Jul 18, 2014
Executives
Aarti Bowman - IR Bryan Jordan - President and CEO BJ Losch - EVP and CFO Susan Springfield - Chief Credit Officer
Analysts
Steven Alexopoulos - JPMorgan Jefferson Harralson - KBW Ken Zerbe - Morgan Stanley Paul Miller - FBR Capital Markets John Pancari - Evercore Ebrahim Poonawalla - Bank of America Merrill Lynch Emlen Harmon - Jefferies Michael Rose - Raymond James Marty Mosby - Vining Sparks Matt Burnell - Wells Fargo Kevin Barker - Compass Point Geoffrey Elliott - Autonomous Kevin Reynolds - Wunderlich Securities
Operator
Good morning, and welcome to the First Horizon National Corporation Second Quarter Earnings Conference Call. All participants will be in listen-only mode.
(Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Aarti Bowman, Investor Relations.
Please go ahead.
Aarti Bowman
Thank you, Andrew. Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we'll use in the call this morning are posted in the Investor Relations section of our website at www.firsthorizon.com.
In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly reports.
Our forward-looking statements today reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call and is reconciled the 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.
Bryan Jordan
Thank you, Aarti. Good morning everyone and thank you joining our call.
Our second quarter results demonstrate that we’re making progress in building franchise value, improving economic profitability and resolving legacy issue. Our core business is showing solid performance and I'm encouraged by positive balance sheet trends.
I’m particularly pleased with loan growth in the bank in the second quarter. Year-over-year average asset price lending was up 14%, Mid-Atlantic increased 12% and Middle Tennessee loan growth was up 8%.
Commercial real estate grew at 19% driven by opportunities with new and existing customers. We’re also starting to make loan commitments in our newest market, such as Houston, Charleston and Jacksonville.
Our specialty lending businesses and entrances in the new market were centered on improving economic profitability. Our approach in the new market is to develop full customer relationships with discipline, underwriting and profitable risk adjusted returns.
We’ve developed a niche strategy by hiring experienced, talented local likeminded lenders to our focused own areas such as C&I, commercial real-estate and private client wealth management. We are not a building a traditional retail branch network in these markets.
We view this focused lender expansion approach as a prudent profitable way to deploy capital. FTN Financial, our capital markets business contributed significantly to our overall fee income and continued to be higher return business for us.
Due to market conditions we're still seeing lower average daily revenues in fixed income and anticipate this trend to continue over the next year or so. We are continuing to invest in our FTN Financial businesses, adding several experienced people to our public finance area in the second quarter.
As you know cutting costs and improving operating efficiency is a major focus for us as well as the overall industry. Consolidated expenses announced 7% year-over-year second quarter, excluding the settlement recovery.
We are streamlining processes using technology to become more efficient in right sizing occupancy and staffing levels. At the same time we are significantly investing for the future.
We’ve opened new offices, hired additional talent and upgraded systems and digital platforms. With our recently announced branch acquisition agreement, we will acquire new customers and gain deposits in Tennessee, more effectively leveraging our capabilities.
We will continue to finalize the lower cost, but as I have said previously we want efficiency to be a way of doing business everyday firmly ingrained in our culture rather setting up one-time expense targets. The wind down of the non-strategic segment is on track and as we continue to work to put legacy issues behind it.
Our non-strategic average loans declined 17% from last year’s second quarter and make up less than 19% of our loan portfolio. GSE put backs are largely behind us and we settled with FHFA in April taking another major step toward resolving legacy mortgage profit.
Asset quality continues to show stable trends. Year-over-year second quarter non-performing assets declined 21% and net charge-offs decreased 53%.
The reserve to loans ratio was 1.54% at the end of the second quarter 2014. I am pleased with our results over the first half of the year.
We’re rolling out economic profit data and tools to better help our employees improve profitability. We believe these efforts will ultimately help us achieve our long term bonefish targets.
I will now turn the call over to BJ for more financial details about the quarter. Then I will be back with some closing comments.
BJ?
BJ Losch
Thanks Bryan. Good morning everybody.
I will start on Slide 7 with our consolidated financial results. You will see net income available to common was $77 million or $0.32 share.
And as you’ll see in a minute the Regional Bank had a particularly great quarter and in addition consolidated earnings were favorably impacted by two significant items which you’ll see on the next slide. And if we look at that slide, Slide 8, first we booked a $47 million pre-tax litigation settlement recovery.
This is related to security product lawsuit involving the Sentinel group that we’ve settled, you might remember in 2011. Approximately $38 million of the insurance settlement was recorded as a contra expense in the litigation expense line and we also received about $9 million to cover legal costs which shows up as a contra item in legal and professional fees.
The other significant item was a favorable $8 million pre-tax adjustment related to the mark, primarily on non-performing loans in the held for sale portfolio. Not included on this slide, we also had various other items that had a negative impact of about $0.01.
Our effective tax rate in second quarter was 28%, which reflects forecasted taxable income for the year and includes the benefit of permanent tax credits. For the remainder of 2014, based on our current estimates, we would expect the effective tax rate to be in that same 28% range.
Turning to segment highlights on Slide 9, second quarter earnings were strong with particularly good performance in the bank’s fee income and net interest income from strong loan growth. Our core businesses contributed $70 million in net income available to common.
And I’ll go into the details of Regional Banking Capital Markets results in a few minutes. But let me briefly hit the non-strategic segment first.
Net income in that segment was $7 million, compared to $12 million in the first quarter. Recall that the first quarter included $20 million servicing gain and the second quarter included that $8 million valuation adjustment related to NPLs in the held for sale portfolio.
