that your bank customers are just finding a higher-yielding asset to invest in so to speak?

Certainly.

Certainly it has an impact.

They would much rather loan it out than put it in the securities book.

So that is contributing probably to the continued moderation in what we're seeing in ADR, but probably the broader and larger issue is the lack of volatility in the markets.

Okay, got it.

Thanks, guys.

Ken Zerbe, Morgan Stanley.

Great, thanks.

Just a little bit on the mortgage warehouse line again.

In the NIM guidance that you guys gave I think you made a comment that you expect loans to mortgage companies to stay at the same levels?

But, I just -- looking at the chart on page 21 on obviously second quarter is a very seasonally strong quarter.

Are you saying that you think that you can keep mortgage warehouse lines at one one and is that reasonable given the seasonality in the Business?

It's BJ.

I think what I would say is, averages in this business can be misleading.

We started at a pretty low level at the beginning of the quarter and then we ended at probably the highest level at the end of the quarter so the average was the average.

Now we're back down as we would expect so far this month.

And so, I think third quarter will be maybe modestly stronger the same or modestly stronger as what we saw in the second quarter and fourth quarter is seasonally a little bit lower.

But again, you average all that together so the second half of the year we think is roughly in the range of what we saw in the second quarter.

But you're speaking in terms of averages.

Speaking in terms of averages, right.

Okay, that helps.

And then just in terms of the Capital Markets business, could you talk about how much of the expense or what the expenses are associated with the Capital Markets business?

Was that a driver of the lower expenses this quarter?

Because I'm just trying to make sure that we match those up properly, because it didn't seem the comp expense really materially reduced?

You know, if you look at -- I'm trying to find this slide -- I think expenses in Capital Markets were down proportionally with the revenue declines, probably down about $4 million, $5 million ex the litigation recovery with revenues down a little bit more than that.

So, again, they kind of come down in tandem with what we're seeing on the revenue side.

Okay.

All right.

Thank you very much.

Paul Miller, FBR Capital Markets.

Yes, thank you very much.

Hello, guys.

One of the biggest I think really positive surprises as I saw is on your non-strategic portfolios, the 30 day delinquencies dropped from roughly 160 to 140, but your charge offs went from 100 basis points almost 20 bps in one quarter.

That is a huge move.

Can you talk a little bit about why those charge-offs dropped so much?

Yes, Paul, I'll take that question.

We're actually seeing some really positive moving asset quality metrics in the non-strategic portfolio, including customers that are in the draw period.

As we've discussed previously and BJ talked about today as well, we are reaching out to customers a lot sooner in the process, nine months ahead, talking to them about the fact that their HELOC is nearing end of draw.

And we believe that this proactive strategy is contributing to that improved performance as these borrowers have more notice about the potential impact on their family budget.

In addition, home values stabilizing, people working hard to want to stay in their homes to keep their mortgages and home equities current, and so we believe it's the combination of the work that we're doing as well as stabilization in home values.

This might be a little more detail, and you may want to get back to me, but when these guys -- when these HELOCs are ending their draw, what type -- they have to start amortizing the loan correctly.

Do you know the average increase in the payments that are coming down the line, or are you just modifying the loan itself?

Actually on average, if you go from just interest only to -- and this is on a ten year amortization, the payment shock is a little over 200%.

However, we have analyzed our customers, and many of our customers pay more than the minimum amount even during the draw phase.

And if you account for our customers that are making more than the minimum payment, the shock actually drops down to about 160% rather than over the 200%.

So, those are some metrics, and we can get you more detail later, if you like.

And if you have it, that's fine, if you can call me back later.

But, what's the average like on average I know what averages are averages but 160% is it going from like $400 to $800 or $200 to $400?

Like, what is the overall average for your customer base?

Paul, it's Aarti, depending on the loan it's about $200 to $400.

$200 dollars to $400?

Okay.

Guys, thank you very much.

John Pancari, Evercore.

Good morning.

Just on the deposit side I wanted to see if you can give us a little color on the decline in the savings deposits during the quarter?

Sorry, John, could you say that again, please?

On the deposit side it looks like your savings deposits declined on an end of period basis pretty materially.

I just want to get some color behind that decline?

