Operator: Welcome and thank you for standing by. All participants are in a listen-only mode until the question-and-answer session of today's call. This call is being recorded. If you have any objections, you may disconnect at this point.
Now, I would like to turn the call over to your host Ram Shankar, Director of Investor Relations. Thank you. Sir, you may begin.
Ram Shankar - SVP, IR: Thank you, Nika and good morning, everyone. Thank you for joining us this morning. With me today are Gary Crosby, Interim President and CEO; and Greg Norwood, our Chief Financial Officer.
Before we begin, this presentation contains forward-looking information for First Niagara Financial Group. Such information constitutes forward-looking statements, which involve significant risks and uncertainties. Actual results may differ materially from the results discussed on this forward-looking statement.
A copy of the earnings release and an earnings review deck are available under the Investor Relations section at firstniagara.com.
With that, let me turn the call over to Gary.
Gary M. Crosby - Interim President and CEO: Good morning, everyone. Thanks for joining us. When we held our first quarter investor call in April, I began my remarks by saying that as Interim CEO my focus is on leveraging our footprint and franchise and translating in our strong business fundamentals and the strong financial performance and ultimately value to our shareholders. 90 days later, I am pleased to say that we continued to deliver on that promise in the second quarter. While the search progresses for a permanent CEO, and I'll come back to that, our team remains focused and is not missing a beat when it comes to delivering value to our customers, shareholders and communities.
For the second quarter, we delivered earnings per share results that were in line with our expectations. Our businesses continued to drive profitable organic growth across our entire footprint while adhering to our longstanding credit underwriting discipline.
We delivered strong growth in commercial loans as well as total loans. Key to our ability to deliver this industry-leading loan performance is attracting new customers, maintaining our discipline on credit and leveraging our cross-solve approach to sell more to our growing customer base across our entire footprint.
Importantly, we have hired several experienced commercial lending leaders in the first half of 2013. These industry veterans will help further drive our loan growth and fee income initiatives, and our value proposition across our geographies and products. In fact, we've seen immediate benefits to our pipelines with the hiring of these additional commercial lending leaders. Combining our footprint, talent and products, we achieved our 14th consecutive quarter of double-digit commercial loan growth.
We also continue to selectively invest in new products, services and infrastructure to enhance our ability to serve our customers, drive earning, and increase shareholder value over the longer term. At the same time, we're tightly managing our operating expenses, and I'm pleased with our progress to date. We remain focused on delivering our full year expense goals while generating positive operating leverage and net earnings.
I'm going to turn it over to Greg in a moment.
However, in anticipation of your questions around the CEO search, let me once again answer those questions I'm prepared to answer. At this time last quarter, the search committee was only weeks into kicking off its search. They have covered a lot of ground since then and are far along in the interview process. The committee is pleased with the quantity and the quality of candidates who are interested in leading First Niagara. The committee is not working towards a specific deadline, but is moving expeditiously through the process. In the meantime, we're not missing a beat as evidenced by our second quarter results. I can't provide any more incremental color about the process, timing or the candidates. The committee, as I'm sure you can appreciate, is maintaining a very high degree of confidentiality around the search for just the right CEO to continue to grow and operate a strong franchise that will deliver increasing shareholder value.
With that, let me turn it over to Greg to provide you with the details on our second quarter performance.
Gregory W. Norwood - SEVP and CFO: Thanks Gary, and good morning, everybody. Let me start with some key highlights for the quarter. First, we achieved positive operating leverage again this quarter as revenue growth exceeded our expense growth with a 10% increase in pre-tax, pre-provision income. How did we do this? First, a better than expected net interest margin and very strong fee income growth. We have strong fundamentals in the loan and deposit activity despite the competition. Continued our high-quality sustain credit metrics; No surprises there.
Further, our balance sheet rotation strategy executed as planned. Finally, expenses this quarter were higher adjusted for the first quarter executive departure-related charges, primarily due to higher incentives and variable compensation expenses driven by the higher than expected fee income. Additionally, branch consolidation and technology costs and some modest separation cost related to prior executive departures were also higher than expected. We remain focused on both extracting positive operating leverage and achieving our year-end expense targets.
