Jul 19, 2013
Executives
Aarti Bowman D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association William C.
Losch - Chief Financial Officer, Executive Vice President, Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association Susan Springfield - Chief Credit Officer, Executive Vice President, Chief Credit Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association
Analysts
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division Nicholas Karzon - Crédit Suisse AG, Research Division John G.
Pancari - Evercore Partners Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Ken A. Zerbe - Morgan Stanley, Research Division Paul J.
Miller - FBR Capital Markets & Co., Research Division Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division Emlen B. Harmon - Jefferies & Company, Inc., Research Division Matthew H.
Burnell - Wells Fargo Securities, LLC, Research Division Christopher W. Marinac - FIG Partners, LLC, Research Division Ryan M.
Nash - Goldman Sachs Group Inc., Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the First Horizon National Corp.' s Second Quarter 2013 Earnings Conference Call.
[Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms.
Aarti Bowman, Head of Investor Relations. Please go ahead.
Aarti Bowman
Thanks, Allie. 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 reports.
Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and 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
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 nonstrategic segment's 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're not where we want to be yet, but with each quarter, we're getting closer. The economic environment is, of course, a factor in how quickly we reach our goals.
We've 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're increasingly well positioned to make the most of our region's opportunities. In late May, Fed comments sparked concerns that monetary tightening would occur sooner than had been expected, causing the 10-year treasury rates to jump and igniting fears about the effect of higher rates on the economy, businesses and the banking industry.
As 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 seemed 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 had 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're 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 in rates, which occurred in the latter part of the quarter. Through the first 2 months of the second quarter, fixed income average daily revenue was $1.05 million, in line with the past several quarters.
However, market factors experienced in the 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're aware, revenue headwinds have intensified cost-cutting efforts across the banking industry. We've been lowering costs for the past several years and have shown significant progress.
We're looking at all of our businesses. But the regional bank's improvement in 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 and productivity to be ingrained in our way of doing business.
Credit quality strength is also a priority for us. As anticipated, nonperforming 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 nonperforming.
Core asset quality trends, though, caused us to expect stable credit quality metrics in the second half of 2013. Our capital ratios remain strong.
The Basel III framework recently approved by regulators did not have a significant impact. The Tier 1 common ratio 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.
We're improving our cost structure, building our core businesses, broadening our customer base and continuing to wind down the nonstrategic businesses. I'll now turn it over to BJ to discuss our financials.
BJ?
William C. Losch
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 at $0.17.
Our total revenues declined 5% linked quarter. NII held up relatively well.
Regional bank revenues were up and fixed income and mortgage-related revenue accounted for all of the linked quarter decline due to the backup in rates in the latter 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 at $15 million as credit trends continue to remain solid. Moving to segment highlights on Slide 7.
Our core businesses continued to show solid performance. In the regional bank, net income was $43 million in the second quarter.
Pretax pre-provision net revenue was $80 million or 7% above first quarter in the bank. Linked quarter noninterest income grew 5%, driven by growth in deposit transactions, brokerage, management and trust fees, 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 million in the first, simply reflecting a continuing conservative view of reserving for the commercial loan portfolio. In our FTN business, 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, said commentary around tapering led to the 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 2 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 nonstrategic segment. I may never get to say this again, so I'm 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 a loss of $9 million in the first.
Revenue declined 17%, mainly driven by mortgage warehouse valuation adjustment 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 to just under $2 million in the second. The provision decrease there was a result of lower loan balances, improvement in the home equity portfolio from lower delinquencies, and a decline in charge-offs and improved recovery 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 relatively 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 contributor to net interest income.
As Bryan mentioned, the recent rise in rates have 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 remains solid with existing customers representing about 60% of the pipeline or so. Linked quarter uptick in fundings reflected a higher volume of loans leaving the pipeline in closing in the second quarter.
Moving on to 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 nonstrategic. Our average core deposits in aggregate was stable and 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 loan rates.
The recent rise in mortgage rates cost our unrealized gain to decrease from a positive $80 million in the first quarter to a positive $16 million in the second. Our investment portfolio strategy continues to be to buy securities with structure not stretched for yield, thus protecting us a bit more in shock scenarios.