Loan loss provision in the second quarter was a $3 million credit reflecting lower loan balances in ongoing stable credit trends. Expenses in the non-strategic segment were relatively flat at $16 million in the second quarter, compared to $15 million in the first.
And again, we’ve had zero mortgage repurchase provision expense in the quarter. Starting with the Regional Bank trends on Slide 10, again the Regional Bank has delivered an especially strong quarter with net income of $47 million up 30% linked quarter and pre-tax pre-provision net revenue up 18%.
Net interest income increased 5%, driven by higher loan balances. Fee income was up 10% with growth in almost all key line items.
We saw 5% linked quarter increase in deposit transactions and brokerage fees. Trust fees grew 8%, while expenses held steady.
Loan loss provision in the bank was $8 million in the second quarter, compared to $13 million in the first with the decrease reflecting continued stability in credit trends. On slide 11, looking at more detail at the loan growth in the Regional Bank, you can see the broad-based strength across various businesses.
Linked quarter, our average loans were up 4%, our calling efforts and execution of our plans in our specialty lending areas and focus markets are paying off with commercial loans up 5% linked quarter. Loans to mortgage companies, one of our most economically profitable businesses were up significantly linked quarter, reflecting a seasonal rebound from first quarter’s lower levels.
Asset based lending was up 2%, primarily driven by new customer growth. CRE loans were up 11% linked quarter from growth in areas such as multi-family and office.
And growth areas in our markets included the key growth markets in Mid-Atlantic which was up 4%, and Middle Tennessee where loans increased 9%. We saw some consumer strength as well as our private client wealth management loans grew 2%.
We are successfully executing on our retail lending strategies with targeted lending to niche customers, the hiring of specialized lenders, and extended product offerings. We are still facing a highly competitive environment, but our bankers are staying disciplined on pricing and prudent underwriting to maintain profitability.
Net interest spread was up five basis points reflecting slightly higher loan yields from the increase in loan to the mortgage company and a lower deposit costs. We will continue to focus on specialty lending areas and expansion markets that have strong opportunities, higher returns, and better economic profitability.
Turning to our capital markets business on slide 12, pre-tax income was $50 million in the second quarter which included the $47 million expense credit I mentioned earlier. Linked quarter fixed income average daily revenues declined to $642,000.
ADR levels continue to be under pressure due to low rates, low volatility and uncertainty around monetary policy. The fixed income environment remains very muted given the low volatility, low growth, ranged down environment were experiencing.
We believe it’s likely that fixed income activity will continue to remain at lower levels for the next several quarters, most likely approximating the ADR ranges we’ve seen over the past few quarters. Keep in mind as shown on the upper right of Slide 12, our business model is unique and highly flexible in various market conditions.
As the revenue opportunity moves up or down, the highly variable expenses in the business move in tandem. This results in better, less volatile P&L performance relative to others in the industry who do not have the variable expense flexibility and breadth of relationships FTN does.
We are pleased with how the business is performing in this challenging environment. Turning to Slide 13, we look at consolidated balance sheet and margin trends.
On a linked quarter basis averaged total loans were up 2% while average total assets remained stable at about $24 billion, due to lower excess balances kept at the fed. Linked quarter consolidated net interest margin was up 9 basis points to 297.
The increase was primarily due to those lower amount of cash balances at the fed. Sitting here today, we expect second half 2014 net interest margin to be in the 290 to 295 range.
Our assumptions include rates staying in current levels or modestly rising, loan yields declining modestly, loans to mortgage company staying relatively stable to second quarter’s levels, new investments securities yields being flat to modestly accretive to current yields in the portfolio, and excess fed balances reaming below the levels that we saw in the first half of the year. Our balance sheet remains highly asset sensitive as you can see and at 200 basis point rate raise scenario, net interest income would increase roughly 10% and they add almost 30 basis points to the net interest margin.
Turing to expenses on Slide 14, you can see since second quarter of 2011 our run rate of consolidated annualized expense excluding the Sentinel litigation and GSE repurchase provisions has declined 25%. Linked quarter excluding this quarter’s litigation recovery, consolidated expenses declined another 4% with decreases in categories such as occupancy, operations; foreclosed real estate and FDIC expenses.
We’ve improved efficiency in our core businesses as well. In fact our regional bank efficiency ratio improved over 370 basis points for us first to second quarter to 62%.
As Bryan discussed earlier, while we’re always looking for ways to cut cost and become more efficient, we’re also continuing to heavily invest in our future. For example we’re continuing to upgrade systems and enhance our technology, invest in additional talent, products and markets.
Most importantly we’re absorbing these costs, yet still reducing overall expenses meaningfully. Our ongoing focus on expense control, along with our carefully targeted investment spending will enable us to ultimately achieve our bonefish efficiency goal.
As you can see in the bullet points we don’t believe we’ve run out of opportunities to gain more efficiencies and we believe we continue to have multiple leverage to pull on the expense side to lower the numerator of our efficiency ratio. Turning to Slide 15, asset quality trends remain very strong.
Linked quarter net charge-offs declined fully 8% to $9 million and our nonperforming assets declined 2%. And we’re seeing ongoing positive grade migration in our commercial portfolios.
In addition, we remain pleased with the discipline our bankers are demonstrating in a highly competitive environment and we’re comfortable with pricing instruction we’re putting on the books. In the non-strategic portfolio, loan balances are running off at a steady pace and credit trends have generally stabilized.
We also sold one TRUP loan that was on interest deferral and we’re actively monitoring our consumer portfolios for any performance issues related to home equity lines nearing the end of draw period, and we’re proactively reaching out to those borrowers early in the process. While second quarter likely reflect a bottoming out of net charge-off levels, we do expect continued stability in asset quality trends.