Now, a few detailed highlights from the income statement. Our NIM was 3.36%, down only 3 basis points from the prior quarter. Our NII this quarter improved slightly as the quarter benefited from an additional day, 2 basis points decline in the cost of our interest-bearing deposits, and modestly higher prepayment income versus the first quarter. There were no retro adjustments to our residential mortgage-backed securities portfolio related to changing in prepayment speed estimates.
Loan yields declined 6 basis points quarter-over-quarter, impacted by new production at lower yields, partially offset by prepayment income. New production spreads on our commercial book were in-line with recent quarters and consistent with our own expectations. So, no unexpected shift in market pricing. More on structure and credit in a minute.
As shown on Slide 4, a very strong quarter for fee income relative to what we had expected. Strong customer activity in wealth management, deposit service charges, insurance, merchant card income drove the outperformance beyond what is normal seasonality. Wealth management increased 16% over the prior quarter as annuity sales and overall sales productivity improved as investors rotated from bond funds into other investments. Assets under management increased an annualized 7%, and revenues per financial advisor increased 15% quarter-over-quarter.
Deposit service charges increased from first quarter, driven by greater NSF incident rates, and importantly lower waiver rates based on active management by our retail team. Merchant and card income benefited from a 10% sequential increase in purchase volumes coupled with net growth in card member accounts. On the mortgage side, locked volumes were essentially flat over the prior quarter, while slightly lower gain on sale income was offset by other mortgage revenues. Capital markets revenues decreased 17% from the linked quarter attributable to lower swap demand and syndication activity this quarter.
Our operating expenses, on a reported basis, expenses were $235 million, above our guidance due largely to $1.5 million more in incentive and variable compensation expense tied to strong fee income this quarter; a $1 million in true-up for our branch consolidations and exit cost; and $500,000 in separation cost related to prior executive departures.
Compared to last quarter, salary and benefits expenses increased $500,000 with an increase in incentives and variable comp driven by strong fee income, partially offset by lower cost due to lower employee headcount and lower tax and benefit expenses. Said another way, if not for incentive compensation tied to revenue growth, our salaries and benefits expense would've declined nicely quarter-over-quarter. Amortization of core deposit intangibles decreased $3.3 million due to lower amortization, primarily on HSBC related intangibles.
Looking ahead, what does that mean for our $225 million target for fourth quarter? Our organization is committed to achieving our expense management targets. Additionally, we remain focused on increasing revenue, both NII and fee income, and maintaining positive operating leverage.
Let me talk about the key loan takeaways on Slide 5 and 6; a very consistent and distinguishing story for us on loan growth. The growth in the commercial platform continues across all geographies. Our Western and Eastern Pennsylvania markets as well as our New England increased loans at double-digit annualized clips and across all product lines.
Briefly on the competitive environment, both pricing and structures are increasingly competitive. As we have noted, we have no appetite for weaker structures that we see out in the marketplace, and continue to walk such deals.
For example, we walked $60 million into renewals in June in our Eastern Pennsylvania market on three relationships due to structure and pricing. One such borrower was refinanced away to a competitor who is prepared to double the leverage and wave dividend restrictions. That's not how we compete.
So what are we doing? Staying true to our talent acquisition strategy. In the first half of 2013, we significantly added to our commercial banking leadership by hiring some great talent in each of our geographies. These leaders have deep roots in their markets, have decades of banking experience and know the banking clients well. They came to us from larger regional and money center banks. For example, one of our newest leaders covering Eastern PA market was a top 10 lender nationally at one of the top three banks in the country. Additionally, while attracting new talent, we also lowered our overall relationship manager complement, thus increasing productivity.
Turning to Consumer Finance on Page 7; another strong quarter for Consumer Finance Group from both a balanced growth and a fee income perspective. First on indirect business, originations totaled nearly $300 million this quarter. Our new origination net yields were 3.2%, down from 3.3% in the first quarter. Through the remainder of this year, we expect new growth originations at a pace of $100 million each month, and net of normal maturing in this business, we expect year-end balances to approximate $1.5 billion versus $600 million at the end of 2012.