Our net interest spread was stable, linked quarter, while loan yields decreased 3 basis points, deposit costs also declined 3 basis points, reflecting strong discipline around pricing across all of our businesses. And 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 a quarterly net interest margin in the range of 285 to 295 basis points by fourth quarter of 2013. Currently, our assumptions include rates staying -- macro rates staying at current levels or rising modestly over time, continued modest loan yield declines due to competitive pressures, loans to mortgage companies somewhat below current levels, limited buying opportunities with the securities portfolio, Fed 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-point increase would equal about a 6% increase in net interest income and a 200-basis-points rise would be about 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 in mortgage repurchase trends. GSE mortgage repurchase expense was 0 for the fourth consecutive quarter.
Linked quarter, the repurchase price line declined 9% to $235 million and our ending 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 requests from our first lien private securitizations.
And at this time, based on our private securitization origination mix, yield size agent [ph] performance, we continue to believe that losses on our private securitizations should be significantly less than our GSE experience. 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% or $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've seen continued benefits from our efficiency initiatives and they continue to show up in our numbers.
Year-over-year, the regional bank's efficiency ratio improved 500 basis points from 62% to -- excuse me, from 67% to 62%. We now expect to exceed our original 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-offs declined 32% linked quarter.
Linked quarter total loan loss reserves decreased $3 million to $262 million. As Bryan mentioned, nonperforming loans were up as a result of the implementation of regulatory guidance around first and second liens.
Since we do not service or own the majority of our first liens from the 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 senior liens in prior quarters.
We do not expect further significant impact on the NPLs or reserve from this regulatory guidance and 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 1 year ago would have had more of a 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 know anticipate only an incremental 50-basis-points 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 core ROA is 1.02%, and our core ROTCE at 11.8%.
Solid returns in our core operating businesses in 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
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 also.
We are executing on the 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 the 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
[Operator Instructions] Our first question comes from the Steven Alexopoulos of JPMorgan.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Bryan, I want to start, regarding the commentary in the 10-Q for potential update on HUD this quarter, is there anything you can share with us? I did see in the slides that you met with them during the quarter.
And any initial thoughts on potential for settlement here?
D. Bryan Jordan
Yes, there's an update in one of the slides on mortgage repurchase. If you'll remember, that's a matter that's been out there for about 1 year, that I think the HUD investigation or file request was about 1 year or so ago.
As you noted, we mentioned on that slide that we have had one meeting at this point. We have exchanged -- they 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.
I would -- my guess is, at this point, given the time that it's 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's going to take quite a while before we have any real information that is helpful in providing estimates around potential impact.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Okay, that's helpful. And I just had one other question on the buyback.
Why was it so light this quarter at $8 million? And then why step it up to $40 million and then accelerate it in 3Q?
Or 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
Yes. If you look at -- it's an accounting thing more than anything.
We bought back in the open market, $8 million shares. The shares and the capital came out, the prepaid repurchase.
We actually saw the capital come out but not the shares. It started in the middle of the quarter and it ran 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 into the third quarter.
So it's just a timing thing in terms of the way we account for it, but the capital's already been reduced.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
So we think of $40 million, is that a good quarterly run rate for buybacks?
D. Bryan Jordan
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 and organic growth.
We'll continue to evaluate transactions like Mountain National and things that are going on in the economy and otherwise. And we'll evaluate the opportunity to put capital back.
As in the past, to the extent we view -- to the extent we have excess capital, we view using the dividend and the buyback as a way to return that to shareholders.
Operator
Our next question comes from Nicholas Karzon of Credit Suisse.
Nicholas Karzon - Crédit Suisse AG, Research Division
I guess, first on that capital markets business. Just a couple of questions.
I think that capital markets expenses were down around $2 million quarter-over-quarter and trading revenues were down about $10 million. If we were to stay in this rate environment, are there additional costs that can come out of that business?
William C. Losch
Hey, it's BJ. That business out there is very efficient from a fixed cost versus variable.
I'd probably take it at 2/3 or more, variable versus fixed. So it does actually look disproportionate, if you will, the revenue versus the expense decline.