Wrapping up on Slide 16, our core business trends are solid and we’re particularly pleased with the regional banking results this quarter. FTN Financial’s flexible business model remains strong fee generating business that uses capital efficiently.
The bank’s specialty lending areas and expansion markets are driving profitable loan and relationship growth. We will continue to work on expense efficiency and our asset sensitivity will over time help our overall returns.
Lastly, our focus on economic profit continued to help guide our actions and focus areas to improve our return profile overtime. These actions are all aligned with our focus on achieving our bonefish targets.
Now, let’s turn it back over to Bryan.
Bryan Jordan
Thank you, BJ. Our core businesses have shown solid performance in the first half of the year.
We will continue achieve our key priorities, further strengthening our balance sheet, enhancing productivity, and winding down the nonstrategic businesses. With our focus on improving economic profit, we should make additional progress towards reaching our bonefish targets and further build our franchise value.
Finally, the hard work of our people and the celebration of 150th Anniversary across our footprint is generating positive customer momentum, contributing to the opening of more than 17,000 new checking accounts, reflecting 14% new growth year-to-date. Thank you to our First Horizon employees for all that you do to build our business and serve our customers each day.
Andrew with that, we’ll now take questions.
Operator
(Operator Instructions) First question comes from Steven Alexopoulos of JPMorgan. Please go ahead.
Steven Alexopoulos - JPMorgan
Maybe I’ll start just following up on BJ’s comments on ADR. Are you thinking like 650 to 800 BJ over the next few quarters?
BJ Losch
Hey, Steve. Yes.
It could be there. It could be a little bit lower.
It could be little bit higher, but probably in this range.
Steven Alexopoulos - JPMorgan
Okay. And I know, even though we focus on average daily revenue for the quarter that there is quite a bit of variability, actually each day.
When you guys analyze a 640, is this more a function of just not having as many 1 million plus days as you would typically need to bring up the average or is revenue you’re seeing just down across the quarter?
Bryan Jordan
Steve, this is Bryan. It’s a combination of both.
The summer in and of itself is very unpredictable. There is a lot of people that take vacations and that affects the sort of the way the days flow.
Mondays and Fridays are slower than Tuesdays and Wednesdays. We have very strong days and we have some days that are very soft.
And as BJ said, we expected to be in this range. July has been fairly slow to start.
It’s been around that $600,000 range, all just as I said is seasonally slow. So things can change, things can happen and interest rates, we get more volatility whether it’s statements by the fed around monetary policy or whether its world events.
Those things are going to drive the upside in the business. Right now though as we look at it, we just think it’s going to be seasonally slow for the remainder of this quarter and probably end of the fourth quarter.
BJ Losch
I’d also add Steve that I do think over the last couple of quarters our daily range has been tighter, that we haven’t seen as many million dollar days plus because of what Bryan talked about, the volatility. And the five year -- three and five year in particular being so range bound, there just hasn’t been a lot of opportunities for investment.
So we’ve seen that range tighten over the last couple of quarters.
Steven Alexopoulos - JPMorgan
Okay. Maybe if I could just ask a separate question on the loan growth.
C&I was really strong in the quarter. The HH showed a good April, then a bit of slowing in May and June.
Did you guys also see that step down and how are you thinking about momentum carrying into the third quarter here?
Susan Springfield
Steven this is Susan. I’ll take that question.
We actually had a strong quarter each month, in terms of loan growth and due to bank as well as some new commitments to existing customers. So we really didn’t see the slowdown in the second two months of the quarter.
We’re seeing businesses talk more to our bankers about expansion opportunity, but we are remaining obviously very disciplined as it relates to credit and pricing.
Bryan Jordan
Steve, this is Bryan. I’ll pick up on that.
Pipelines, we went in the quarter with pretty strong pipelines and we exited the quarter with pretty strong pipelines. I think our bankers are doing a really good job in their calling efforts and as Susan said, they are having a lot of conversations that have a positive turn with our customers.
And I also think that our bankers are being extraordinarily well disciplined in terms of the loans that we’re booking. They get within our risk appetite.
We’re monitoring request for exceptions and things of that nature. So we’re spending a lot of time making sure that we’re doing a good job executing in booking loan growth and that this is loan growth that adds value and economic profitability, as well as gives us a balance sheet that will perform consistently in up and down environments.
Steven Alexopoulos - JPMorgan
Bryan sorry, if I missed it but hasn’t line utilization changed in the quarter?
Bryan Jordan
Very small, less than a percent. It was up just marginally but less than a percent on the C&I side, not a whole lot of movement on the consumer side either.
Operator
The next question comes from Jefferson Harralson with KBW. Please go ahead.
Jefferson Harralson - KBW
I wanted to dig out on the mortgage warehouse business or loans to mortgage Company business a little bit, because the growth is so much greater than you're seeing in originations nationally. Can you just talk about that growth and what's driving it?
Are you adding new companies that you are lending to? Are you doing more jumbo or other things are expanding the business?
Can you just talk about what happened this quarter and what's going on there in the big picture?
Susan Springfield
Yes. Jefferson this is Susan.
I’ll answer that question. Related to the mortgage warehouse business, we did see strong purchases.
It was -- about 63% of the volume was purchase activity. The refinances continued to come down a little bit each quarter.
We have been very -- we’ve been in this business a long time and our clients, even while some of them are reducing lines with potentially other lenders, we’ve been able to maintain strong lines and strong relationships with our mortgage customers.
