First Horizon Corporation (FHN) Q3 2015 Earnings Report, Transcript and Summary

Good day and welcome to the First Horizon National Corporation Third Quarter 2015 Earnings Conference Call and Webcast. 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. Please go ahead.

Thank you, Carrie. Please note that the earnings release, financial supplement and slide presentation we'll use in this call this morning are posted on 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 in our most 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.

Thanks Aarti. Good morning everyone and thank you all for joining us. I am very pleased with the results in the third quarter. I think we showed very good momentum. I am encouraged by the strong loan growth that we saw in our banking units especially in our specialty lending area when you look at year-to-year comparison then linked quarter comparisons and adjust for the movement in our mortgage warehouse business. We saw a very, very good trends. Susan is on the call with us and you’ll hear more about credit quality, about employees and the continued strength in our credit quality and our credit outlook for the remainder of this year and the transition into 2016. We’re pleased that in the first few days of October we completed the acquisition merger with TrustAtlantic. We have a conversion scheduled for this weekend and we expect to have everything wrapped up on Monday of this coming week. So we are excited about the progress we have made there. As we look out into the next several quarters it is pretty clear that the Fed has not moved rates at this point and we’ve come to expect that when the Fed does start moving whether it’s later this year or sometime next year, or maybe even 2017, that this rate cycle is going to have a much lower peak than we would have previously anticipated. And that’s going to put pressure on revenues not only for us but the industry in our view. And we look at this as an opportunity to capitalize on the work that we have been doing around one, controlling cost, and two, to continue to capitalize on the tools that we put in place around profitability. Economic profitability tools that allow us to analyze lines of business, relationships, and continue to drive value out of the existing business. We look at the rate environment is continuing to be challenging and probably going to be structurally lower for extended period of time which means that we and others will have to continue to look at how we do business and make adjustments in business models that really reflect a structural change in interest rates. As a result too we probably will reduce some of our asset sensitivity over the next several quarters. Not to take it out completely and probably not more than just a minor reduction but we’ll look at how we put additional fixed rate assets whether in the lending portfolios or securities portfolio to bring down some of that rate sensitivity. But we’ll stay focused on expenses as I just mentioned. Our goal for 2016 is to achieve efficiencies and continue to reinvest those in the business with an overall objective of keeping our expense base flat in 2016. We also expect to begin to reinvest in stock repurchases, distribute capital, shareholder repatriate capital shift to our shareholders through stock repurchases. Well, we are in the period of leading up to the completion of the TrustAtlantic merger. We were in position where we couldn’t buy any additional shares. With that wrapped up we expect to be back in the market opportunistically over the next several quarters and accumulate some additional stocks. So overall really pleased with the progress that we are seeing in the organization. Continue to be very pleased with the momentum in the company. I’ll turn it over to BJ now to walk through some of the financial goals. BJ?