On card, a 10% increase in purchase volumes driven by both seasonality and the impact of over 6,000 new card members that we acquired during our first quarter solicitation campaign of our existing depositor household base. As I noted earlier, our mortgage lock application volumes were largely unchanged compared to the first quarter. Consistent with what you've heard, the gain on sale margins decreased given the increased mortgage rate especially in June.
Bucking the industry trends, both our application volumes and closed volumes were up quarter-over-quarter by nice amounts. Our purchase originations volume increased $100 million quarter-over-quarter to approximately $220 million.
Clearly, the opportunity in this business is our underpenetrated market share. We've added capacity, reduced our cycle time, and increased mortgage lending officers. All of this will continue to help us maintain a strong position in the market going forward.
Moving to deposits on Page 8; our cost of interest-bearing deposits came down 2 basis points to 23 basis points, driven by continued pricing actions that we took on non-transactional accounts like online savings and money market deposits. Average transaction deposits, which include interest-bearing and non-interest bearing checking accounts increased an annualized 17% over the prior quarter, and currently represents 34% of the Company's deposit base up from 30% a year ago. DDA balances increased 22% driven by continued customer acquisitions, especially in Western New York market as well as higher balances held by customers.
As I noted earlier, we consolidated another five branches during the quarter bringing our year-to-date total to nine. As we look ahead, we continue to consolidate branches. Since 2011, we have consolidated over 60 branches.
Turning to Slides 9 and 10 on credit, we had another clean and simple credit quarter. Originated provision was approximately $24 million, half reflecting charge-offs and the other half to support organic loan growth of $1 billion. Compared to the prior quarter, our originated loan growth provision was up $2 million to $11.7 million in the second quarter. Our classified and criticized loans both improved quarter-over-quarter. Nonperforming loans decreased 1 basis point to 1.02% of originated loans while the dollar amount increased modestly compared to prior quarter due to one commercial real estate loan that is well secured. The lost exposure on our nonperforming loan portfolio remains low as the mark on our NPLs is 63% of customer obligation.
Finally, our reserve for originated loans has remained consistent at around 1.2% and we remain comfortable with the allowance levels given the current mix on our portfolio.
For the acquired loan portfolio; another benign quarter. We feel good about the credit marks against this portion of our portfolio, and our remaining credit marks are approximately $141 million, representing nearly 30 basis points of tangible capital and approximately 2.5% of the acquired balances, up 10 basis points from the prior quarter. As you can see strong improvements in the classified and criticized level is driven by favorable portfolio migration and payoffs.
Let me quickly touch upon our investment book on Page 11. If you look at just the AFS component of our investment book, the unrealized net gain after-tax was approximately $84 million, down from $161 million at March 31 of this year. A couple of points I'd like to highlight. The duration of our AFS book was 2.46 years, compared to 2.49 years at March 31. As you know in the first quarter, we transferred roughly $3 billion of CMOs from AFS to HTM. At (6.30), this has an amortizing OCI amount of approximately $35 million. On our residential mortgage-backed security book within our AFS portfolio, only 26% of them are pass-throughs with the rest being CMOs and REMIC structures that are not influenced as much by the QE3 purchases, and therefore not subject to the pricing volatility that we saw in June.
As noted, we reduced the par amount of the securities by roughly $200 million by quarter end in June 30. From prior year-end, 12/31/12, they are down almost $500 million. About $1.9 billion or 25% of our $7.6 billion AFS book primarily CLO and ABS are variable-rate, and therefore not impacted by mark-to-market based on interest rate moves. About 58% of the OCI net gains we have in our CMBS book has a duration of 2.9 years. And finally, our $550 million muni book has an atypically short duration of 2.8 years. So what does all that mean is the duration and the composition of our book has resulted in an OCI reduction that we've talked about earlier.
On the bottom of Page 11, we repeated the chart we laid out last quarter reflecting we've been saying since July of 2011. Our overall commercial credit portfolio, which would include our C&I and CRE loans, plus CMBS, CLO, and corporate security balances, expressed as a percentage of deposits, are in line with our peer group. Said another way, while we may have a larger portion of credit assets in our investment portfolio, total commercial credit exposure, whether it's in loans or investment securities, is consistent with our peers. Importantly, 76% of our credit securities are rated AA or better, presenting better credit exposure than a traditional middle-market loan book. In total, measured this way, we would have a loan-to-deposit ratio of 95%, consistent with our target we've given in the past and consistent with our peers.