Jefferson Harralson - KBW
And is there a jumbo -- what is the jumbo component of these loans and mortgage companies? Is that a piece of what you are doing or is it just basically more business signaling great originations in the future?
Bryan Jordan
Jefferson, this is Bryan. We don’t -- most of the collateral that we lend against is conforming mortgages.
There is not a big component of jumbo. And I think the other factor that you are seeing in the performance in the second quarter is seasonally stronger particularly as you get into the selling and the moving season following the school years.
Some of it is a bit of a seasonal pickup. But we’re encouraged by the calling efforts there as well and as Susan said, we see good opportunities for us in that business.
And as we’ve noted in the past, it goes up and it will come down, which it did in the intervening 12 months between this June and last June. And so we accept a little bit more volatility but we like the business.
We think it’s a very strong and profitable power term business for us. So we’re encouraged as we go into the third quarter and we will see what happens over the remainder of the year.
Jefferson Harralson - KBW
My follow up, I want to ask about the -- one question on the bond business. We’re seeing good loan demand from the banks this quarter.
Is that a big thing that’s affecting your bond business? Is that your bank customers are just finding higher yielding assets to invest in so to speak?
Bryan Jordan
Certainly, it has been impacted. They’d much rather loan it out than put in the securities book.
So that is contributing probably to the continued moderation in what we are seeing ADR. But probably the broader and the larger issue is the lack of volatility in the markets.
Operator
The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.
Ken Zerbe - Morgan Stanley
Just a little bit on the mortgage warehouse line again. In the NIM guidance that you guys gave, I think you made a comment that you expect loans from mortgage companies to stay at the same levels.
But I just -- just looking at the chart on page 21, obviously second quarter is a very seasonally strong quarter. Are you saying -- do you think you can keep mortgage warehouse lines at 1.1 and is that reasonable given the seasonality in the business?
BJ Losch
It’s BJ. I think what I’d say is averages in this business can be misleading.
We started at a pretty low level at the beginning of the quarter and then we ended at probably the highest level at the end of the quarter. So the average was the average.
Now we are back down as we would expect so far this month. And so I think third quarter will be maybe modestly stronger, the same or modestly stronger as what we saw in the second quarter and fourth quarter is seasonally a little bit lower.
But again, you average all of that together. So the second half of the year we think it’s roughly in the range of what we saw in the second quarter.
Ken Zerbe - Morgan Stanley
But you’re speaking in terms of averages?
BJ Losch
I’m speaking in terms of averages right.
Ken Zerbe - Morgan Stanley
That helps. And then just in terms of capital markets business, can you talk about how much of the expense or what expenses are associated with the capital markets business?
Was that a driver of the lower expenses this quarter? Because I’m just trying to make sure that we match those up properly, because it didn’t seem the comp expense really materially reduced.
BJ Losch
Ken, I think expenses in capital markets were down proportionally with the revenue declines, probably down about $4 million or $5 million, ex the litigation revenue with revenues down a little bit more than that. So again they kind of come down in tandem with what we’re seeing on the revenue side.
Operator
The next question comes from Paul Miller of FBR Capital Markets. Please go ahead.
Paul Miller - FBR Capital Markets
Hey, guys. One of the, I think really positive surprises I saw is on your non-strategic portfolios.
The 30 day delinquencies dropped from roughly -- from 160 to 140 but your charge offs went from a 100 basis points to almost to 20 bps in one quarter. That is a huge move.
Can you talk a little bit about why these charge offs dropped so much?
Susan Springfield
Paul, I’ll take that question. We are actually seeing some really positive moving asset quality metrics in the non-strategic portfolio, including even customers that are in the draw period.
As we’ve discussed previously and BJ talked about today as well, we are reaching out to customers a lot sooner in the process, nine months ahead talking to them about the fact that their HELOC is near the end of draw. And we believe that this proactive strategy is contributing to that improved performance as these borrowers have more notice about the potential impact on their family budget.
In addition, home values stabilizing, people working hard to stay in their homes, keep their mortgages and home equities current. And so we believe it’s the combination of the work that we’re doing as well as stabilization in home value.
Paul Miller - FBR Capital Markets
And this might be a little bit more detail, you might want to get back to me but when these guys are -- when these HELOCs are ending their draw, what type -- they have to sell it amortizing the loan correctly. So do you know the average increase in the payments that they are coming down the line?
Or are you just modifying the loan itself?
Susan Springfield
Actually on average, if you go from just interest only to, and this is on a 10 year amortization, the payment shock is a little over 200%. However, we have analyzed our customers.
And many of our customers pay more than the minimum amount, even during the draw side and if you account for our customers that are making more than the minimum payment, the shock actually drops down about 150% rather than over the 200%. So those are some metrics and we can get you more detail later if you like.
Paul Miller - FBR Capital Markets
Yes, and if you have it, that’s fine, if you can call me back later. But what’s the average -- like on average I know averages are averages.
But 160%, is it going from like $400 to $800 or $200 bucks to $400 bucks? Like, what’s the overall average for your customer base?
Susan Springfield
Depending on the limits, it’s at $200 to $400.
Operator
The next question comes from John Pancari of Evercore. Please go ahead.
John Pancari - Evercore
Just on the deposit side, I want to see if you can give us a little color on the decline in the savings deposits during the quarter?
BJ Losch
Sorry John, can you say that again please?
John Pancari - Evercore
Yes, on the deposit side, it looks like your savings deposits declined on an end of period basis pretty materially. And just want to get some color behind that decline.
BJ Losch
Yes, I think that’s mostly where we keep, what we call it insured network deposits, which are contractual deposits that we have that we use primarily for corporate funding needs. So, it wasn’t core operating balances from customers.