We did mention that there were some legal and professional fees 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 - Crédit Suisse AG, Research Division
Okay, that's helpful. And 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's changed kind of quarter-over-quarter?
William C. Losch
Yes. I think we had been running in the 70%, 75% refi range.
I think we are still positive, but it come down it's more in the 60% to -- the 60-40 range refi. And I think as we go out, we think that starts to continually shift more towards purchase volumes 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
Our next question comes from John Pancari of Evercore Partners.
John G. Pancari - Evercore Partners Inc., Research Division
Could you give us some additional color on the existing FHFA litigation? I know there's probably a limited amount you can say, being that it's ongoing.
But, I guess, can you just give us some update from the status, and maybe just help us think about the likelihood of a settlement there, or just how you can think about it?
William C. Losch
Hey, John, it's BJ. Yes, not too much new on the FHFA front.
Last quarter, you would've seen us put up a RPO in that and that had taken probably 12 to 18 months to get to that point. So it's a pretty slow and complex process, as you might imagine.
So there's -- unfortunately, I can't give you much of an update because there just isn't one at this point.
D. Bryan Jordan
John, this is Bryan. Keep in mind, this is a process where there are a number of people involved in this litigation that the litigation has been divided up into tranches and we're in one of the latter -- later tranches of litigation.
So right now, we're just in a bit of a holding pattern as this continues to unfold.
John G. Pancari - Evercore Partners Inc., Research Division
Okay, that's helpful. And then on the capital market side, can you give us a little bit more color on your confidence in that reiterated ADR range of $1 million to $1.5 million, particularly given the backup in rates here?
I mean, is there a risk that you're going to start to communicating a lower normalized range here?
William C. Losch
Hey, John, it's BJ. If you look at what happened, and again, as Bryan and I both kind of mentioned, April and May, we're over the $1 million a day threshold and then June just really tanked [ph] .
If you think about what happened and fixed-income businesses, there were multiple players trying to reduce loan inventory as quickly as they possibly could to avoid marks as rates continued 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 positions. But what we've seen in the last couple of weeks and 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 intraday, range of a 10-year over the quarter was something like 8 or 9 basis points. Whereas usually, historically over time, it's 1 or 2.
I mean, that is just massive dislocation, and it started to come back and start to normalize a little bit more in terms of intraday. So all of that leads 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, is certainly possible.
Operator
Our next question comes from Marty Mosby of Guggenheim.
Marty Mosby - Guggenheim Securities, LLC, Research Division
BJ, I wanted to ask a question. You went out of the way on Page 10 to say that no expected 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, 2 years before our short-term rates go up, that you would begin to reconsider that last bullet point and start accelerate the benefit of we could see a little more movement on the long end?
William C. Losch
Yes. We -- what we've got is we've naturally got some fixed rate lending in our nonstrategic portfolio that we are purposely letting run off, so we're not trying to retain a lot of that.
So what that's 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 on nonstrategic is running off, you're 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're well positioned, but we are taking advantage of pockets of opportunity to grow relationship-oriented lending 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
Marty, this is Bryan. We've -- as BJ described, we want to use our long-term interest rate exposure or positioning to do customer activity, to do customer business.
Fundamentally, we don't believe in putting the carry trade on just to generate short-term earnings. Taking interest rate risk is not where we think we create a lot of value for shareholders.
And 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 rates just to generate carry. And so when we do, as BJ described, we do it for customer-oriented activity.
Marty Mosby - Guggenheim Securities, LLC, Research Division
Got you. And that kind of transitions me, Bryan, to my follow-up question was, this is a kind of an inflection quarter.
BJ highlighted that the nonstrategic, 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.
A lot of the catalysts are things that happen like you kind of conditioned it long term. How does that timeframe accelerate, or how do you sort of see the earnings power beginning to improve as you're able to find more strategic opportunities?
D. Bryan Jordan
Yes, yes. I'm going to go back and look at the transcript to what BJ said to make sure.
I think he said he was going point it out because he might not get to it again. We're not looking at that nonstrategic segment as a profit center.
