Operator: Good day, ladies and gentlemen and welcome to the First Horizon National Corp Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded.
I would now like to introduce your host for today's conference call Ms. Aarti Bowman, Head of Investor Relations. Please go ahead.
Aarti Bowman - IR: Thanks, Alley. Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we'll use in this call this morning are posted on the Investor Relations section of our website at www.fhnc.com.
In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly report. Our forward-looking statements reflect our views today and we are not obligated to update them.
The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call and is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call.
This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch. Additionally, our Chief Credit Officer, Susan Springfield will be available with Bryan and BJ for questions.
I'll now turn it over to, Bryan.
D. Bryan Jordan - Chairman, President and CEO: Thanks, Aarti. Good morning and thank you for joining our call. I'm pleased with our continued progress in the second quarter. Our core businesses delivered solid results, we made headway in realizing our efficiency initiatives, the non-strategic segment drag diminished and we prudently deployed capital.
We're managing our Company for improved sustainable profitability and higher returns. Our focus is on structuring a profitable balance sheet that will drive long-term earnings growth.
We are not where we want to be yet, but with each quarter we are getting closer. The economic environment is, of course, a factor and how quickly we reach our goals. We have seen some recent improvement or positive data points and with rising employment higher consumer confidence, solid home price appreciation and reasonably steady yet modest GDP growth. While our markets in and around Tennessee are generally in line with national trends, certain areas such as Middle and Southeast Tennessee are doing better than average. We are increasingly well-positioned to make the most of our regions opportunities.
In late May, Fed comments spot concerns that monetary tightening would occur sooner than it been expected; (calls) in the 10-year treasury rate to jump and igniting fears about the effect of higher rates on the economy, businesses and the banking industry. BJ will discuss later First Horizon is well positioned for higher rates and should be the beneficiary over the long-term. Near term though, our borrowers seeing somewhat cautious about the strength of the recovery resulting in restrained credit demand.
Our second quarter loan production was steady and our bankers focus on making quality relationship-oriented loans will ultimately benefit our balance sheet and enhance long-term profitability. On the mortgage front, rising rates have slowed refinancing, but purchase activity has picked up impacting our loans to mortgage companies line of business.
Mortgage warehouse lending is a good profitable lending area for us and we don't expect that to change in the second half of 2013. We are taking market share, adding new customers and expanding lines to existing customers.
FTN Financial, our fixed income business was negatively affected by the unprecedented rate volatility and the significant rise rates, which occurred in the later part of the quarter. Through the first two months of the second quarter, fixed income average daily revenues was $1.05 million in line with the past several quarters.
However, market factors experienced in late May and June led to an overall average daily revenue for the second quarter of $915,000. We've recently begun to see some pickup in activity and with greater market stability we expect this business to generate average daily revenue in the range of $1 million to $1.5 million per day. As you are aware revenue headwinds have intensified cost cutting efforts across the banking industry. We have been lowering cost to the past several and have shown significant progress. We are looking at all of our businesses but the regional banks improvement and its efficiency ratio and revenue per FTE clearly shows that our productivity initiatives are paying off. Keep in mind that we don't want to reach our targeted cost cutting goals and stop. We want efficiency in productivity to be engrained in our way of doing business. Credit quality strength is also a priority for us. As anticipated non-performing loans did increase in the second quarter, reflecting further implementation of a regulatory change that required us to classify second liens as non-accrual if the first lien was non-performing. Core asset quality trends though cause us to expect stable credit quality metrics in the second half of 2013.
Our capital ratios remained strong and the Basel III framework recently approved by regulators will not have a significant impact. The Tier 1 common ratios under a fully implemented Basel III would be approximately 9.8%.
In the second quarter, we deployed capital through continued share buybacks and we also acquired a small bank in East Tennessee from the FDIC. Again, I'm pleased with our second quarter performance with improvement in our cost structure, building our core businesses, broadening our customer base and continuing to wind down the non-strategic businesses.
I'll now turn it over BJ to discuss our financials. BJ?
William C. Losch III - EVP and CFO: Thanks Bryan, good morning everybody. I'll start on Slide 6. Our net income available to common shareholders for the second quarter was $41 million with diluted EPS of $0.17. Our total revenues declined 5% linked-quarter, NII held up relatively well. Regional bank revenues were up. Fixed income and mortgage related revenue accounted for all of the linked-quarter decline due to the back-up in rates in the later part of the quarter.
Expenses were down 5% linked-quarter to $14 million, with most expense categories decreasing. Our loan loss provision was flat to last quarter's level of $15 million and credit trends continued to remain solid.
Moving to segment statement highlights on Slide 7, our core businesses continue to show solid performance and the regional bank net income was $43 million in the second quarter. Pre-tax pre-provision net revenue was $80 million or 7% above first quarter in the bank. Linked quarter non-interest income grew 5%, driven by growth in deposit transactions, brokerage, management, and trustee, while expenses in the bank decreased 1%. Loan loss provision was $13 million in the second quarter compared to a provision credit of 2.5 in the first simply reflecting a continually conservative view of reserving for the commercial loan portfolio.