To close by investment discussion, our long-term strategy is to focus on customer relationships, fee income generation and cross solvings. We will continue to gradually rotate the investment portfolio to a targeted 20% to 25% of assets over time.
Briefly on the Basel III final rules, we are evaluating every aspect of the final rule; mainly, like many of you surmise the bank our size, there were some real positive. As you're aware, the regulatory minimum requirement phase-in did not change and starts at 4.5% on the implementation date of January 2015 and gradually increases to the 7% by January 1, 2019. Based on our preliminary view, we feel positive particularly about changes in the proposed provisions relating to the exclusion of the AOCI and more favorable treatment of junior liens and residential real estate assets from a risk-weighting perspective. On the other hand the rules remain punitive on some of our investment securities; particularly for certain ABS and CLOs where the risk weights increased from a significant factor and some are dollar-for-dollar deductions under Basel III versus Basel I.
While we like these assets in 2011 when we set up our HSBC investment strategy and we like them today, through the Basel III transition period the pejorative capital treatment of these assets under Basel III makes them less attractive upon implementation.
We have approximately $275 million in such ABS and CLOs that have an average risk weighting of 40% under Basel I but would be subject to more than a 30x increase to 1,250% risk weightings under Basel III.
By rotating out of the assets which we've already planned to do under our HSBC balance sheet rotation strategy, it would benefit our capital ratios by approximately 40 basis points. Based on our interpretation and our planned rotation of these assets totaling $275 million, we estimate that the Tier 1 common ratio at June 30th under Basel III would be 5 to 10 basis points lower than the 765 we reported.
Now let me talk a little bit about our outlook for the third quarter of 2013. Bottom line, the $0.19 consensus estimate for the third quarter is consistent with our expectations. Based on current interest rates, we believe the third quarter NIM will see low to mid-single-digit basis point compression from the 3.36% we reported in the second quarter of 2013. If you look at our asset sensitivity for a 200 basis points increase in rate gradually, net income will increase by approximately 4.5% over a 12 month period. Unlike some others, this does not assume a day one increase in rates based on the forward curve that would produce a noticeably higher number. Instead, we assume a 16 basis point increase in rate each month across the curve over the 12 month period. In a 200 basis point immediate increase scenario, our NII upside would be approximately 7% asset sensitive.
While the steeper yield curve is welcome for some asset classes, as you've heard repeatedly over the last week, the real benefit for banks comes when the short interest rates move. About two-thirds of our loan portfolio is variable tied short-term indexes. Of the variable rate loans, 45% are tied to the three-month LIBOR and 26% to prime rate. With the steepening yield curve recently, the movement rate have been in the mid to long end of the range, while the three-month LIBOR has given up one basis point.
For securities, our reinvestment rates have increased from 90 days ago. For instance, our CMO purchases in June yield us approximately 2.5% compared to the 2.0% we were investing in in the first quarter.
Finally, we expect GAAP net interest income to be up again slightly from second quarter levels. Current fee income consensus of $94 million is consistent with our expectations. Consistent with what you've heard so far from others, we expect moderating volumes coupled with lower gain on sale margins will reduce mortgage banking revenue, which we will mitigate partially by gaining market share. Likewise, we expect capital markets revenues to recede modestly from second quarter levels given higher interest rates, increased competition, offering of long-term fixed-rate loans, and continued impact of Dodd-Frank.
On expenses, given what we expect revenue growth to be, we expect a low single-digit reduction in expenses from 2Q levels. Said another way, the current medium of $226 million estimate for third quarter operating expenses appears a bit low.
CDI amortization expense will decline again in 3Q. As I noted earlier, we remain focused on achieving our previously communicated year-end targets.
Moving to credit, we expect net charge-offs on originated loans to average roughly 40 basis points plus or minus, and excess provision, consistent with the mix of originated loan growth. If you recall, starting in the third quarter, we will be charging off credit card losses to the allowance compared to our prior practice of charging off credit card losses to the purchase accounting credit mark related to HSBC. The reason for this is – the case is because the entire card book we acquired from HSBC and only the card book has been moved from acquired to originated bucket over the last 12 months since the acquisition. As we have said before, this is a change in geography from excess provision to charge-offs.