It was more corporate balances.
John Pancari - Evercore
Okay.
Bryan Jordan
Wholesale funding as opposed to customer related activity.
John Pancari - Evercore
Okay. And then on the flip side, on the loan side, back to the C&I growth, I know you pointed to -- outside of mortgage warehouse, I know you pointed to the ABL business being strong.
But what really -- what other color can you give us on why the strong lift in the pace of growth here and the non-warehouse book, whether it’d be within ABL or outside of it. What really drove the uptick here this quarter, because it’s a pretty good lift?
Is it that a surge in calling efforts like you had referenced Bryan or is there another factor behind it when it comes to demand or something?
Susan Springfield
John, I can take that question. It was a combination of things.
First of all, we do have a strong calling effort across all our lines of business in all markets. Obviously, I do mention ABL was a strong contributor that’s been a great business for us for a number of years.
We’ve also, as we highlighted, in our markets where we have real upside opportunity, Middle Tennessee, Mid-Atlantic, we saw strong growth there. Part of that is again great work by our bankers, people that we’re hiring, that have great relationships within those communities with businesses.
It’s also a reflective of the -- Middle Tennessee has been stronger in that market in terms of business, new people coming in, job growth. The same can be said for the Raleigh area, Richmond area, where we have bankers on the ground and are really doing a good job.
We’re seeing growth across a number of different industries. So we continue to have a diversified portfolio.
Bryan Jordan
Those things that we’ve seen and we believe for a while is over the last several years, couple of years, in particular, we’ve put on a number of strong relationships, and some of when you see in the CRE line of business, where we knew these loans were going to fund up in the future. And you’re starting to see some of that activity fund up in addition to things that Susan mentioned.
John Pancari - Evercore
And if I can ask one more thing, on the capital markets business, are you still comfortable with that normalized 1 million to 1.5 million ADR range? And then lastly, at what ADR level is the business breakeven?
Bryan Jordan
I’ll take it John. Look, the range, at some point we think 1 million to 1.5 million might be a reasonable range long term.
But it’s pretty clear to us that we haven’t been in that range in the last five or six quarters. And as BJ and I reiterated earlier, we don’t think we’ll be in that range this year.
So, maybe you expand that range out to 600,000 to 1.5 million or 550,000; I don’t know what the right range is. And in fact you noticed we didn’t mentioned on the slide because our -- it just doesn’t seem to be relevant to predict it at this point.
And we think as BJ said, we’ll be in that 600,000 - 800,000 range, probably the remainder of this year. The breakeven in the businesses is bit lower than where we are.
You can see in the slide, I think it’s slide 11 or 12 that has the graphics about average daily revenue, we put expenses next to it so you can sort of see. We do start to see a little bit of compression with the revenue graphs.
The vast majority of our cost in the business are scalable and flow with revenues, but we do have fixed cost, in technology, terminal, things of that nature that do sooner or later push to a breakeven. But we think we are going to -- we are above that level, we’re going to stay above that level in all likelihood.
We will continue to look for strong profitability in the business.
Operator
The next question comes from Ebrahim Poonawalla with Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawalla - Bank of America Merrill Lynch
I have a quick follow-up question. BJ, I know you mentioned that the cap markets, ADR was relatively tight changed [ph] through the quarter.
Do we have the monthly progression in terms of was June better than April or May, or does it not really change?
BJ Losch
I think we didn’t see much change. I know others in the industry had talked about a stronger June.
We didn’t particularly see that. It was fairly consistent across all the months.
Ebrahim Poonawalla - Bank of America Merrill Lynch
And second question, just in terms of fee income, mortgage banking outside of the valuation adjustment was essentially $500,000 this quarter. Was there anything one-off this quarter, or is it sort of resetting at a very, very low run rate?
BJ Losch
Yes, I think there wasn’t anything outside of the ordinary other than the litigation cover.
Ebrahim Poonawalla - Bank of America Merrill Lynch
Okay so we should see, you expect it to stay around the 2Q run rate going forward or could it move higher?
Susan Springfield
Are you asking of mortgage rent banking run?
Ebrahim Poonawalla - Bank of America Merrill Lynch
Yes.
Susan Springfield
Yes. It’s at lower levels, just everything runs off, that also really becomes just breakeven business.
Ebrahim Poonawalla - Bank of America Merrill Lynch
Got it, and then last question, if I may. Is there any sense in terms of the timing around the HUD investigation?
I know you guys gave an update on the slide deck, but broadly, if you could give any sense of are we getting in -- how much closer we are today than we were back in April?
Bryan Jordan
Yes, this is Bryan. There is really not anything to add to what’s in the slide.
It’s a process. It’s just going to take some time.
We continue to work for it in terms of building our fact bases and our knowledgebase around the business and the discussion. And I think the same is true in terms of HUD and The Department of Justice and I can’t really put a calendar around it and basically the slide there describes all -- sort of the current relevant information on it.
Operator
The next question comes from Emlen Harmon of Jefferies. Please go ahead.
Emlen Harmon - Jefferies
Bryan, just to follow-up on the last one, is there an ongoing dialogue with the DoJ on that? Is it a back and forth or is it just kind of -- I know that obviously, there’s been an initial investigation.
Just kind of curious if, at least there is some progress -- seeming progress there?
Bryan Jordan
There is contact and I don’t know -- I wouldn’t describe it as dialogue. There is interaction, there is contact and from our perspective we have said -- they reviewed a subset of loans and want to re-underwrite it.
We gather facts around that interviewing people. They are sort of building their fact base I assume at the same time.