In our FTN business, the net income was $8 million, positive in second quarter of '13. As I said, fixed income revenue declined 14% linked quarter and as everyone knows Fed's commentary around tapering led to significant market volatility and spike in rates adversely impacting our fixed income revenues in the quarter. Expenses also decreased 3% linked quarter, reflecting lower variable comp as expected which was somewhat offset by the modestly higher legal and professional expenses. As Bryan stated earlier, during the first two months of the quarter average daily revenue was a little over $1 million, but June was substantially lower. Our management team and our traders at FTN did an excellent job managing our loan positions down efficiently during June to keep our business as efficient and nimble as possible.
Moving to the non-strategic segment, I may never get to say this again so I am going to say it now, we actually had a positive net income in that segment for the quarter. It was 2.5 million in the second quarter positive compared to the loss of 9 million in the first. Revenues declined 17%, mainly driven by mortgage warehouse valuation adjustments of 2.5 million in the second quarter. Expenses were down 31% from lower litigation, reduction in professional fees, occupancy cost as well as other expenses related to continued wind down of our legacy businesses. Loan loss provision was down significantly from 17.5 million in the first two, just under 2 million in the second. Provision decreased there with the result of lower loan balances, improvement in the home equity portfolio from lower delinquencies, then a decline in charge-offs and improve recoveries in the commercial portfolio.
Moving to the regional bank balance sheet trends on Slide 8, our average core deposits remained steady at $14.6 billion and average loans were relative steady as well at $12.2 billion. Period-end loans to mortgage companies were up 23%, but down 6% on an average basis. In that business yields are around 4.5% to 4.75% making these loans a significant contributors to net interest income.
As Bryan mentioned the recent rise in rates has slowed mortgage refi volumes. However, we still expect relative strength in this business since rates remain historically low. Purchase activity is likely to become more of a driver versus refis over time and we have started to see that shift in our mix.
For the remainder of the year, we anticipate balances to fluctuate up and down in line with market conditions. Our commercial pipeline remained solid with existing customers representing about 60% of the pipeline or so. Linked quarter uptick and fundings reflected a higher volume of loans leading the pipeline and closing in the second quarter.
Moving onto the consolidated balance sheet trends on Slide 9; our total assets were $25 billion, roughly flat to last quarter. Our consolidated loans decreased just slightly reflecting modest growth in our bank and runoff in the non-strategic. Our average core deposits in aggregate were stable. We also repaid about $250 million of debt at the bank level and $100 million at the parent.
Our securities portfolio averaged $3.2 billion in the quarter, and linked quarter yields declined 12 basis points as reinvestment rates faced continued pressure. Securities that are rolling off yield about 3% to 4%, and we're now reinvesting at about 2% to 2.5% given the recent rise in longer rates. The recent rise in mortgage rates caused our unrealized gain to decrease from a positive $80 million in the first quarter to a positive $60 million in the second.
Our investment portfolio strategy continues to be to buy securities with structure not stretch for yield thus protecting us a bit more in short scenarios. Our net interest spread was stabled linked quarter, while loan yield decreased 3 basis points, deposit costs also decline 3 basis points, reflecting strong discipline around pricing across all of our businesses.
If you look at Slide 10, our consolidated net interest income was relatively flat due to lower average loan balances which were partially mitigated by higher day count, lower deposit rates and an increase in loan fees. Our net interest margin was up slightly linked quarter at 2.96% in the second.
Lower cash balances improved the margin and was somewhat offset by continued yield declines in securities and fixed-rate loan portfolios. Sitting here today, we continue to expect the quarterly net interest margin in the range of 285 basis points to 295 basis points fourth quarter of 2013.
Currently our assumptions include macro rate staying at current levels arising modestly over time. Continued modest loan yield decline due to competitive pressures, loans to mortgage company somewhat below current levels, limited buying opportunities with the securities portfolio, debt balances similar to 2Q, and flat to modest growth in our loan portfolio in aggregate.
Over the long-term our asset sensitivity has positioned us well for rising rates. Our consolidated loan portfolio is comprised of about 67% floating-rate loans tied to LIBOR, so all else equal in a rising rate scenario 100 basis points increase would equal about a 6% increase in net interest income and a 300 basis points rise would be about a 11% increase to NII. We continue to believe that an asset sensitive balance sheet is key to our ability to generate strong profitability and returns over time.
Moving to Slide 11 and mortgage repurchase trends, GSE mortgage repurchase expense was zero for the fourth consecutive quarter. Linked quarter the repurchase pipeline declined 9% to $235 million and our lending reserve was down to $123 million. New requests were up 24% reflecting an anticipated acceleration of requests. Our total expected aggregate requests remain unchanged and we still expect any ongoing GSE related provision to be immaterial. We have not been named in any new lawsuits related to our private securitization since October '12 and we had no loan repurchase request from our first lien private securitization. And at this time based on our private securitization origination mix deal size, age and performance we continue to believe that law suits from our private securitization should be significantly less than our GSE experienced.