Before we go to Q&A, let me reiterate that we are committed to executing on the strategy we've embarked on; to continue profitable growth without compromising credit, maintain a key focus on expenses, and rotate the balance sheet profitably to improve return profile.
With that Nika, we can begin the Q&A session.
Operator: Damon DelMonte, KBW.
Damon DelMonte - KBW: My first question deals with a comment you guys made about prepayment income from commercial loans being repaid during the quarter. Could you quantify what that was in the second quarter compared to the first quarter?
Gregory W. Norwood - SEVP and CFO: Sure. So, as you know, with loans paying off, many of them have prepayment penalties. So what we saw in the second quarter was a little over $2 million prepayment income reflected in NII and that's compared to roughly $500,000 in the first quarter.
Damon DelMonte - KBW: And is there a way that you can kind of gauge that as we look into the back half of this year or is that just kind of see how it goes each quarter?
Gregory W. Norwood - SEVP and CFO: It's hard to predict that because you're predicting of all the loans in the customer competition which ones would be prepaid. So we estimated and it moves plus or minus based on those estimates.
Damon DelMonte - KBW: And then just kind of circle back on the commentary on expenses, so a large part of the movement this quarter had to do with variable rate compensation because of the growth on the fee income side of things. So you are basically saying you are going to have lower fee income in the third quarter and thus that will benefit your expense base in the third quarter. Is that correct?
Gregory W. Norwood - SEVP and CFO: Yeah, I think you've got it, Damon. I mean, obviously, we are focused on expenses. That's a key part of how we are running the business. But certainly we are focused on generating positive operating leverage. And while we predict that going forward as we saw in the second quarter, fee income was higher than we had expected, and therefore that resulted in the expenses.
Damon DelMonte - KBW: And then, kind of following up here on expenses, are there any other initiatives that you guys could look to undertake may be more aggressive approach on branch rationalization or some other areas of your expense base where you can maybe trim some items?
Gregory W. Norwood - SEVP and CFO: Well, certainly we continue to focus on the three major areas we've talked about in the past, which is salaries, vendor management, and other expenses, and it'd be in the CDI. When we look forward, we kind of look at the decline from here to the end of the year as being kind of evenly contributed by each of those. So, further reduction in personnel costs, further reduction in vendor costs, and then the CDI, as we've laid out in the past. Around branches, we continue to look at that, and we continue to look at both the profitability today, the profitability in the near-term and also how we want to position branches relative to particular markets. So while we're not communicating today any additional planned cuts, know that as we look out to 18 months to 24 months, that is certainly part of an operating perspective, and how we think about rationalizing the footprint.
Operator: Dave Rochester, Deutsche Bank.
David Rochester - Deutsche Bank: On the loan portfolio, you mentioned the pipeline remained strong, but if I remember correctly, you generally see a little bit of softer growth due to seasonality in 3Q. Are you seeing any of that this year? Do you think you can offset that seasonality with bigger market share gains?
Gregory W. Norwood - SEVP and CFO: Well, you're right. When you think about it, August typically is a slower month. I would say we don't see right now a dip due to seasonality. As you mentioned, our pipelines are strong, and they were strong going into the quarter. So while it's hard to predict exactly the seasonality, I would say probably less impactful.
David Rochester - Deutsche Bank: Switching to the margin, can you talk about (what went in) the way of premium amortization expense, and the prepay penalty income is baked into your margin guidance?
Gregory W. Norwood - SEVP and CFO: Well, first let me go back to the prepayment. Our guidance has a more normal run rate of prepayment income than we saw in the second quarter. So, let me focus on that. And then as we talk about NIM going forward, it remains still pretty volatile and in part in certain areas of loan originations. So, it's kind of hard to give much more guidance on that. But I would want to make sure that when we look into the forecast and you guys look into it, we don't see the kind of prepayment income in the second quarter. We haven't modeled or assumed that in third and fourth quarter.
David Rochester - Deutsche Bank: Do you think that premium amortization expense continues to decline somewhat if the curve holds here?