So, there is interaction, there is communication. I’m not sure when it will gain significant traction.
My hope is sooner rather than later but it’s a two-party process and we all have to be in a position to -- we all have to be in a position to begin to move things forward.
Emlen Harmon - Jefferies
I know you’re loathed to provide too much guidance on the expenses, but the annualized core expenses now at $850 million, it’s meaningfully below kind of the $900 million annualized you talked about last quarter. Just given the efficiency plans you’ve outlined, is it fair to say the expense rate drifts down on a core basis?
Or is there anything that would throw you off that trajectory? And I guess it’s fair to accept quick revenues from that conversation.
BJ Losch
I think it’s fair to say that the $850 million range, probably for this year. I would expect us to be in that range, clearly below the $900 million that we have laid out at the beginning of the year.
So I think that’s a good range for this year. But as I tried to talk about in my upfront remarks, we don’t think that we’re done.
We have multiple opportunities to continue to move the expense base lower over the next 18 to 24 months, let’s say. And we’ve put a couple of bullet points on Slide 14 about the key areas that certainly help us get us there.
So we’re certainly not done. As Bryan talked about, we’re not big fans of putting out goals in more.
We think sometimes they are helpful. But at this point I’m not sure what they are.
But you can be assured that we think we have some still meaningful expenses to take out.
Operator
The next question comes from Michael Rose of Raymond James. Please go ahead.
Michael Rose - Raymond James
Just wanted to get a sense on capital deployment from here and maybe how you think about potential M&A. You clearly got into some other markets, have had some pretty success thus far, but with your loan to deposit ratio closing in on 100%, how attractive might acquisitions be on a go forward basis, at least from a deposit point of view?
Thanks.
Bryan Jordan
This is Bryan. In terms of capital deployment, there is a slide towards the back and we continue to evaluate all areas of capital deployment.
From our perspective, to the extent that we do M&A we’re going to make sure that it makes sense and that it makes sense from an economic perspective as well as a footprint and a franchise perspective. Over the last couple of years, we thought we’ve had better opportunities to repurchase some common stock.
In I guess the quarter call of last year, we talked about suspending that effort until we got more clarity around the mortgage related issues and over that time -- and we also referenced the DFAST stress testing process. Remember that time we resolved Fannie Mae, Freddie Mac, FHFA.
We’ve resolved in addition Sentinel matter. We gone through the DFAST process and although we like everybody else in that process are not in a position and obligated not to disclose results, that fits into our continuous framework of providing stress testing information to our regulators and we’re pleased with the outcome and we think we’ve made a stronger process and we’ll continue to make that stronger management process.
With all that fit, we think we still are going to generate some excess capital. We think we have opportunities to deploy that in the business through loan growth in the vehicles, which you’ll see in the second quarter.
And in all likelihood, we’ll begin to consider buying back some stock in the third quarter again and evaluate opportunities as they come up. We’ve had two attractive M&A type opportunities in the last year or so with Mountain National acquisition in June 2013.
We got a pending branch acquisition with -- an agreement with Bank of America that should close later this year. So we will look at all those opportunities and we’ll evaluate whether we put it into the balance sheet, whether we put it into some type transaction or whether we continue to modestly buyback our stock when we have the opportunities.
Michael Rose - Raymond James
Okay that’s helpful and maybe just in terms of what you’re looking for in a deal, is it in market, is it out of market, is it one of the metrics, the financial metrics that you maybe look at or need to achieve to make it compelling for you? Thanks.
Bryan Jordan
Well, we look at it at a whole lot of different measures and ultimately it comes down to -- it has to meet our financial hurdles, which we can compare to using the business -- using the capital in the business or using the capital in a stock buyback. But we look at the fit into the franchise filling opportunities in end market in the state of Tennessee, help us.
They obviously have a lot more in terms of efficiency gain type opportunity. We also consider opportunities outside of Tennessee and Mid-Atlantic and areas such as that where we can fill in our existing major developing middle market type businesses there.
So we consider a lot of different things, but as in the past we continue to be very disciplined in the way that we approach it. We want to make sure that, one it fits from a strategic standpoint, and two that it makes sense from a financial standpoint.
And so we’re open minded but we’re going to be very, very disciplined in the way we approach the business.
Operator
The next question comes from Marty Mosby of Vining Sparks. Please go ahead.
Marty Mosby - Vining Sparks
I had two questions, two kind of thoughts that you maybe pushed past the actual surface numbers. But first off is I think the benefit of the unusual gain this quarter, about $50 million worth or little bit more actually helps -- if kind of think about allocating that to the potential losses or settlements that are still to come.
You kind of paid for some of those things in the sense of protecting your capital. So Bryan, I just thought -- was going to get your thoughts on that?
Bryan Jordan
Well, yes, I guess you’re right at -- those things do add to the capital base and they do provide capital flexibility for us. As you know from our discussions in the past, there is what you can estimate and what’s profitable and estimable what you record and what you don’t.
We’ve got very strong reserves still set up for the remaining portions of the GSE repurchases, but yes, clearly the settlement helped to strengthen our capital base as we moved through the second quarter.
Marty Mosby - Vining Sparks
And then BJ, I wanted to ask you about the page 14. When you are looking at the expense improvement over the last year, while the expenses were down significantly, $16 million on an annualized basis, if you really look at the components of that, about $52 million came from the revenues in FTN Financial coming down.
So their expenses are coming down, which doesn’t really create any net profit. Actually it is little bit of drain?
And then non-strategic, continued run off there as well as the expenses down by about $5 million. So out of the $60 million improvement, $57 million is really related to revenues running down.