Moving to expenses on Slide 12. We continue to be proud of what our employees have been able to accomplish with expense efficiency efforts and you can see that in the bottom graph. Total expenses this quarter declined 5% for $14 million and our consolidated efficiency ratio also improved. We lowered expense across several categories including compensation, occupancy, FDIC premiums and foreclosed real estate costs. We have seen continued benefits from our efficiency initiatives and they continue to show up in our numbers. Year-over-year the regional banks efficiency ratio improved 500 basis points from 67% to 62%. We now expect to exceed our regional goal and anticipate consolidated annual expenses below $925 million by the end of 2013.
Moving to asset quality on Slide 14, our total net charge-off declined 32% linked quarter. Linked quarter total loan loss reserve decreased $3 million to $262 million. As Bryan mentioned, non-performing loans were up as a result of the implementation of regulatory guidance around first and second liens. Since we do not service or earn the majority of our first liens in front of second, we needed a third-party vendor to provide first lien status, which we received information on in the second quarter.
The increase in NPLs did not have a material effect on our allowance, since we already had contemplated the risk associated with the standalone junior liens in prior quarters. We do not expect further significant impact on the NPLs or reserve from this regulatory guidance. You'll note that our ORE levels were up due to the Mountain National acquisition.
Moving to Basel III highlights, our actual 2Q '13 Tier 1 common ratio is 10.3% and as you might recall the originally proposed Basel III rules about a year ago would have had more of the negative impact on us primarily because of the higher risk-weighting applied to our home equity portfolio, you would remember probably a 240 basis point spot rate impact.
However, the recently approved Basel III final rule did not raise the residential loan risk-ratings. We now anticipate only an incremental 50 basis point hit to our 2Q '13 Tier 1 common ratio. This would put 2Q '13's estimated Tier 1 common ratio at a 9.8% spot rate under fully phased in Basel III, well above the 7% threshold.
Wrapping up on Slide 15; core business trends are generally encouraging. As we've discussed with our 12 month trailing quarter ROA at 1.02% and our core ROTCE at 11.8%. Solid returns in our core operating businesses, the regional banking and capital markets continue to demonstrate the progress we're making towards our long-term goals by controlling what we can control.
So with that I'll turn it back over to Bryan.
D. Bryan Jordan - Chairman, President and CEO: Thanks BJ. We're building the platform for long-term success, a platform that will enable us to fully take advantage of the opportunities that are attractive to operating regions and are strengthening the economy offer.
We're executing on our strategic priorities of differentiating our customer service, improving our productivity and efficiency and prudently managing our capital. We also have significant asset sensitivity embedded in our balance sheet. We will continue to work towards improving profitability, reducing the overhang of our legacy businesses and achieving our long-term bonefish targets.
Please remember that we're hosting an Analyst Day on November 21 here in Memphis. Finally, thanks to the First Horizon employees for their commitment and hard work. With their ongoing support I'm confident in our ability to make additional progress in the second half of 2013.
Allie with that we'll now take some questions.
Operator: Steve Alexopoulos, JP Morgan.
Steve Alexopoulos - JP Morgan: Bryan, I'd like to start. Regarding the commentary in the 10-Q for potential update on HUD this quarter, is there anything you could share with us? I did see in the slides that you said that you met with them during the quarter and any initial thoughts on potential for settlement here?
D. Bryan Jordan - Chairman, President and CEO: There is enough data in one of the slides on mortgage repurchase. You will remember that's a matter that's been out there for about a year. I think (indiscernible) investigation or file request was about a year or so ago. As you noted, we mentioned on that slide that we have had we (weren't) meeting at this point. We have exchanged some information that they provided us to review they looked at a small sample. It will take us a while to evaluate that. As we noted on that slide, we don't have the ability at this point to estimate any range of losses or provide any estimates around reserves. My guess is at this point given the time that it is taking to get to this point in their investigation what we need to do in terms of evaluating the loan files and so on and so forth, it is going to take quite a while before we have any real information that is helpful in providing the estimates around potential impact.
Steve Alexopoulos - JP Morgan: And I just had one other question on the buy back. Why was it so light this quarter at 8 million and then why step it up to 40 million and then accelerated in 3Q are you just making up for being a bit light in 2Q or is this a new run rate given the updated capital rules?
D. Bryan Jordan - Chairman, President and CEO: If you look at – it is an accounting thing more than anything. We bought back in the open markets 8 million shares, the shares and the capital came out the prepaid repurchase. They actually saw the capital come out, but not to shares. It started in the middle of the quarter and it is running across quarter end. So, it will take some time to complete it but that's sort of a continuation. So, the actual buying under the $40 million program will occur throughout the latter half of the second quarter, end of the third quarter. So, it's just a timing thing in terms of the way we account for it, but the capital has already been reduced.
Steve Alexopoulos - JP Morgan: So, we think of $40 million as a good quarterly run rate to buybacks?