Right, thanks Bryan, and good morning everybody. I’ll start on slide 6 which is a view of our consolidated results. You’ll see for the third quarter our net income available to common was 67 million or $0.29 a share compared to $0.22 a share in the second quarter. Our core performance as Bryan talked about was strong. We are very pleased with how our businesses are operating and we also had a few notable items that helped in the quarter as well. You’ll see that go on slide 4 pretax gain of about $8 million related to an amendment of our retiree medical plans. Pretax gain of 6 million from the retirement of one of our TruPS this quarter, and we have about 4 million, 4.5 million or so of discrete tax credits and capital loss carryovers that reduced our effective tax rate in the quarter as well. So just wanted to note those and make sure you were aware of those. Slide 7 shows an overview of our segment highlights and you can take a look at those. But let's go straight to some of the more detail on our core businesses in the next few slides. I’ll start with the regional bank on slide 8, linked quarter our net interest income in the bank was flat as growth in various specialty lending portfolios was offset by about $200 million decline in outstandings from our loans to mortgage companies portfolio. Non-interest income was down about 5% linked quarter as increases in deposit fees were offset by lower fees and brokerage and trust as market returns were obviously softer in the quarter. Expenses were in line with our expectations and decreased 6% linked quarter largely driven by an item related to the amendment of those employee benefit plans I talked about. But our expense discipline in the bank remained strong. Our loan loss provision in the bank decreased to 7 million from 17 million in the second quarter. You will remember that second quarters provision was higher driven by an increase in reserve for one single credit related to borrower fraud. Turning to regional banks balance sheet on slide 9, we are again pleased with the broad based growth we are seeing across all of our portfolios. In particular we are encouraged by our specialty lending areas since they are strong drivers of economic profitability. Overall average loans were up 11% year-over-year. Loans were flat linked quarter as continued strong specialty lending growth was offset by that decrease in loans to mortgage companies. From second quarter to third quarter we saw 4% average growth in both our asset based lending and corporate portfolios. The ABL growth was across a mix of industries such as consumer finance, commercial factoring, transportation, manufacturing, and distribution. Average commercial real estate loans grew 6% with increases across all markets and product types. Average commercial loan growth excluding loans to mortgage companies was up 2%. Meanwhile pricing and underwriting remained competitive. Our bankers are clearly managing to find plenty of opportunities to make economically profitable loans and pass on ones that don’t make as much sense for us. As we sit here today, our loan pipeline continues to look fairly stable. Our customer sentiment we believe is mixed across our geographies, some continue to feel very strong, some were a little bit more cautious. But we wouldn’t necessarily say negative. We are seeing good opportunities in growth markets such as Middle and Southeast Tennessee. But borrowers seemed to be a bit more cautious in Houston. Turning to FTN in the fixed income business on slide 10, our net income was about $4 million in the third quarter. Our average daily revenues reflecting continued [indiscernible] market conditions was about $671,000 a day compared to about $730,000 in the second quarter. Expenses were down as you would imagine primarily reflecting our variable comp. We see trading volumes continuing to remain modest but again we have done a good job of holding share and in some cases and in some desks gaining shares. We continue to invest in the business and are focused on increasing market shares through strategic hires primarily, our municipal product expansion, and developing our public finance capabilities. Turning to the total company balance sheet and margin trends on slide 11, net interest income was up 3% year-over-year and down modestly linked quarter. As expected our net interest margin declined to 2.85% from 2.92% in the second. The linked quarter decline was primarily driven by a reduction in loan fees and cash basis income which were elevated in the second quarter, as well as the continued effective non-strategic loans running off the balance sheet. The net interest margin in particular was further impacted by higher cash balances on our balance sheet. Average balances were roughly double in terms of excess cash as I have said relative to what we had in the second quarter. For 4Q 2015 we expect the margin to likely decline into the lower 2.70 range as we anticipate a meaningful buildup in cash balances which we typically see towards the end of the year which will have a sizeable impact on the margin. A reminder that while NIM may be pressured by the excess cash position, net interest income will largely be unaffected by the larger position in cash. We did expect though that NII should have some more modest downward pressure as further loan growth will be helpful but will likely be offset by seasonal declines in loans to mortgage companies, more modest loan fees at the end of the year, and continued challenges on holding loan yields steady. Liability side of the bank's balance sheet showed good performance as well. Key factor in improving economic profit is deposit gathering and average core deposits in the bank grew 16% year-over-year and about 1% linked quarter. And according to the most recent FDIC data we regained the number one position in deposit market share for the state of Tennessee growing faster than our footprint market. So we’re certainly proud of our bankers for doing that. Turning to asset quality on slide 12, linked quarter our allowance to loan losses declined to about 126 basis points and our NPAs declined 9%. Net charge offs increased from 9 million to 12 million in 3Q15 which includes an $8 million charge off related to borrower fraud. Overall however our credit trends continued to remain strong with consumer trends improving and commercial loan trends remaining stable. Wrapping up on slide 13 and 14, we feel great about the momentum of the core businesses. We have good loan growth in the bank and steady performance in the fixed income business. Our non-strategic portfolio continues to wind down and now stands at only 13% of our total loans outstanding. We’ll continue to focus on strong economically profitable loan growth, low cost core deposit gathering, controlling expenses and looking for ways to put more excess capital to work. Our Bonefish building blocks as you have seen before on slide 15 continued to show our path that we are following towards our long-term goals. With the prolonged low rate environment we will continue to focus on controlling what we can control. That’s improving our profitability with managing expenses tightly, profitably growing and investing in our extension markets, improving economic profit with existing books of business, and smartly deploying our excess capital. With that I will turn it back over to Bryan for some closing comments.