Yes, I think that's mostly where we keep what we call insured network deposits, which are contractual deposits that we had that we used primarily for corporate funding needs.

So it wasn't core operating balances from customers.

It was more corporate balances.

Wholesale funding as opposed to customer related activities.

Right, okay.

And then on the flip side, on the loan side, back to the C&I growth I know you pointed to -- outside of mortgage warehouse, I know you pointed to the ABL business being strong.

But what really -- what other color can you give us on why those strong lift and the pace of growth here in the non- warehouse book whether it be within ABL or outside of it?

What really drove the uptake here this quarter because it's a pretty good lift?

Is it a surge in calling efforts like you referenced, Bryan, or is there another factor behind it when it comes to demand or something?

Sure, I can take that question.

It was a combination of things.

First of all we do have a very strong calling efforts across all our lines of business and all markets.

Obviously as you mentioned, ABL was a strong contributor that's been a great business for us for a number of years.

But also as we highlighted in our markets where we have real upside opportunity -- middle Tennessee, mid-Atlantic, we saw strong growth there.

Part of that is again great work by our bankers, people that we're hiring that have great relationships within those communities of businesses there.

It's also reflective of the middle Tennessee has seen strong growth in that market in terms of the business, new people coming in, job growth.

The same can be said of the Raleigh area, Richmond area where we have bankers on the ground and really doing a good job.

We're seeing growth across a number of different industries, so we continue to have a diversified portfolio.

Another thing that we've seen and we've believe for a while is over the last several years -- couple of years in particular we've put on a number of strong relationships, and some of them you see in the CRE line of business where we knew these loans were going to fund up in the future.

And you're starting to see some of that activity fund up in addition to the things that Susan mentioned.

Okay.

All right.

And if I could ask one more thing on the Capital Markets business, are you still comfortable with that normalized $1 million to $1.5 million ADR range?

And lastly, at what ADR level is the business breakeven?

I'll take it, John.

The range at some point we think $1 million to $1.5 million might be a reasonable range long term, but it is pretty clear to us that we haven't been in that range in the last five or six quarters.

And as BJ and I reiterated earlier, we don't think we will be in that range this year.

So maybe you expand that range out to $600,000 to $1.5 million or $550,000.

I don 't know what the right range is.

In fact we didn't mention on the slide, because it just doesn't seem to be relevant to predict it at this point.

We think as BJ said we'll be in that $600,000 to $800,000 range probably the remainder of this year.

The breakeven business -- in the business is a bit lower than where we are.

You can see in the slide -- I think it's slide 11 or 12 that has the graphic about average daily revenue.

We put expenses next to it so you can sort of see we do start to see a little bit of compression as the average daily revenue drops.

The vast majority of our costs in the business are scalable and flow with revenues, but we do have fixed costs in technology, terminals, things of that nature that do sooner or later push to a breakeven.

But we think we're above that level, and we're going to stay above that level and in all likelihood.

And we will continue to look for strong profitability in the business.

Ebrahim Poonawala, Bank of America Merrill Lynch.

A quick follow-up question.

BJ, I know you mentioned that the cap markets ADR was in a relatively tight range through the quarter.

Do we have the monthly progression in terms of was June better than April or May or there is not really change?

I think we didn't see much change.

I know others in the industry have talked about a stronger June.

We didn't particularly see that.

It was fairly consistent across all the months.

Got it, and second question just in terms of fee income, mortgage banking outside of the valuation adjustment was essentially $500,000 this quarter.

Was there anything one-off this quarter, or is that sort of resetting at a very low run rate?

Yes, I think there wasn't anything outside of the ordinary other than the litigation covered.

Okay, so we should expect it to stay around 2Q run rate going forward or could it move higher?

Are you asking about the mortgage banking loans?

Yes.

It's at lower levels as the servicing runs off that ultimately becomes a breakeven business.

Got it.

And last question if I may is there any sense in terms of the timing around the HUD investigation?

I know you guys gave an update in the slide deck, but broadly if you could give any sense of how much closer we are today than you were back in April?

Yes, this is Bryan.

There's really not anything to add to what's in the slides.

It's a process.

It's just going to take some time.

We continue to work forward in terms of building our fact basis and our knowledge base around the business and the discussion.