D. Bryan Jordan - Chairman, President and CEO: Well, if you look back on the last couple of quarters, that's where we've been. But as we look forward, we'll do as we always have. We'll look for opportunities to invest capital in organic growth. We'll continue to evaluate transactions like Mountain National and things that are going on the economy and otherwise, and we'll evaluate the opportunity to put capital back. As in the past to the extent, we have excess capital we'll be using the dividend and the buyback is a way to return that to shareholder.
Operator: Nicholas Karzon, Credit Suisse.
Nicholas Karzon - Credit Suisse: I guess first on the capital markets business, just a couple questions. I think that capital market expenses were down around $2 million quarter-over-quarter and trading revenues were down about $10 million. If we stay in this rate environment, are there additional costs that can come out of that business?
William C. Losch III - EVP and CFO: It is BJ. That business out there is very efficient from a fixed cost versus variable. I'd probably tell you that two-thirds or more variable versus fixed. So, it does actually look good proportion if you will the revenues versus the expense decline. We did mention that there were some legal and professional fee costs that offset the decline in the variable comp. But you should generally see something like 40% to 50% variable to the fluctuation in the revenue.
Nicholas Karzon - Credit Suisse: Then within the mortgage company balances. Can you give us an idea of the mix between refi and purchase in that portfolio and how that changed quarter-over-quarter?
William C. Losch III - EVP and CFO: Yeah I think we've had been running in the 70%, 75% refi range. I think we are still positive, but it's come down, it's more in the 60/40 range refi. I think if we go out we think that it'll start to continually shift more toward purchase volume than refi. I can't sit here today and tell you when that's actually going to cross over, but we certainly have started to see that mix shift.
Operator: John Pancari, Evercore Partners.
John Pancari - Evercore Partners: Could you give us some additional color on existing FHFA litigation. I know there is probably limited amount you can say being that it's ongoing. But I guess, could you just update us on the status and maybe just help us think about the likelihood of a settlement there or just how we could think about it?
William C. Losch III - EVP and CFO: Yeah, not too much on the FHFA front. Last quarter you would have seen us put up a RPO in that and that had taken probably 12 to 18 month to get to that point. So it's a pretty slow and complex process as you might imagine. So there is -- unfortunately I can't give you much of an update because there is just isn't one at this point.
D. Bryan Jordan - Chairman, President and CEO: Keep in mind, this is process where there are number of people involved in this litigation. The litigation has been divided up into tranches and we are in one of the later tranches of litigation. So, right now we are just in a bit of a holding pattern as this continues to unfold.
John Pancari - Evercore Partners: And then on the capital market side can you give us a little bit more color and your confidence in that reiterated ADR range of 1 million to 1.5 million, particularly given the back up in rates here. I mean, is there risk that you are going to start communicating a lower normalized range here?
William C. Losch III - EVP and CFO: It is BJ. If you look at what happened again as Bryan and I both kind of mentioned April and May were over the $1 million a day threshold and then June just really (tanked). If you think about what happened in fixed income businesses there were multiple players trying to reduce long inventory as quickly as they possibly could to avoid marks as rates continue to spike up. And so there wasn't a lot of buying activity in the market. So, everybody was kind of doing the same thing trying to reduce their position. But what we have seen in the last couple of weeks and we will see if it continues to stay is much less variability in what the (10-year) has been doing. So, just to give you an example, I think the intraday range is the (10-year) over the quarter was something like 8 basis points or 9 basis points, whereas usually historically over time it is 1 basis points or 2 basis points. I mean, that is just math, it is dislocation and it started to come back and start to normalize a little bit more in terms of intraday. So, all of that leads us to a cautious outlook on it, but the belief that getting back to that lower end of the range, where we were in April and May it is certainly possible.
Operator: Marty Mosby, Guggenheim.
Marty Mosby - Guggenheim: BJ, I wanted to ask a question. You went out of the way on Page 10 to say that no expect to material actions to reduce asset sensitivity. When you look at the long end performance of about $9 million favorable 4 basis points, and then if you look at the increase in short-term rates, which is much more material. Can you see how at some point if we keep getting this, let's say, two years before short-term rates go up, you would begin to reconsider that last bullet point to start to accelerate the benefit if we can see a little more movement on the long end?
William C. Losch III - EVP and CFO: What we've got is we've naturally got some fixed rate lending in our non-strategic portfolio that we are purposely letting run-off. So, we are not trying to retain a lot of that. So, what that giving us is incremental opportunity to build more relationship-oriented lending in the regional bank that might have fixed rate characteristics? So, in aggregate though as fixed rate or non-strategic is running off you are adding fixed rate relationship in the bank your net asset sensitivity isn't changing all that much. So, again, that's why we don't think we're going to see a material change in what our profile is. We think we are well-positioned. But we are taking advantage of pockets of opportunity to grow relationship-oriented blending on the left side of the balance sheet to help us a little bit more both in the near term and the long-term.