If you look at the bank’s efficiency ratio over the last year, it’s actually tripled up about 0.5 percentage point. So I just wanted to kind of get a feel for how fundamentally there is going to be efficiency gains in the process.
BJ Losch
Sure. And I think your math is right and I’d love to see a higher expense base because of FTN revenues but the reality is that’s not where we’re at right now.
And I think them taking their expenses down as the revenue opportunity is not there is pretty good performance. And I imagine if you sell a full P&L with a fixed income business across the industry, I’m not sure you’d see the same trends as what you see at FTN.
But with that said, I think what we try to lay out on that same page is how we expect to take another meaningful chunk of expenses out of the organization over the next 18 to 24 months. If you think about non-strategic expense, think just about the legal cost, for instance that we continue to lay out.
Those are in the range of let’s say $40 million a year. If we ultimately get past the FHA investigation, which we will at some point, that number drops meaningfully and that drops right to the bottom line, and that will certainly be helpful.
And we’ve got a lot of other things -- you can see a few of them on this page -- that will meaningfully reduce cost in the core business over time as well while not sacrificing anything related to our revenue generation opportunity in the bank. So we’re pretty pleased with where we’re at right now and we think we can continue to take some meaningful cost out of the organization over the next year and a half to two years.
Bryan Jordan
This is Bryan. And to add to what BJ said, the other thing to keep in mind in that comparison is over that period of time, you are seeing although -- you might describe it as modest, we’ve covered a lot of additional investment, we’ve covered increases and costs of doing business, compensation increases.
We’ve covered investments in FTN Financial. We’ve opened in new offices in Jacksonville and Charleston and Houston.
We’ve covered the increased cost associated with regulatory compliance and things of that nature. So I’m pretty proud of what the organization is doing to control cost and to offset sort of the inherent up drift that naturally occurs in your cost base overtime.
So I wouldn’t overly minimize the amount of effort that goes in to see even a modest reduction in the banking and the overall operating cost outside of what BJ has talked about.
Operator
Matt Burnell - Wells Fargo
Just a larger picture strategic question perhaps Bryan, for you. You’ve mentioned your priorities in terms of M&A activity and how you look at it and all of that certainly makes sense.
I guess I’m just curious, given some of the weakness that you’ve seen in the capital markets business and some of the other transactions that we’ve seen other banks do within the capital market space, does it -- I know you’re thinking at this point to possibly try to broaden that business, the revenue side of that business with the potentially a strategic acquisition that wouldn’t necessarily have to be that big but could provide some benefits in the longer term for revenue growth.
Bryan Jordan
Yes, Matt absolutely and that’s something that we have thought about and continue to consider. I mentioned making investments in our municipal finance business in terms of hiring people.
That’s a prime example of an area where we had the right acquisition opportunity to help us build that business and expand that product set for our customer base. We would certainly look at those opportunities, absolutely.
Matt Burnell - Wells Fargo
And then just in terms of the offices or the lending that you are now doing in Florida, in Charleston and in Houston, how do you drive a relationship type of lending business similar to what you would do in your home markets, in areas where you’ve said you are not really focused too much on branch density or anything like that and how do you end up from not being sort of the -- for lack of a better phrase dump money in those markets? I appreciate -- you’re hiring local talent.
So I’m sure that goes a long way to help. But I guess maybe a question for Susan is how do you ensure asset quality in those portfolios once we start to see a turn in corporate credit quality?
Susan Springfield
I’ll take that question. As you hit the nail on the head with the talent, obviously that’s one key thing that we do and that is in-depth interviewing in the markets where we decide that we want to go in.
We hire long tenured bankers with great reputations. We go through a number of interviews.
Credit risk management, I’m involved in a number of the interviews. People on my team are.
Line and credit and executives involved in the hiring process. And we have hired some extremely talented bankers.
We’re glad they joined First Tennessee. In addition to that, both during the interview process as well as once they are on-board, we talk about our credit culture, we talk about our credit risk appetite.
We also have a robust government structure that relates to credit, portfolio limit by industry and within the tree line of business we have product limits within that. And so, we continue to operate within those limits, even with the addition of our new markets.
As it relates to relationships, they’re in less reliance today by commercial and corporate customers and consumers as well on a dense branch network. And so first of all hiring bankers that have established relationships, but also using technology with treasury management products, remote deposit capabilities and those kinds of things, we are able to bring on full service relationships in those markets.
So I believe that we’re doing a very good job there and we maintained our same credit discipline in those markets as we do in our core market.
BJ Losch
And I might just add as well, just as an example, if you think about our Mid-Atlantic market, where we have no branch presence, it is a calling effort as Bryan and Susan described, and we have about 30% deposit to loan ratio in that market, which certainly isn’t like a full service market, but that’s pretty strong I believe. And so that kind of goes to the point that Susan said that commercial customers by and large, more and more don’t necessarily need as full of a branch network.
Our treasury management capabilities are excellent. And we’re able to sell into those as well with the loan relationship over time and that bring us commercial deposits.
So we’ve carefully studied how we’re going to build full relationships, not just loan only and we’re pleased with what we’re seeing so far.
Operator
The next question comes from Kevin Barker of Compass Point. Please go ahead.
Kevin Barker - Compass Point
Given the reduced origination volume in the industry and we’re hearing of increased competition and lower spreads in the mortgage warehouse lines; now, your commercial loan yields only ticked up 1 basis points -- ticked down 1 basis point this quarter. Could you give us some color around where you’re seeing mortgage warehouse yields and the other commercial loan yields today?