And I think the same is true in terms of HUD and the Department of Justice.

I can't really put a calendar around it, and basically the slide that is there that describes some of the current, relevant information on it.

Emlen Harmon, Jefferies.

Bryan, just to follow-up on the last one.

I mean is there ongoing dialogue with the DOJ on that?

Is it a back-and-forth, or is it just kind of -- I know that obviously there had been an initial investigation.

Just kind of curious if at least there some progress, seeming progress there?

Well, there is contact, and I don't know -- I wouldn't describe as dialogue.

There's interaction, there's contact, and from our perspective we have said look, they reviewed a subset of loans, and we want to re-underwrite it.

We gather facts around that -- interviewing people.

They're sort of building their fact base I assume at the same time.

So there's interaction, there's communication.

I'm not sure when it will gain significant traction.

My hope is it sooner rather than later, but it's a two party process, and we all have to be in a position to begin to move things forward.

Got it.

Okay, thanks.

I know you're loathe to provide too much guidance on expenses, but the annualized core expenses now at $850 million, that's meaningfully below the $900 million annualized you talked about last quarter.

Just given the efficiency plans you've outlined is it fair to say the expense rate drifts down on a core basis?

Or is there anything that would throw you off that trajectory?

I guess it's fair to except FIC revenues from the conversation?

Yes, I think it's fair to say that the $850 million range for this year I would expect us to be in that range.

Clearly below the $900 million that we had laid out at the beginning of the year.

So I think that's a good range for this year.

But as I tried to talk about in my upfront remarks, we don't think that we're done.

We have multiple opportunities to continue to the expense base lower over the next 18 to 24 months, let's say.

And we put a couple bullet points on slide 14 about the key areas that would help us get us there.

So we're certainly not done.

As Bryan talked about, we're not big fans of putting out goals anymore.

We think sometimes they're helpful, but at this point I'm not sure that they are.

But you can be assured that we think we have some still meaningful expenses to take out.

Got it, thanks for taking the questions, guys.

Sure thing.

Michael Rose, Raymond James.

Please go ahead.

Just wanted to get a sense on capital deployment from here and maybe how you think about potential M&A.

You've clearly gone into some other markets and have had some pretty good success thus far, but with your loan to deposit ratio closing in on 100%, how attractive might acquisitions be on a go forward basis at least from the deposit point of view?

Thanks.

Michael, this is Bryan.

In terms of capital deployment there's a slide towards the back, and we continue to evaluate all areas of capital deployment.

From our perspective to the extent that we do M&A we're going to make sure that it makes sense and that it makes sense from an economic perspective as well as a footprint and a franchise perspective.

Over the last couple of years we thought we'd have better opportunities to repurchase some common stock.

In I guess the third quarter call of last year we talked about suspending that effort until we got more clarity around the mortgage related issues.

And over that time -- and we also referenced the DFAST or stress testing process.

Over that time we've resolved Fannie Mae, Freddie Mac, FHFA, we've resolved in addition the Sentinel matter.

We've gone through the DFAST process, and although we, like everybody else in that process, are not in a position and are obligated not to disclose the results, we -- that fits into our continuous framework of providing stress testing information to our regulators.

And we're pleased with the outcome, and we think we've made it a stronger process, and we will continue to make that a stronger management process.

With all that said, we think we are still going to generate some excess capital.

We think we have opportunities to deploy that in the business through loan growth and the vehicles that you've seen in second quarter.

And in all likelihood we'll begin to consider buying back some stock in the third quarter again and evaluate opportunities as they come up.

We've had two attractive M&A type opportunities in the last year or so with Mountain National acquisition in June of 2013.

We've got a pending branch acquisition with agreement with Bank of America that should close later this year.

So we'll look at all those opportunities, and we'll evaluate whether we put it into the balance sheet, whether we put it into some other type transaction or whether we continue to modestly buy back our stock when we have the opportunities.

Okay that's helpful, and maybe just in terms of what you're looking for in a deal, is it in market?

Is out of market?

What are the metrics, the financial metrics, that you maybe look at or need to achieve to make it really compelling for you?

Thanks.

We look out a whole lot different measures and ultimately it comes down to, it has to meet financial hurdles which we can compare to using the business, using the capital in the business or using the capital in a stock buyback.