D. Bryan Jordan - Chairman, President and CEO: As BJ described, we want to use our long-term interest rate exposure or positioning to do customer activity, do customer business. Fundamentally we don't believe in putting the carry trade on just to generate short-term earning. Taking interest rate risk is not where we think we create a lot of value for shareholders. So, we're very deliberate about how we use the balance sheet, we think the securities portfolio, in particular, ought to be used to provide liquidity, to provide collateral, and to manage that aggregate interest rate risk. But we don't believe that we ought to put on long-term rate just to generate carry. And so when we do, as BJ described, we do it for customer oriented activity.
Marty Mosby - Guggenheim: That kind of – Bryan -- my follow-up question was, this is a kind of an inflection quarter BJ highlighted that the non-strategic actually now was making a little money, at least for this quarter. So a lot of the overhang issues are kind of dealt with and now we're kind of starting to move over to the profitability and the overall kind of returns that you can generate. Lot of the catalyst or things that happen like you kind of condition as long-term. How does that time frame accelerate or how do you sort to see the earnings power beginning to improve as you're able to find more strategic opportunities.
D. Bryan Jordan - Chairman, President and CEO: I'm going to go back and look at the transcript to what BJ said and make sure. I think he said he was going to point it out because he might not get to it. We're not looking at that non-strategic segment as a profit center. I think a lot of it had to do with improvement in credit quality and credit trends and who knows how that plays out. But we think we have made significant progress there. The non-strategic portfolio is down about 18% year-over-year and we feel good about where we are positioned there, but we also want to see it run-off and get that segment of our history behind it. We are still doing the same fundamental things as we think about our balance sheet for the long term. We want to focus on growing our customer relationships in the core banking business. We want to win all the business that we can win on a profitable basis in the state of Tennessee and beyond. We are expanding our efforts in the Mid-Atlantic region under John Fox's leadership. We are making progress there. Our capital market FTN financial business is going very, very well. We are adding to our municipal capability. So, our focus is to continue to focus our capital allocation and our resources towards driving those activities that allow us to produce what we have laid out in the bonefish. Those high teens up to 20% range ROEs and so we are taking a real disciplined approach about the balance sheet and how we deploy that capital to grow the business for a sustainable long-term shareholder returns.
Operator: Ken Zerbe, Morgan Stanley.
Ken Zerbe - Morgan Stanley: Just a question in terms of your net interest margin it sounds like one of the reasons that it went up a little bit this quarter was because of the excess liquidity reduction. How much excess liquidity do you have left? I got the (2.85 to 2.95) margin guidance, but I am just wondering if this potentially could be an area, where it might actually drive margin above your current guidance?
William C. Losch III - EVP and CFO: Yeah, there is a not a lot more that you would have seen in the second quarter in terms of excess balance opportunity going forward. Now, again, that's going to fluctuate and it's actually a good thing sometimes that they happens, which means more customer deposit inflows that we can't find a short-term way to put the work. So, yeah, I'm not sure, if you're going to see a lot there, but I did in my comments give you some of the assumptions that I had around the outlook. You will generally see that they're pretty realistic maybe more towards the cautious side. So, if we see a little bit more loan growth that can certainly help. We certainly have done a good job. Our bankers have done a good job of managing the private costs down that can certainly be helpful. Depending on what the competitive environment does to pricing pressures. We could do better there. So, all that said, I think I still feel pretty good about our range and hopefully we can get more towards the higher end of that range than lower.
Ken Zerbe - Morgan Stanley: With the range that you're referencing, is there anything – what would materially get you out of that range? Aside from – or is there anything aside from like materially higher interest rates, because it just seems a little bit – starting loan growth, little bit less or more something else, might kind of keep you in that range? I'm just wondering if there's anything where we could be surprised one way or the other aside from rates.
William C. Losch III - EVP and CFO: I'll give you three impacts that are always material and they were three that really impacted us in the first quarter, when you saw from fourth to first, we saw pretty material decline in margin. The first is fluctuation in balances from loans to mortgage companies. As those yields 450 to 475 and they can move around pretty materially from quarter-to-quarter. So they could have a pretty big impact up or down on net interest margin in any given quarter. The second is like you mentioned excess balances at the Fed, they can have a pretty material impact depending on the size of the excess in any given quarter on the margin. Third is our capital markets net interest margin. Now, we don't focus on that in that business that's a fee based business, but depending on whether or not we use the balance sheet to hedge our positions on the balance sheet or off the balance sheet can have a material impact and that's what we saw from fourth to first, it was pretty benign from first to second, but those three are probably the biggest that are going to move it around one way or the other.
Operator: Paul Miller, FBR.
Paul Miller - FBR: Can you talk a little bit about your C&I lending in your market. Have you seen any release over the last. We know short term rates haven't really moved, but on the competitive front, from some of the bigger players or even some of the smaller players?
D. Bryan Jordan - Chairman, President and CEO: I'll start, and then I'll ask Susan to go into detail. It's still an extraordinarily competitive environment out there. We're seeing still a lot of cautious activity from borrowers in terms of new investment. There might be just a marginal leaning towards a little bit more activity this quarter than there has. But it's still very competitive, so most of the opportunities or opportunities to win existing debt from competitors or so on and so forth but it is still a very, very competitive environment.