I think a lot of it had to do with the improvement in credit quality and credit trends and who knows how that plays out. But we think we've made significant progress there.
The nonstrategic portfolio was down about 18% year-over-year and we feel good about where we're positioned there, but we also want to see it run off and get that segment of our history behind us. We're 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 business in the state of Tennessee and beyond.
We're expanding our efforts in the mid-Atlantic region. Under John Fox's leadership, we're making progress there.
And our capital market, the FTN Financial business, is doing very, very well, we're 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've laid out to the bonefish.
Those high-teens of 20% range ROEs, and so we're taking a real disciplined approach about the balance sheet and how we deploy that capital to grow the business for sustainable long-term shareholder return.
Operator
Our next question comes from Ken Zerbe of Morgan Stanley.
Ken A. Zerbe - Morgan Stanley, Research Division
Just a question. In terms of your net interest margin, it's 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 mean, could -- I got the 2.85% to 2.95% margin guidance.
But I'm just wondering if this potentially could be an area where it might actually drive margin above your current guidance?
William C. Losch
Ken, it's BJ. There's not a lot more that you will see 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 if it happens, which means more customer deposit inflows that we can't find a short-term way to put to work.
So I'm not sure if you're going to see a lot there, but I did, in my opening comments, give you some of the assumptions that I had around the outlook. And you'll generally see that they're pretty realistic, maybe more towards the cautious side.
So if we see a little bit more loan growth, that could certainly help. We certainly have done a good job.
Our bankers have done a good job of managing deposit cost down, that can certainly be helpful. And 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 the lower.
Ken A. Zerbe - Morgan Stanley, Research Division
And with the range that you're referencing, I mean, is there anything -- what would materially get you out of that range? I mean, aside from -- or is there anything, aside from materially higher interest rates?
Because it just seems a little bit starting [ph] loan growth, a 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
Well, two -- I'll give you three impacts that are always material and they were three that really impacted us in the first quarter when we saw from fourth to first, we saw pretty material declines in margin. The first is fluctuation in balances from loans to mortgage companies.
Those yields, 4.50% to 4.75%, and they can move around pretty materially from quarter to quarter. And so they could have a pretty big impact up or down on a net interest margin in any given quarter.
The second is, like you've 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. And the 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 position 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 3 are probably the biggest that are going to move it around one way or the other.
Operator
Our next question comes from Paul Miller of FBR.
Paul J. Miller - FBR Capital Markets & Co., Research Division
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 a competitive front, from some of the bigger players or even some of the smaller players?
D. Bryan Jordan
Paul, this is Bryan. 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 in this quarter than there has been, but it's still very competitive. And so most of the opportunities are more opportunities to win existing debt from competitors or so on and so forth, but it's still a very, very competitive environment.
Susan Springfield
Paul, this is Susan. I would agree with Bryan.
I think a little bit more activity in the second quarter, some additional conversations with clients and prospects about potential income [ph] growth that a lot of what we're seeing are opportunities to refinance debt away from other banks. I think our bankers are doing a great job of staying focused, talking about the fact that we're a relationship bank oriented so that we get both a great asset quality maintenance, as well as good pricing.
Paul J. Miller - FBR Capital Markets & Co., Research Division
And are you guys going after some of the multifamily stuff that's out there?
Susan Springfield
Yes, Paul, we are. We're seeing some good opportunities in multifamily.
We typically stick within our footprint in surrounding areas as it relates to that. We've got some great commercial real estate clients who are active in that market and we've done a very good job in the multifamily lending arena.
Paul J. Miller - FBR Capital Markets & Co., Research Division
And back to the C&I, my last question is, are you seeing any movement in the utilization rates? Are they still, I believe, in the high 20s?
Susan Springfield
Actually, on the commercial side, our utilization rates are 43%. They've been roughly that same amount the last 3 quarters.
In a more normalized environment, you would see C&I commercial utilization in the 55% to 58% range.
Operator
Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
You all spent some time earlier talking about the asset sensitivity and that you're positioned well for it. 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
Kevin, it's BJ. Primarily, the short end of the curve, I mean, if you think about our floating rate assets, 67% of them are tied to LIBOR and it's -- virtually, all of those were tied to 1-month LIBOR.