BJ Losch
Yes, so it’s BJ. I’d say, the mortgage warehouse yields are in the 450 to 475 range.
And they stay fairly consistent in that range. There hasn’t been a lot of movement.
We haven’t materially tried to change our pricing structure to keep or gain business. So that’s been relatively steady.
I would say loan yields on the commercial side would be probably in the LIBOR 250 type range is by and large what we’re seeing in some businesses would be a little bit better, some businesses would be a little bit tighter. But that’s generally what we’re seeing come on the books.
Bryan Jordan
Kevin, this is Bryan. You alluded to competition.
There is not a lending area out there where there is an absence of competition. There is still a tremendous amount of competition for every deal, some areas much more than others, depending on the product set.
But all deals are competitive. And as a result, there is not a whole lot of upward pressure on spreads and as you can imagine, as a result most of the pressure is on contracting spreads.
And I am pleased with what our team is doing to sort of balance out that pressure in that competition and maintain spread. You may have heard us talk in the past about the work we do to compare across the footprint.
We gather some data from outside parties and try to synthesize what’s going on in our marketplace. And I think in terms of maintaining strong customer service and maintaining positive spreads, I think our bankers are really doing a fantastic job in an extraordinarily competitive environment.
Kevin Barker - Compass Point
And then one other thing, I actually saw the tax rate jump up to almost 20% this quarter. Was that primarily related to the litigation recoveries or the insurance recoveries?
Bryan Jordan
Yes.
Kevin Barker - Compass Point
And do you expect it come back down closer to 25% going forward?
Bryan Jordan
No, I think it will stay in this 28% range, which is what the effective tax rate is. So, the way we calculate that is every quarter we look at what our estimated pre-tax earnings are for the year as we factor in our permanent tax credits and we come up with a blended rate.
When you have a large positive like we had this quarter or a large negative, it will impact obviously what your pre-tax earnings are and therefore how you spread the effected tax rate over the rest of the year. So 28% is inclusive of the $47 million recovery and that’s what we see and what you could use for the third and fourth quarter.
Operator
The next question comes from Geoffrey Elliott of Autonomous. Please go ahead.
Geoffrey Elliott - Autonomous
You mentioned that you’d be contemplating resuming buybacks in the third quarter. What’s changed that makes buybacks attractive now when they weren’t so attractive before?
Bryan Jordan
You said buyback of preferreds?
Geoffrey Elliott - Autonomous
No, of common stock share repurchases.
Bryan Jordan
Yes, well, over the last two, two and half years, we’ve bought back a substantial portion of our common when we felt that the pricing was attractive and we had excess capital to invest in it. As I suggested earlier, we made a call last year, we wanted to see more clarity around resolution of several of the mortgage issues and we wanted to work our way through the first round of the stress testing process, given the significant work that our team has done in resolving mortgage related issues, the strength of capital base.
We just think that we have the opportunity to continue to invest small amounts of excess capital and stock repurchase over the second half of this year.
Operator
And due to time constraints the last question will come from Kevin Reynolds of Wunderlich Securities. Please go ahead.
Kevin Reynolds - Wunderlich Securities
Obviously most of the questions have been answered at this point, but I wanted to ask a question about two things; sort of rate expectations as we go forward what it means for your Company and then on the NIM side of things, but then also longer term what you think. I know you’ve said Bryan it’s difficult right now to predict ADRs in the fixed income business over the next several quarters.
But if we were to look out overtime and see a rising rate environment, whether that’s in ‘15 or ‘16 or beyond, when I look at Slide 13, I see that that you predict roughly $63 million of increased NII in an up 200 basis points environment and it seems like that number has been inching lower quarter-after-quarter here and I was wondering what’s happening to cause that to occur and would that possibly flatten out and maybe even go the other way over the next several quarters in terms of modeling and the second is in that rising rate environment down the line, do we actually think that we can get back to that $1 million to $1.5 million normalized ADR or will higher rates, if they tend to march higher put a constraint on trading activity in the bond business?
BJ Losch
Kevin, its BJ. Yes, I think probably last year is a high on our up 200, might have been in the low $70 million range.
So down to $63 million is a modest move towards less asset sensitivity and it’s really on the liability side and it’s really related to how we’re managing our wholesale deposits, not necessarily core deposits with customers. We would have thought last year that we would have some modest pockets of opportunity for fixed-rate lending, but there has been very, very little demand on that side.
We had said that we might just try to pursue those to modestly bring down our asset sensitivity in the near term. But those opportunities just have not been there with the extent that we thought.
So asset sensitivity remains very high we are comfortable with that and we think that will play well in the banking business over the long term. On the FTN side, I don’t think I’ve ever heard a fixed income salesman or trader hope for higher rates, but as I’ve talked to some of our folks they want something.
This low rate environment where it is with the three and five year in particular been so range bound, it offers very little opportunity for customers or obviously for our salesmen to make meaningful trades on behalf of our clients. So to some extent, I think rising rates would cause more volatility, which could cause a little bit more trading activity, which would be helpful.
Now in general, rising rate environment for fixed income is not strong, but I think there could be pockets of volatility, which would therefore help our ADR as rates did start to rise. So, we certainly put all of that in our asset sensitivity models as we look at it.
FTN is certainly included and net, net we still believe the firm is very positively positioned for rising rates.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Bryan Jordan, CEO for any closing remarks.
Bryan Jordan
Thank you, Andrew. We are pleased with our progress this quarter and look forward to maintaining the momentum in second half of 2014.
Thank you all for your interest in our Company and joining us on the call this morning. Please let any of us know if you have any additional questions or need additional information.
You all have a great Friday and a great weekend. Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.