Susan L. Springfield - EVP, Commercial Banking and Chief Credit Officer: Paul, this is Susan. I would agree with Bryan. I think there was little bit more activity in the second quarter, some additional conversations with clients and prospects about potential growth but a lot of what we are seeing are opportunities to refinance debt (indiscernible) other banks. I think our bankers are doing a great job of staying focused, talking about the fact that we are a relationship bank oriented so that we get great asset quality maintenance as well as good pricing.
Paul Miller - FBR: Are you guys going after some of the multi-family stuff that's out there?
Susan L. Springfield - EVP, Commercial Banking and Chief Credit Officer: Yes. Paul, we all are seeing some good opportunities in multi-families typically stick within our footprint and surrounding areas as it relates to that. We've got some great commercial real estate clients and we are active in that market and we have done a very good job in the multi-family lending arena.
Paul Miller - FBR: And back to the C&I. My last question is have you seen any movement in the utilization rates are they still – are they I believe in the high 20s?
Susan L. Springfield - EVP, Commercial Banking and Chief Credit Officer: I guess, on the commercial side our utilization rates are 43% they've been roughly that same amount the last three quarters. In a more normalized environment you would see C&I commercial utilization in the 55% to 58% range.
Operator: Kevin Fitzsimmons, Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill: You all spent some time earlier talking about the asset sensitivity and you got your position well forward. Can you give a little color on what part of the curve the margin is most sensitive to? Specifically, do you need the short-term rates to move up to get the margin benefit or is there another part of the curve that you would benefit from as we look forward?
William C. Losch III - EVP and CFO: Primarily, the short end of the curve. If you think about our floating rate assets 67% of them are tied to LIBOR and it's virtually all of those are tied to one month LIBOR. So, we really need over time the short end of the curve to rise to really see the most positive impact to our asset sensitivity.
Kevin Fitzsimmons - Sandler O'Neill: Just a quick follow-up. I know you just recently had a failed bank acquisition and there hasn't been all that many of them in your footprint, but how has that process gone and what's your latest outlook on M&A opportunities in or around your current footprint, in terms of – do you get a sense there is more conversations activity or is there less willingness to sell out there?
D. Bryan Jordan - Chairman, President and CEO: The Mountain National transaction has gone very, very well today. We're very pleased with the progress that we've seen there. We've brought on our great group of folks. We acquired 12 branches there will be some consolidation opportunities for us, as we convert later in the year. The integration process is working well, lowering out our credit processes and credit standards and reengaging our lending efforts or their lending efforts in that market have gone very, very well. So, we're pleased with the progress we see there. We think the conversion for later this year is – the planning for that is going very, very well. This is in integration conversion process is not something that First Tennessee, First Horizon has done organizationally for a few years, so it's a great opportunity to test those processes, and do it in a way that we ensure that it positions us to do additional activity in the future. I don't know what happens in Tennessee in the short run. We run strings all the time and look at things. My guess is that we want to get very far down the path of getting Mountain National integrated and done right before we do anything else. But as I say, we think later this year, we'll have Mountain National converted and we'll see what unfolds between now and then. I don't sense, in terms of the overall M&A market, a significant pick up in conversations of any real significance that's here, anecdotes from time to time about what may be going on in the smaller institution market. But my sense is there is probably a whole lot today, it's a whole lot like it has been for the last 12 to 18 months. It's still fairly slow.
Operator: Emlen Harmon, Jefferies.
Emlen Harmon - Jefferies: Just on the expense progress in the quarter, you guys have kind of gotten to where you're hoping to be in terms of fourth quarter run rate. Could you give us a sense of just a reflection of your ability to get expenses sooner than expected or is this more a reflection of, as you said just kind of like ongoing expense controls and maybe finding a little bit more there than you thought initially?
William C. Losch III - EVP and CFO: I think it's a little bit of all of that. I think we started really focusing on this effort maybe three years ago and so it takes a while to really kind of get through the entire organization and not just identify efficiencies to build the culture around efficiency. So, I think, we've really started more towards the end of last year and on into this year really have started to see the fruits of those workings from the last two years. So, we've certainly seen – we identified efficiencies coming out and we are very pleased with that. But culturally it is showing us more and more better ways to deepenings which is giving us incremental expense reductions that we hadn't been claiming on. So, we are pleased with that and again we updated our guidance to say we now believe we are going to exceed our goal. As we’ve talked about in the past as revenues continue to be pressured we will manage to our bonefish and understand that there are things that we can control and things we can't. The ones we can control like expenses we will continue to work those down as effectively as we can without sacrificing revenue opportunity in the process.