But we look at the fit into the franchise, fill in opportunities and in market in the state of Tennessee help us -- they obviously have a lot more in terms of efficiency gain type opportunities.

We also consider opportunities outside of Tennessee in the middle Atlantic and areas such as that where we can fill in our existing niche or developing middle-market type businesses there.

So, we consider a lot of different things but, as in the past, we continue to be very disciplined in the way we approach it.

We want to make sure that one, it fits from a strategic standpoint and two, that make sense from a financial standpoint.

And so, we're open minded, but we're going to be very, very disciplined in the way we approach the business.

Marty Mosby, Vining Sparks.

I have two questions, two kind thoughts that you kind of maybe pushed past the actual surface numbers.

First off is I think the benefit of the unusual gains this quarter, about $50 million worth or a little bit more, actually helps.

If you think about allocating that to the potential losses or settlement that are still to come, you kind of pay forward some of those things in a sense of protecting your capital.

So, Bryan, I just thought -- was going to get your thoughts on that?

Well, I guess you're right, those things do add to the capital base, and they do provide capital flexibility for us.

As you know from our discussions in the past there's what you can estimate what is probable and estimable in what you can record and what you don't.

We've got very strong reserves still set up for the remaining portions of the GSE repurchases, but, yes, clearly the settlement helped us strengthen our capital basis as we moved through the second quarter.

BJ, I wanted to ask you about page 14.

When you're looking at the expense improvement over the last year, while the expenses were down significantly, $60 million on an annualized basis.

If you really look out the components of that, about $52 million came from the revenues in FTN Financial coming down so their expenses were coming down which doesn't really create any net profit, actually a little bit of a drain and then non-strategic continued runoff there has brought expenses down by about $5 million.

So out of the $60 million improvement $57 million is really related to revenues running down.

If you look at the bank's efficiency ratio over the last year it's actually trickled up about half a percentage point.

Just wanted to get kind of a feel for how fundamentally there's going to be efficiency gains in the process?

Sure, Marty.

And I think your math is right, and I'd love to see a higher expense base because of FTN revenues.

But the reality is that not where we're at right now, and I think them taking their expenses down as the revenue opportunity is not there is pretty good performance.

And I imagine if you saw a full P&L of the fixed income business across the industry I'm not sure you'd see the same trends as what you see at FTN.

But with that said, I think what we tried to lay out on that same page is how we expect to take another meaningful chunk of expenses out of the organization over the next 18 to 24 months.

If you think about non-strategic expense, think just about the legal cost, for instance, that we continue to lay out.

Those are in the range of let's say $40 million a year.

If we ultimately get past the FHA investigation which we will at some point, that number drops meaningfully, and that drops right to the bottom line.

And that will certainly be helpful.

And we've got a lot of other things, you can see a few of them on this page that will meaningfully reduce cost in the core business over time as well, while not sacrificing anything related to our revenue generation opportunity in the bank.

So, we're pretty pleased with where we're at right now.

We think we can continue to take some meaningful costs of the organization over the next year and a half to two years.

Marty, this is Bryan and add to what BJ said, the other thing to keep in mind in that comparison is over that period of time you are seeing although you might describe it as modest, we've covered a lot of additional investment.

We've covered increases in cost of doing business, compensation increases.

We've covered investments in FTN Financial.

We've opened new offices in Jacksonville and Charleston and Houston.

We've covered the increased costs associated with regulatory compliance and things of that nature.

So, I'm pretty proud of what the organization is doing to control cost and to offset sort of the inherent up drift, that naturally occurs in your cost base over time.

So I wouldn't overly minimize the amount of effort that goes into seeing even a modest reduction in the banking and the overall operating cost outside of what BJ has talked about.

Matt Burnell, Wells Fargo.

Good morning, everybody.

Just a larger picture strategic question perhaps, Bryan, for you.

You've mentioned your priorities in terms of M&A activity and how you look at it and all of that certainly makes sense.

I guess I'm just curious, given some of the weakness that you've seen in the Capital Markets business and some of the other transactions that we've seen other banks do within the capital market space, does it enter your thinking at this point to possibly try to broaden that business, the revenue side of that business with potentially some -- a strategic acquisition that wouldn't necessarily have to be that big but could provide some benefits in the longer-term for revenue growth?