So we really need, over time, the short end of the curve to rise, to really see that most positive impact to our asset sensitivity.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
Okay. 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's more conversations activity, or is there less willingness to sell out there?
D. Bryan Jordan
Kevin, this is Bryan. The Mountain National transaction has gone very, very well to date.
We're very pleased with the progress that we're seeing there. We've brought on a great group of folks.
We acquired 12 branches of recent consolidation opportunities for us as we convert later in the year. The integration process is working well, rolling out our credit processes and credit standards and re-engaging 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. It's 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 said, 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. I hear anecdotes from time to time about what may be going on in the smaller institution market.
But my sense is, there's 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
Our next question comes from Emlen Harmon of Jefferies.
Emlen B. Harmon - Jefferies & Company, Inc., Research Division
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. And 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, I'll just say, just kind of ongoing expense controls, and maybe finding a little bit more there than you thought initially?
William C. Losch
It's BJ. I think it's a little bit of all of that.
I think we started really focusing on these efforts maybe 3 years ago. And so it takes a while to really kind of get through the entire organization and not just identify efficiencies that build the culture around efficiency.
And so I think we've really started more towards the end of last year and on into this year, it really has started to see the fruits of those working from the last 2 years. So we've certainly seen the identified efficiencies coming out, and we're very pleased with that.
But culturally, it's showing us more and more better ways to do things, which is giving us incremental expense reductions that we hadn't been planning on. So we're pleased with that.
And again, we updated our guidance to say, we now believe we're going to exceed our goal. And 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 that we can control like the expenses, we'll continue to work those down as effectively as we can without sacrificing revenue opportunity in the process.
D. Bryan Jordan
Emlen, this is Bryan. I want to sort of echo BJ's last point.
Cost control is important. And as you've said, we've done a lot of work in that area.
But growing revenues, 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 have done a lot of great work over the last several years on it, but we're -- 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. And so as I said in my comments earlier, this is not so much a target-driven process.
It's a process driven around driving long term, sustainable profitability, which necessitates that you do things in a high-quality manner, but you're also doing as efficiently as you possibly can. And 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 and the support areas are doing a great job focusing on how we get more efficient and more profitable over the long term.
Emlen B. Harmon - Jefferies & Company, Inc., Research Division
Got it. Okay.
And then additionally, are your expectations for the pace of runoff in the nonstrategic book changing at all? Is that kind of a mix of economic factors, I guess, to consider between improving home prices at least in the near-term, kind of, rising rates.
How are you thinking about just the pace with that book comes down?
D. Bryan Jordan
This is Bryan again. It hasn't changed an awful lot.
I guess in the last couple of quarters, the CPR rate on the home equity portfolio has picked up to about 20%. I think it's down, nonstrategic is down to about 18% year-over-year.
I think there's some natural acceleration as rates pick up and as that portfolio continues to age, the vast majority, if not all of it, was originated 5 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's 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
Our next question comes from Matt Burnell of Wells Fargo.
Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division
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 a little more -- little bit more confident about where yields were going. And if the 10-year does continue to rise a little bit, does that potentially bode for pressure on capital markets revenues going forward?
How sensitive is that revenue line to rising rates?
D. Bryan Jordan
Matt, this is Bryan. Movement in the rates is going to influence it in short-term lenders.
We think with stability and 10-year 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 instability.
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 in 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 valuations on inventory and all of that impacts the revenues and all of it gets reported in a net basis. So I think our folks out at FTN did a fantastic job managing through it.
I think we're well positioned. I think we brought good liquidity, the customers that wanted to move securities during this period and the market in general.
And I think we're extraordinarily well positioned for the next -- for the cycle that we're about to go through.
Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division
Bryan, maybe a bigger picture question for you. Given your outlook for loan growth, which still, I think remains relatively muted 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 1.5x book than they might have been at 1.1, 1.2?
D. Bryan Jordan
Well, I guess in broader terms, as Susan pointed out, utilization rates are low. We think in some respects, we've put a lot of very high-quality relationship activity on the balance sheet over the last several years that's going to lead to a lot of fundings when the economy picks up.