Gregory W. Norwood - SEVP and CFO: Yeah, I think it declined about $1 million quarter-over-quarter from a premium amortization and that's as good a number as any to think going forward.
David Rochester - Deutsche Bank: Perfect. You gave some great detail on the auto business. I was just wondering, it seems like your FICO scores are decently higher than what you're generally targeting for that business, and that's, I guess, has been the case this whole time. Is there a thought to dropping those a bit to take up some more yield given you're seeing some pressure on pricing there?
Gregory W. Norwood - SEVP and CFO: Well, I think you captured it right. When we did the business model back in 2011, we did assume a lower FICO and a higher yield. And as we started into the business, it consistently has created a slightly different opportunity where we thought there was a better risk reward trade-off as we grew the portfolio by keeping the higher FICO and being reasonably competitive on the price. So, while we've thought about it; one, as you go down the FICO spectrum, it's a smaller overall industry population. And frankly, when we look at the book, we like the lower loss contents that the higher FICO gives us as we grow and mature the book.
Operator: Robert Ramsey, FBR.
Robert Ramsey - FBR Capital Markets: The earning asset guidance of $32.7 billion, I guess, implies only about $100 million growth quarter-over-quarter, which is a lot less than you guys have been doing. I'm just curious, is that a reflection of more of a mix shift out of securities into loans? Or does it say something about the loan growth outlook in the seasonal third quarter, or what's sort of the factors in there?
Gregory W. Norwood - SEVP and CFO: Well, one, I'm not sure I would fly the plane quite that directly. It is consistent with where we are. I think there is potential relative to the loan growth as we talked about earlier. Also we will continue the balance sheet rotation which will impact earning asset that obviously helps us in our NIM guidance. The other thing is as we go down is, I mentioned the payoffs we had in June where we did not like the structures, obviously that will reduce the averages in the short-term. So again, I think we're comfortable with looking into the third quarter on loan growth. There will be some impact from the June, and we will continue to rotate the securities book.
Robert Ramsey - FBR Capital Markets: Then I think I heard you correctly in the intro comments that the expectation for GAAP net interest income is that that will be higher slightly from second quarter to third?
Gregory W. Norwood - SEVP and CFO: Correct. And just to tie that to interest rate sensitivity, I want to make sure, when we look at the two ways that you commonly see it in the industry, we expect interest income in our way, a gradual up $200 million to be about 4.5%. And as I said, another way to look at it is an immediate up $200 million, and that's where we would expect net interest income to be up the 7% that I mentioned.
Robert Ramsey - FBR Capital Markets: I know Damon sort of asked you about expense expectations as we go into the back half of the year. Last quarter, you all had said that you expected in the fourth quarter to do possibly little better than the $225 million run rate guidance you'd previously given. Are you still feeling good at being at or under that $225 million level in the fourth quarter?
Gregory W. Norwood - SEVP and CFO: That is clearly a focus of the entire organization. I think, as both Gary and I have said, we're clearly focused on expense management. But as I said, to the extent we create better than expected operating leverage, that would have an impact on what just sheer absolute point in time expenses might be up.
Robert Ramsey - FBR Capital Markets: Then last question and I'll back out. But on fee income, you're obviously expecting lower fees next quarter. What are the primary areas where you are expecting a sequential drop quarter-over-quarter?
Gregory W. Norwood - SEVP and CFO: I think its simple; one's industry and one's probably more unique to us. So certainly mortgage, we don't expect anywhere of the volume declines that maybe we've heard others talk about. So, yes, that will be softer but not to the magnitude related to volumes. Gain-on-sale as you know is very difficult to predict. The other aspect for us where we see challenges is in the capital markets area. Two things impacting that. One is, given competition is extending fixed rate, both in duration as well as level; that makes the swap transaction less competitive in the marketplace. To a lesser extent, obviously, Dodd-Frank eligible participant rules impact that, and while we can still work with customers to meet their need, it doesn't create swap income, it creates NII going forward.
Operator: Casey Haire, Jefferies.
Casey Haire - Jefferies: Two-part question on the funding side of things. One, deposits down a little bit this quarter. Just wondering if you can provide color on that decline. You guys did – and then secondly, you did backfill with tapping some more short-term borrowings. You just talk about your appetite there and what your strategy is there?