Yes, Matt, absolutely and that is something that we have thought about and continue to consider.

I mentioned making investments in our municipal finance business in terms of hiring people.

That's a prime example of an area where if we had the right acquisition opportunity to help us build that business and expand that product set for our customer base we would certainly look at those opportunities.

Absolutely.

And then just in terms of the offices or the lending that you are now doing in Florida and Charleston and Houston, how do you drive a relationship type of lending business similar to what you would do in your home markets in areas where you've said you're not really focused too much on branch density or anything like that?

And how do you end up from not being sort of the, for lack of a better phrase, dumb money in those markets?

I appreciate your hiring local talent so I'm sure that goes a long way to help.

But I guess maybe a question for Susan is how do you ensure asset quality in those portfolios once we start to see a turn in corporate credit quality?

Matt, I'll take that question.

You hit the nail on the head with the talent, Obviously that's one key thing that we do and that is in-depth interviewing in the markets where we decide we want to go in.

We higher long tenured bankers with great reputations.

We go to a number of interviews, credit risk management.

I'm involved in a number of the interviews.

People on my team are.

So line and credit and executive involved in the hiring process, and we have hired some extremely talented bankers.

We're glad they joined First Tennessee.

In addition to that, both during the interview process as well as once they're onboard, we talk about our credit culture.

We talk about our credit risk appetite.

We also have a [ROSA] governance structure as it relates to credit, portfolio limits by industry within the CRE line of business.

We have product limits within that, and so we continue to operate within those limits even with the addition of our new markets.

As it relates to relationships there is less reliance today by commercial and corporate customers and consumers as well on a dense branch network.

And so by first of all hiring bankers that have established relationships but also using technology with Treasury Management products, remote deposit capabilities and those kinds of things, we are able to bring on full-service relationships in those markets.

I believe that we're doing a very good job there, and we are -- maintain our same credit discipline in those markets as we do in our core markets.

I might just add as well just as an example.

If you think about our mid-Atlantic market, where we have no branch presence.

It is a call in effort as Bryan and Susan described.

And we have about 30% deposit to lend ratio in that market.

Which certainly isn't like a full-service market, but that's pretty strong I believe, and so that kind of goes to the point that Susan said that commercial customers by and large more and more don't necessarily need as full of a branch network.

Our Treasury Management capabilities are excellent, and we're able to sell into those as well with the loan relationship over time.

And that brings us commercial deposits.

So, we've carefully studied how we're going to build full relationships not just loan only, and we're pleased with what were seen so far.

Kevin Barker, Compass Point.

Good morning.

Given the reduced origination volume in the industry we're hearing of increased competition and lower spreads in the mortgage warehouse lines.

Now, your commercial loan yields only ticked up one basis point -- I mean ticked down one basis point this quarter.

Could you give us some color around where you're seeing mortgage warehouse yields and the other commercial loan yields today?

It's BJ.

I'd say mortgage warehouse yields are in the 4.50% to 4.75% range, and they stayed fairly consistent in that range.

There hasn't been a lot of movement.

We haven't materially tried to change our pricing structure to keep or gain business, so that been relatively steady.

I'd say loan yields on the commercial side would be probably in the LIBOR 2.50% type range is by and large is what we're seeing.

Some businesses would be a little bit better.

Some businesses would be a little bit tighter, but that's generally what we're seeing come on the books.

Kevin, this is Bryan.

You alluded to competition.

There's not a lending area out there where there's an absence of competition.

There's still a tremendous amount of competition for every deal, some areas much more than others depending on the product set, but there's -- all deals are competitive.

And, as a result, there's not a whole lot of upward pressure on spreads.

As you can imagine as a result most of the pressure is on contracting spreads, and I'm pleased with what our team is doing to sort of balance out that pressure and that competition and maintain spreads.

You may have heard us talk in the past about the work we do to compare across the footprint.

We gather some data from outside parties and try to synthesize what's going on in our marketplace, and I think in terms of maintaining strong customer service and maintaining positive spreads, I think our bankers are really doing a fantastic job in an extraordinarily competitive environment.