Thank you BJ, that’s nevertheless you just went through at the end is really a moment [ph] of the long view that we take in the organization in creating all time shareholder value. We do recognize that on a quarter-to-quarter basis particularly with businesses like FTN Financial and Mortgage Warehouse Lending we have a little more ebb and flow in revenue sources that can be hard to forecast. We are committed long-term that the Bonefish driving higher returns and improving profitability while controlling cost and most importantly continuing to focus on key and core customer relationships in building a high quality balance sheet and franchise for the long term. Thank you to the First Tennessee, First Horizon, FTN Financial folks that are on the call for all that you are doing to help us build the business and now Carrie with that we’ll open the call for questions please.

Thank you. [Operator Instructions]. Our first question comes from Steven Alexopoulos of J.P. Morgan. Please go ahead.

Hey good morning everyone.

Good morning Steve.

In terms of the commentary around reducing the level of asset sensitivity could you frame for us the actions that you are contemplating and maybe the timeline that you’ll move forward with those plans?

Well Steve, I didn’t probably do a very good job of dimensioning that out and we’re probably thinking somewhere between we are I think at about $77 million or high 11% 200 basis point move. We’d probably reduce that into the high single-digits probably the 9% to 10% range. And so I am not talking about significant shift but what we would look at doing is putting more fixed rate assets in either an absolute sense in our securities portfolio or fixed rate lending or we could use derivatives to take a portion of a floating rate assets and swap them to fixed but something of that nature which would put more duration in our balance sheet.

And is that something you expect to start near term Bryan or is it a 2016 plan?

I think we would probably get some signaling in the next week or two out of Fed statement, FOMC statement but our sense is it is probably something that’s going to start here in the fourth quarter.

Okay, got you. And then in terms of the ADR in the past higher levels of vol was a really strong driver of ADR, why is this not translating into stronger ADR today?

Well, BJ can add to this as well, part of the -- I think if you go back and you look at third quarter year-to-year-to-year third quarter is always slower and such. You have the seasonal effects of July and all of it which just tend to be a period of higher vacations and lower activity. I think the lower volatilities today or particularly September is much driven based on what the interest rate environment is going to be, what action FOMC is going to take or not take. I think there has been a lot of wait and see and the Fed statement that came out, interest rates came in, bond prices rallied and so I think that is driven contractions in activity. So all the volatility has been uncertainty and then sort of rallying rates.

Yes, I think another point I would mention is roughly 50% of our bucket depository institutions which are mostly buying agencies, MBS, maybe little bit of municipals and then total return which is more corporate, and corporate desk is doing pretty well. Right, so when volatility has been in the market it has mostly been there and so we have seen – we’ve seen some good days out of that desk. But on the bank side even with some of the moves in the 10 year bank clients are generally still staying pretty short. There is not a ton of buying so we have certainly held our shares as I have said on those desk and maybe even modestly grown it. But those products certainly hasn’t been as volatile as some of the others.

Okay, great. Thanks for taking my questions.

Thank you.

Our next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Great, thank you. Good morning.

Good morning Ken.

Bryan in your opening comments you mentioned that you wanted to keep the expense base flat in 2016 versus 2015 but your expenses plus or minus have been a little bit volatile. What -- is there a base number that you had in mind in terms of what you considered the flatness will be off of?

You are getting me to –pin the tail on the donkey, I will make BJ do that. I generally think about it in 8.50 range, BJ you may want to fine tune it from there.

So I think Bryan is right. I would also add about $8 million to $10 million for the TrustAtlantic expense base. So I kind of peg it at about 8.60. And I think to Bryan's point, depending on where FTN revenues go, if they are up it will be higher than this but I think staying largely in that 8.60 range next year is kind of what we are targeting which looks probably like anywhere from 2.10 to 2.20 of expenses a quarter depending on the ins and out of variable cost. So that is what we are targeting.