Gregory W. Norwood - SEVP and CFO: Sure, so let me do on the deposits. I mean, clearly, our focus in the decline has been on what is the right pricing for our online savings as well as our money market. And we continue to believe there's a positive trade there relative to lowering the cost of those versus planned attrition. And as we talked about in the past, when you think of the moving parts we don't set absolute target for loans, securities, deposits or wholesale. Clearly, we've focused on our loan growth perspective, the rotation goal of $200 million a quarter. And then deposits, we manage relative to customer, and then secondarily, to treasury and overall funding. And currently, believe that wholesale perspective to match all of those up is the right way to go, and as we look forward in pricing and the value of the deposit base moves, we'll look at that. I think it's also important to pull that all in the deposit side. (In 2012), we talked about as our transaction, saver, borrower; and one of the things that we look out there is how to increase that and also whether or not, the saver piece of money market and OSA is contributing to that. So we continue to look at that, first as a customer acquisition perspective, and then secondarily from a treasury or a funding perspective.
Casey Haire - Jefferies: Then the NIM guide, does that contemplate any further easing of funding costs?
Gregory W. Norwood - SEVP and CFO: From a deposit perspective, I would say, think about that as flat, and wholesale borrowings is probably about the same.
Casey Haire - Jefferies: And then just to sum up on the efficiency ratio, I know you guys are talking about 61%. From what I'm gathering, it sounds as though before it was mostly coming on the expense side, but obviously the top-line is showing up a little bit better, you can get there with a more balanced mix of revenue improvement and the expense cuts versus just expense cuts prior, is that fair?
Gregory W. Norwood - SEVP and CFO: I think you've been looking at it the right way. Obviously the $225 million remains our target, and depending on the ratio and the mix, obviously revenue driven by customer behavior is a key goal of ours. So it's probably less precise that that Casey, but again, we continue to believe that creating operating leverage while managing expenses is the right way to balance that.
Operator: (Mike Lawris, Bank of New York America)
Mike Lawris - Bank of America Merrill Lynch: Just a real quick one. Back to the underwriting auto book, I know you guys kind of gave a little bit of guidance out in terms of originations. But I know last quarter, I think you were up 50 dealers to around 900 dealers. I was just curious as to what kind of dealer increase you saw this quarter, and kind of what you expect by the end of the year.
Gregory W. Norwood - SEVP and CFO: So this quarter, we saw a little over 50. As we've mentioned, our business plan had us moving into Pennsylvania, and as – we did do that beginning this quarter. Pennsylvania is not going to be a needle mover, but it was a market that in our business plan, we thought was a positive one. I would say, certainly the increase in dealer will moderate over time. So only slightly, think about it going up. So 51, 50-ish more this quarter with a decline in increase going forward.
Mike Lawris - Bank of America Merrill Lynch: Then I have just another quick one, kind of switching to C&I. I know yields look like they compressed around 8 bps to around 366 basis points in the quarter. I was just curious what are current origination yields that you're seeing on the C&I side. I know at the beginning of the call, you had indicated that you are seeing a lot of pricing competition and also competition on structure, but kind of curious for the – kind of right credit, where are you seeing kind of those yields coming at.
Gregory W. Norwood - SEVP and CFO: Yeah, we really haven't seen a big change this quarter. I'll just give you some actuals. So second quarter origination yields for the entire commercial book were at 2.43 and that's down five basis points from 2.48. CRE is more around at an L plus 2.50 and again a little less than that probably from what we saw in the first quarter versus second quarter. But again, right now in the second quarter in total, we had basically a LIBOR plus 2.43, a little bit higher in C&I and business banking and little bit lower down into the L 2.50 for the CRE book.
Operator: David Darst, Guggenheim.
David Darst - Guggenheim Securities: Greg, you've given us some details on the AFS portfolio, the duration of what percentage was variable rate. Could you, kind of – like cover those details again?