D. Bryan Jordan - Chairman, President and CEO: This is Bryan. I want to sort of echo, BJ's last point. Cost control is important and as you said we have done a lot of work in that area, but growing revenue, supporting our customer activity, providing high levels of quality services is very, very important. And so reducing cost is not a strategy in and of itself it is a part of our strategy to improve profitability. BJ and his team had done a lot of great work over the last several years on it and continuing to disaggregate the organization, allowing us to continue to look at our organization in greater and greater levels of granularity, and when you do that you see more and more pockets of opportunity they may not be as big dollar wise, but you continue to see opportunity to improve profitability around products or regions, or the way we're doing this with that activity. So, as I said in my comments earlier, this is not so much a target driven process. It's process driven around driving long-term sustainable profitability, which set to take that you do things in a high-quality manner, but you are also doing as efficiently as you possibly can. So, I'm encouraged by the progress we've made to-date. I think BJ as well as our line of business leaders, our bankers, our folks all throughout the organization in support areas are doing a great job focusing on how we get more efficient, more profitable over the long-term.
Emlen Harmon - Jefferies: Then additionally just, your expectations for the pace of run-off and the non-strategic book changing at all is that kind of a mix of economic factors, I guess, to consider between improving home prices and at least in the near-term kind of rising rates. How are you thinking about just a pace, there is a pace at which that book comes down?
D. Bryan Jordan - Chairman, President and CEO: This is Bryan again. It hasn't changed an awful lot I guess in the last couple of quarters as CPR rate on the home equity portfolios picked up to about 20%, I think it's down about 18% year-over-year. I think there is some natural acceleration as rates pickup and that portfolio continues to age. The vast majority, if not all of it was originated five years or more ago. More of it gets into amortization phase. Now, it continues to run down. So, it may pick up a little bit, but there is nothing as we sit here today, that we think is going to cause us to pick up significantly or change significantly over the next several quarters.
Operator: Matthew Burnell, Wells Fargo Securities.
Matthew Burnell - Wells Fargo Securities: I guess I'm just curious as to whether or not, what was contributed to the downturn in the capital markets revenues aside from the market volatility was just your bank customers holding off and buying securities until they felt little bit more confident about where yields were going. If the tenure does continue to rise a little bit, does that potentially bode for pressure on capital markets revenues going forward? Or how sensitive is that revenue line to rising rates?
D. Bryan Jordan - Chairman, President and CEO: Movement in the rates is going to influence it in short-term. We think with stability and tenure rates or stability in the market, all of the fundamentals are still there for customer activity in terms of investing or reinvesting in their securities portfolio. So, we think rates sort of gapped up a little bit here, that created some stability. It did lead to lower activity in terms of customer buying. As I noted in my opening comments, we did have seen a little bit of pickup in the early part of the third quarter. The third quarter seasonally is a little more difficult. But we're overall reasonably optimistic about where we see those average daily revenues for the foreseeable future, I mentioned the 1 to 1.5 range. A lot of the impact in the second quarter was the impact of not only customer activity but as you see these moves the value relations on inventory and all that impacts the revenues and I will just report it on a net basis. So, I think, our folks out at FTN did a fantastic job managing through it. I think we are well positioned. I think we brought liquidity to customers that wanted to move securities during this period and in the market, in general, but I think we are extraordinarily well positioned for the next – for the cycle that we are about to go through.
Matthew Burnell - Wells Fargo Securities: Bryan, maybe a bigger picture question for you. Given your outlook for loan growth which still I think remains relatively muted and in line with a lot of other banks we've heard from this week and your better than expected Basel III ratios. Does that give you any greater level of confidence as you head into the capital planning process for '14, and if that's the case are buybacks any less attractive as your share price gets closer to 1.5 times book than they might have been at 1.1, 1.2?
D. Bryan Jordan - Chairman, President and CEO: I guess, in broad terms, as Susan pointed out, utilization rates are low. We think in some respect we put a lot of very high quality relationship activity on the balance sheet over the last several years it is going to lead to a lot of fundings when the economy picks up. We think we are going to be the beneficiary of an upturn in the economy that will allow us to use some of that capital. I was never quite as pessimistic on Basel III as the original proposal dictated, I felt like it would come back. So, I've never really thought about the full impact of Basel III impacting our capital strategy. As we said in the past, we look at capital in the context, what are our growth opportunities. Clearly, if we have opportunities to put the capital to work in the business that allow us to produce our bonefish type returns that is our first choice, whether that's organic or whether that's something like of Mountain National. Then to the extent, we have excess capital, buyback and dividend are important tools in our ability to return that. We are analytical about it too. We look at what price and so and so forth. But as we said here today, it's hard to think about any big differences about how all of this might impact 2014 and beyond.
Operator: Christopher Marinac, FIG Partners.
Christopher Marinac - FIG Partners: Just I wanted to ask about the increased income. Net interest income from higher rates whether it's 100 or 200 what are some of the – your thoughts about your ability to lag upon deposit pricing as well as sort of retention of deposits as the higher rates scenario plays out?