Perfect, okay, that helps. And then another question, just in terms of buybacks now that TrustAtlantic is done, Bryan you mentioned that you would be back in the market buying back share but how aggressive could you be and obviously from a common equity tier 1 ratio you are still well above your long-term targets for Bonefish, rates aren’t moving up anytime soon. Just wondering if this is going to be more of a drawn out process, or is this something if you’ll be a little more aggressive near-term with?

Well Ken we are always going to be opportunistic about it I guess is the best way to describe it. We are going to try to be smart in the way we pick our spots and in the way we repatriate capital. Clearly at lower price tangible book value it is an easier decision for us to be more aggressive than it is at higher prices to tangible book value. But we do think long-term we create value by getting excess capital back into our shareholders hands and at the same time doing it in ways that allow us to own more of our stocks. I wouldn’t describe it as overly aggressive but I wouldn’t describe it as overly passive. We have not done much for the last six months or so since the proxy was made on First Atlantic. But I think we will find opportunities in the fourth [quarter] [ph] to begin the repurchase program.

Our next question comes from Paul Miller of FBR Capital Markets. Please go ahead.

Hi, this is Jessica Ribner in for Paul, how are you? Just a quick question on the credit side and I know we’ve talked about this in the past but how do we think about your exposure to primary and secondary exposure to the markets affected by the energy, the downturn in energy and commodity prices?

Jessica, this is Susan. As you know we entered the Houston market just about a year and a half ago. So we came into that market at the time when not long as we entered the prices starting to get down. We have a very small direct energy portfolio at this time. So we are -- in terms of true energy direct portfolio, have very small exposure there. And actually see it as an opportunity to get in when prices are lower. In terms of other sort of indirect, we’ve actually got some benefit in some industries to lower fuel prices, energy prices, things like transportation where we do have some exposure through asset based lending in our core commercial portfolios. But it is something that we are continuing to watch and watching how it affects Houston overall not just energy specific sector. And our bankers in Houston are very focused on that and they have been through these sorts of energy cycles before.

Alright, great and then just one more on capital deployment. How do you think about pricing now in terms of M&A in your area? Is there -- are there still really great opportunities or how prices - are prices just a little bit too high?

I’ll start and BJ can put the fine points on it. I think M&A is very opportunistic and it is hard to generalize about pricing. As I’ve articulated in the past in a number of different settings we think MOE or lower premium type transactions where both sets of shareholders realize the benefits from synergy are very important. And typically those are larger type transactions and from our perspective focusing on transactions that really move the needle and allowing you to gain leverage on your cost and expense base and deal with some of the structural things that I talked about in my opening comments are probably most impactful. So it is hard to generalize about pricing specific. There are a number of transactions, smaller transactions that get printed. There was a couple this week in fact, but we look at it as most importantly what does it do for our franchise and how does it add to our franchise and how does that deployment of capital play out long-term versus alternative uses of that capital.

Alright, great, thank you so much.

Sure.

Our next question is from John Pancari of Evercore ISI. Please go ahead.

Yes, hi, this is Rahul Patil on behalf of John. Just a question on your loan yields, they were down 8 bits and you mentioned on the call earlier that there is a challenge to maintain loan yields at current levels. Can you discuss where any particularly markets that you are seeing an increased loan pricing competition and then just revenue loan yields are coming in and how that compares to your current portfolio even?

Sure, it is BJ. Actually I think from quarter-to-quarter they went down but year-over-year our loan yields are relatively flat maybe down a basis point. So I think our bankers are doing a pretty good job of trying to hold the line as best as they can but we’ve got two thirds of our portfolio that’s floating rate and so that’s staying pretty low and so we’re going to be subject to a lower yielding portfolio. So we think we are holding it pretty well but with that said pricing and competition out there for assets is highly competitive. I can’t be more proud of what our bankers have brought in. Look at our year-over-year loan growth in the banks. This is several quarters now where we have had double-digit year-over-year loan growth. So obviously we are doing something right, holding to the ropes and our net interest spread is holding up very well. So, I think Susan can maybe give you a little bit more color on maybe pockets of where we are seeing most of the challenge. But I would tell you if you I look relative to others, I am pretty proud of how our yields are holding up.