Gregory W. Norwood - SEVP and CFO: Sure. Let me go back a little bit to the investment page in the deck. So when you think about it – what we said is our AFS book has about 2.46 years in duration and that's down a little bit from 2.49 years and 3.31 years. So again, the duration overall hasn't really changed. As you know, that duration is by design from the HSBC strategy, where part of that was to shorten the duration of the overall securities book. Also, if you look at as I mentioned, a couple of other just discreet portfolios, the muni portfolio, I think important to compare it to others is it is really a short portfolio, again by design, of only 2.8 years for muni. And then CMBS, again, a lot of our portfolio is '06, '07 originations. So you can put that in the normal ten-year maturity, and that's where we have the 2.5 years for CMBS. I think another piece that I would highlight is in our CLO and ABS, they are variable rate. So 25% of our $7.6 billion book is variable-rate, and obviously, those are only impacted by credit spreads. So again, a pretty variable against the book of both CLOs ABSs, CMBS as well as muni.
David Darst - Guggenheim Securities: And then as you're discussing the capital markets business and the changing dynamic there, are you beginning to see better yields on what's your booking and are the origination volumes staying the same even though the dynamics of the fee income associated with are declining?
Gregory W. Norwood - SEVP and CFO: Well, from our capital market syndication, I think they are reflective of the broad market and what we're seeing in the commercial loan book. So in our syndications I think we're seeing on the larger deals that for us would be the 100-plus type deal where we would sell off. That's where you are seeing a lower spread because you have more competitors in the market. In our sweet spot, more of the club-size deal in the 50 to 75, again less competition there so the spreads aren't quite. What I would tell you on the capital markets swap business is our volumes and the number of transactions we've done are basically flat first to second quarter. So to your point there is, there is more pricing competition in the swap market, again, consistent with what I would call as a very competitive overall commercial lending environment.
David Darst - Guggenheim Securities: Would you say as far as the commercial bank on your production fore, so the number of lenders you have and are you done as far as building your capacity or there is still areas within the commercial franchise that you need to add either new (lender) segments or to various markets?
Gregory W. Norwood - SEVP and CFO: I think we like our overall complement. As we said in the past, we actually believe we have capacity within our existing complement. The two things we wanted to highlight that we've really been focused on for five plus years now is, talent acquisition, talent brings talent. So when we focus, we find folks that like our business model of decentralized credit underwriting, more autonomy than some of the bigger. So we started first by saying what are the leadership roles? And that's where we've increased there, and that's the main focus. But what we've also done is we look at what our RM complement or our relationship managers are in each of the footprints, and we've undertaken kind of a best-in-bank perspective. So what is the productivity – where are we seeing it done the best reflecting obviously geographic differences, competition differences? So we're really looking at both the leadership roles and the productivity of RMs as two discrete components of our resources. But again, as we've said consistently for probably six months or nine months now is, we believe there is embedded capacity in what we have, and we will manage that capacity of our delivery capabilities to the marketplace capacity.
Operator: Matthew Breese, Sterne Agee.
Matthew Breese - Sterne Agee: Most of my questions have been answered, but just one quick one. You guys gave some really good color on net interest income sensitivity in a parallel shift environment. Could you give us some of idea of sensitivity in a steepening yield curve environment, such as what we're seeing recently?
Gregory W. Norwood - SEVP and CFO: We haven't disclosed information around that. I think just to be specific to your question of the steepening in recent, the back end of the curve would have less to do with that given it's less impactful both for deposits which is the most difficult assumption in ALM management, and the short end. We do run, as you would guess, a lot of different scenarios and we look at our business strategies, but really haven't disclosed the number of different scenarios. What we wanted to do this quarter, because frankly, we got a lot questions, is the simplest distinction between asset sensitivities are those banks that do a gradual versus those that do an immediate; not that one is better or worse than the other; but as you can see for ours, a gradual has a 4.5% increase to NII where an immediate would model a 7% increase in NII.
Operator: Thank you. No further questions at this time.
Gary M. Crosby - Interim President and CEO: Alright. Well, in wrapping up, let me just say that we're really pleased with our second quarter results, and we continue to demonstrate our ability to translate strong business fundamentals and the strong financial performance. Our CEO search continues and in the meantime, we have a very strong team that is focused on further enhancing our financial performance. Thanks again for joining today's call. Have a great day.
Operator: This concludes today's conference. Thank you all for participating. You may now disconnect.