We think we're going to be the beneficiary of an upturn in the economy. That will allow us to use some of that capital.
And I was never quite as pessimistic on Basel III as the original proposal dictated. I felt like it would come back.
So I never really thought about the full impact to Basel III and impact in 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 work -- the capital to work in the business that allow us to produce our bonefish-type returns, that is our first choice, whether it's organic or whether that's something like a Mountain National. Then to the extent we have excess capital, buyback and dividend are important tools in our ability to return that.
We're analytical about it too. We look at what price and so on and so forth.
But as we sit here today, it's hard to think about any big differences about how all of these might impact 2014 and beyond.
Operator
Our next question comes from Christopher Marinac of FIG partners.
Christopher W. Marinac - FIG Partners, LLC, Research Division
Bryan and BJ, I just want to ask about the increased income from higher rates, whether it's 100 or 200. What are some of these -- your thoughts about the ability to lag upon deposit pricing, as well as sort of retention of deposits as the higher-rate scenario plays out?
William C. Losch
Yes, good question. Generally speaking, I think the first, maybe 50, 75 basis points have moved, you'll 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 of years.
After that, it starts to get a little bit more interesting because in aggregate, deposits are very, very valuable. So it remains to be seen 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's a lot of pressure on that side, on this money fund. So in the first moves of a rising rate environment, I don't 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 not -- we're a little bit more cautious on what competitive pressures are going to be over the long term.
Christopher W. Marinac - FIG Partners, LLC, Research Division
And I guess it cautions more after the first 75, to your point?
William C. Losch
Yes.
Operator
Our next question comes from Ryan Nash of Goldman Sachs.
Ryan M. Nash - Goldman Sachs Group Inc., Research Division
Just a follow up on the rate-sensitivity question. It seems like it has come down a little bit over the past quarter.
So I just wanted to ask, given that a lot of your sensitivity comes from the C&I book, as well as the home equity portfolio, which is in runoff or parts of that equity 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 in addition 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 weighing on spreads?
William C. Losch
Good question. Maybe I'll start with the last.
As rates do 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 had 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 would see the benefits, certainly, is lagging on the deposit side.
Ryan M. Nash - Goldman Sachs Group Inc., Research Division
Got it. And then just, 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 it all change the way the level of which you think you have to run at? I know you'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
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, the $10 billion to $50 billion banks are going to start the strip testing process in the late part of this year and on a formal basis with the OTC and the Fed will submit results in 2014.
We'll go through it again in 2015 and actually report the results, and I think the way the rules are set up in 2015, we'll learn a lot through this process this year. But as we sit here today, I don't feel any -- I don't think I feel any different about the 8% to 9%.
I think I would've said, if the rules came out, whether 220, 240-basis point impact, you'd probably say, given those high capital levels of some of the portfolios, you might lean towards the lower end of the range. But I think at this point, we'll continue to be dictated by our stress test.
I think 8% to 9% is still a fair range to think about our long-term capitalization of an organization with a business mix that looks like ours.
Operator
Our next question comes from the Jon Arfstrom of RBC Capital Markets.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Just 2 quick ones here. BJ, on the provision, just for nonstrategic being down and the regional bank being up, are either those shifts permanent, or is this just kind of quarterly nuances?
William C. Losch
It's probably quarterly nuances. But generally speaking, we think that nonstrategic continues to improve.
Whether or not it's the magnitude of improvement that you saw first to 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 in 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 G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. And 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, Knoxville.
But give us an update on Memphis. What's going on there?
How you see the recovery progressing, and a little bit on the outlook.
D. Bryan Jordan
Yes, the Memphis, West Tennessee market continues to recover at a modest pace. It's -- unemployment is latently 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 are doing here and across the state.
But here, in terms of winning customer relationships and growing in a market where we have a significant presence to begin with. And I'm encouraged how we're positioned here.
And as the West Tennessee, Memphis recovery continues to pick up pace, I think we'll 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
Thank you, Allie. Thank you, all, for joining our call this morning.
Please let us know if you have any additional questions and need additional information. Please remember our investor day in November, we'd love to have you join us.
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.