William C. Losch III - EVP and CFO: Generally speaking, I think the first maybe 50 basis points, 75 basis points move you will see very little movement in deposit rates in terms of historical proportional movements. As banks try to recapture some of the lost fee income and some of the lost net interest income that we've seen over the last couple years. After that it starts to get a little bit more interesting because in aggregate deposits are very valuable. So, it remains to be seeing what the competitive pressures will be. The other wildcard, I think, from my perspective is what happens to the money funds? The money funds have historically been a very strong competitor to deposits, and there is a lot of pressure on that side on this money fund. So, in the first move, the rising rate environment and I think they're going to be very competitive, and depending on what rules change there they may not be as competitive, as they might have been in the past. So, all of that to say is we're expecting some modestly better deposit rate lag than what we would historically see. But we're little bit more cautious on what competitive pressures are going to be over the long-term.
Christopher Marinac - FIG Partners: I guess your caution is more after the first (indiscernible)?
D. Bryan Jordan - Chairman, President and CEO: Yes.
Operator: Ryan Nash, Goldman Sachs.
Ryan Nash - Goldman Sachs: Just a follow-up on the rate sensitivity question. It seems like – it has come down a little bit over the past quarter or so. I just wanted to – given that a lot of your sensitivity comes from the C&I book, as well as the home equity portfolio, which is in run-off, or part of home equity of run-off. I guess what are you doing to maintain the level of sensitivity, whether it's reducing duration or is it adding floating rate securities to the securities portfolio. And then just to that, BJ, you talked about competition on the deposit side, but what are your underlying assumptions in terms of competition on the lending side, are you assuming that as rates rise, we see more competitive pressures laying on spread?
D. Bryan Jordan - Chairman, President and CEO: Maybe I will start with the last. As rates did start to rise we continue to believe there will be competitive pressures, but I don't think that they – we don't believe that they intensified. So, generally speaking, in rising rates we would expect on like assets to maintain the spreads that we have today on the asset side where we would see the benefit certainly is lagging on the deposit side.
Ryan Nash - Goldman Sachs: And then, Bryan, as a follow-up to one of the questions that we heard before regarding capital. Now that we know the final rules and they have come in more positive just in terms of both AOCI and lower mortgage risk rates. Does this at all change the way – the level of which you think you have to run that. We've talked as part of the bonefish at 8 to 9, but given that the capital volatility will probably be lower. Do you think this ends up pushing you closer to the lower end of that target relative to the higher end?
D. Bryan Jordan - Chairman, President and CEO: I don't know that I feel any differently about that range at this point. I think what's going to be important as you know $10 billion to $50 billion banks are going to start the stress testing process in the late part of this year on a formal basis with the OCC and the Fed. We will submit result in 2014. We will go through it again in 2015 and actually report the result as I think the way the rules are set up in 2015. We will learn a lot through this process this year but as we say here today I don't think I feel any different about the 8% to 9%. I think I would said if the rules came out with the 220 basis points, 240 basis points impact you would probably say given those high capital levels on some portfolios you might lean towards the lower end of the range. But I think at that point, we'll continue to be detected by our stress test. I think the 8% to 9% still a fair range to think about for a long-term capitalization of an organization, where the business makes it looks like ours.
Operator: Jon Arfstrom, RBC Capital Markets.
Jon Arfstrom - RBC Capital Markets: Just two quick ones here. BJ on the provision just the non-strategic being down and the regional bank being up, are either those shift permanent or is this just kind of quarterly nuances?
William C. Losch III - EVP and CFO: It's probably quarterly nuances. But generally speaking, we think that non-strategic continues to improve. Whether or not it's the magnitude of improvement that you saw first and second, that's probably a little bit big, it will probably normalize a little bit more. On the regional bank side, we're still seeing very good asset quality trends and metrics. But if you look back at our quarterly results there, we've actually had a provision credit in the regional banks through the last several quarters, and this time we moved to an actual provision. So, I think the charge-offs in the regional bank were somewhere in the $8 million to $9 million range, which is still a fantastic result. It's just dependent on what our reserving models tell us about individual portfolios and where we believe it's prudent to set those reserves.
Jon Arfstrom - RBC Capital Markets: Then Bryan just a quick one for you. You talked earlier about middle Tennessee and Southeast Tennessee being better. So, I'm guessing that Nashville, Chattanooga and Knoxville, but give us an update Memphis what's going on there? How you see the recovery progressing and a little bit on the outlook?
D. Bryan Jordan - Chairman, President and CEO: The Memphis, West Tennessee market continues to recover at a modest pace, unemployment is lately a little bit higher in this marketplace but it continues to recover nicely sort of in line with the U.S. recovery. I am very, very pleased with the work that I see our bankers doing here and across the (states) here in terms of winning customer relationships and growing in a market where we have a significant presence to begin with and I am encouraged how we are positioned here and as the West Tennessee, Memphis recovery continues to pick up pace I think we will do very, very well here.
Operator: Ladies and gentlemen, that is all the time we have for today. I'd now like to turn the conference back over to Mr. Bryan Jordan for any closing remarks.
D. Bryan Jordan - Chairman, President and CEO: Thank you, Alley. Thank you all for joining our call this morning. Please let us know if you have any additional questions or need additional information. Please remember our Investor Day in November. We'd love to have you join us. I hope you all have a great weekend. Thank you.
Operator: Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.