Okay and one other thing, I saw the tax rate jump up to almost 28% this quarter.

Was that primarily related to the litigation recoveries?

Or the insurance recoveries?

And --

Yes.

And do you expect to come back down, because they are 25% going forward?

No, I think it will stay in this 28% range which is what the effective tax rate is.

So, the way we calculate that is every quarter we look at what our estimated pretax earnings are for the year, we factor in our permanent tax credits and we come up with a blended rate.

When you have a large positive like we had this quarter or a large negative, it will impact obviously what your pretax earnings are and therefore how you spread the effective tax rate over the rest of the year.

So, 28% is inclusive of that $47 million recovery, and that's what we see and what you could use for third and fourth quarter.

Geoffrey Elliott, Autonomous.

You mentioned that you'd be contemplating resuming buybacks in the third quarter.

What's changed there that makes buybacks attractive now when they weren't so attractive before?

You said buyback of preferreds?

No, of common stock, share repurchases.

Yes, over the last two, two and a half years we have bought back a substantial portion of our common when we felt that the pricing was attractive and we had excess capital to invest in it.

As I suggested earlier, we made a call last year, we wanted to see more clarity around the resolution of several of the mortgage issues and we wanted to work our way through the first round of the stress testing process.

Given the significant work that our team has done in resolving mortgage related issues, the strength of our capital base, we just think that we have the opportunity to continue to invest small amounts of excess capital in stock repurchase over the second half of this year.

And due to time constraints the last question will come from Kevin Reynolds of Wunderlich Securities.

Thanks.

Obviously most of my questions have been answered at this point, but I wanted to ask a question about two things, sort of rate expectations as we go forward and what it means for your Company and then -- on the NIM side of things -- but then also longer-term what you think -- I know you said, Bryan, it's difficult right now to predict ADRs in the fixed income business over the next several quarters.

But if you were to look out over time and see a rising rate environment whether that's in 2015 or 2016 or beyond, when I look at slide 13 I see that you predict roughly $63 million of increased NII in an up 200 basis point environment.

And it seems like that number has been inching lower quarter after quarter here.

And I was wondering what's happening to cause that to occur and sort of would that possibly flatten out and maybe even go the other way over the next several quarters in terms of modeling?

And the second is in that rising rate environment down the line, do we actually think that we can get back to that $1 million to $1.5 million normalized ADR, or will higher rates if they tend to march higher put a constraint on trading activity in the bond business?

Kevin, it's BJ.

Yes, I think probably last year the high on our up 200 might've been in the low $70 million range, something like that.

So down to $63 million is a modest move towards less asset sensitivity, and it's really on the liability side and it's really related to how we're managing our wholesale deposits, not necessarily core deposits with customers.

We would have thought last year that we would have some modest pockets of opportunity for fixed-rate lending, but there's been very, very little demand on that side.

We had said that we might just try to pursue those to modestly bring down our asset sensitivity in the near-term.

But those opportunities just not -- have not been there to the extent that we thought.

So, asset sensitivity remains very high and we are comfortable with that, and we think that will play well in the banking business over the long-term.

On the FTN side, I don't think I've ever heard a fixed-income salesman or trader hope for higher rates.

But, as I've talked to some of our folks, they want something.

This low rate environment where it is with the three and the five-year in particular being so range bound, it offers very little opportunity for customers or obviously for our salesmen to make meaningful trades on behalf of our clients.

So to some extent I think rising rates will cause more volatility which could cause a little bit more trading activity which would be helpful.

Now in general, a rising rate environment for fixed income is not strong, but I think there could be pockets of volatility which would therefore help our ADR as rates did start to rise.

So, we certainly put all of that in our asset sensitivity models as we look at it at it; FTN is certainly included.

And net net we still believe the firm is very positively positioned for rising rates.

This concludes our question and answer session.

I would like to turn the conference back over to Bryan Jordan, CEO, for any closing remarks.

Thank you, Andrew.

We are pleased with our progress this quarter and look forward to maintaining the momentum in the second half of 2014.

Thank you all for your interest in our Company and joining us on the call this morning.

Please let any of us know if you have any additional questions or need additional information.

I hope you all have a great Friday and a great weekend.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.