You gave that competition for loan yields I think like everyone does but our bankers as BJ said are doing a great job. And Bryan mentioned we have a long deal of our portfolio, we are building a high quality portfolio. We have continued to see positive rate migrations both in our high pass grades, mid pass grades and declining balances in low pass and non-pass. So in terms of building out better quality portfolio we really are focused on the total risk adjusted returns, not just the loan yields in the back but we see probably more pressure in what I would just call core commercial where you have more competitors from throughout the markets. You have got large banks, regional banks, as well as community banks. Specialty areas, it is a little bit easier to be -- have more discipline around pricing. There are fewer competitors. But that being said again our bankers are doing a great job of focusing on the long-term in that risk adjusted return profile.

Okay, and then how does that like now you mentioned about adding fixed rate just kind of reduced your asset sensitivity so should we expect some relief on the loan yields going forward now that you are going to be adding longer dated fixed rate loans?

Well, as Bryan talked about that will certainly help. But as Bryan talked about it is not like we are materially reducing our asset sensitivity profile. We are moderating it if you will. So, there will be some help. Clearly with what we are doing by reducing asset sensitivity is looking at the rate environment and saying we captured more near-term net interest income without jeopardizing or hurting our ability to materially grow net interest income when rates do rise further. So, you should see a benefit from our net interest income in aggregate from some of the asset sensitivity reduction moves we will make. But I would make sure that you compare those with what Bryan said at that beginning.

What I am going to add BJ just a point on interest rate sensitivity, I don’t want to be at the risk of being redundant and in an effort to be clear, we believe that interest rates ought to go up. We believe if the economy is strong enough then interest rates ought to be higher. But what we are talking about is adapting to sort of an interpretation of our view of a practical reality which is not likely to go up very far. If they go up then this can be measured. And so we think it is appropriate in that context of bringing that sensitivity down some. But we think rates ought to go up. So we are not talking about taking off our interest rates sensitivity or asset sensitivity leaning in the higher rates. We are saying we are going to pull it back a little bit to deal with the practical reality that the results and the yield curve that probably doesn’t reach above 1% to 1.5% in this cycle and so we are trying to adjust the balance sheet to deal with that.

Our next question comes from Emlen Harmon of Jeffries. Please go ahead.

Hey, good morning everyone.

Good morning Emlen.

Bryan just given your view on the potential for the less significant rate cycle, and you are potentially having a little bit of duration of the balance sheet, if that were to come to fruition do you start to think differently just about your longer-term ROTE of goals?

Well, I think that is a question that we continue to have to look at and we will be in the process of -- we are all continually in the process of looking at this target. It seems unlikely in the near-term that we are going to get into the 3.5% to 4% net interest margin range. And that really raises and I think it is going to be hard for the industry to push margins significantly and pressure on fee income, etc. And so I use the word structural earlier. I think there is a structural change going on in banking that is going to really result on in us thinking very, very differently over the next several years about how we drive profitability. And some of the tools that I referenced during the important part of that. But it is going to put additional pressure on cost structure and efficiency and delivery models and I think it is going to be complimentary with the trends that we are seeing in customer behaviors where customers are visiting branches whereas often they are using mobile banking, internet banking, ATMs, and another technology. All of those are going sort of work together to say that we and maybe the industry as a whole are going to have to have more pressure or focus on how we control cost as we do business to deal with the realities of interest rates. And revenue are not going to sort of be a panacea because rates move up very significantly in this rate cycle. So we think it really puts all of our business model as well as sort of our targeting on the table. But we are committed to driving higher returns. We still think that we can be 15% plus ROE business overtime and we’re committed to driving those returns.

Got it, thanks and then just a question on the loan growth, it looked like strong growth out of Middle Tennessee and East Tennessee just because I was curious if you had an update on trends and other geographies whether it is kind of Mid Atlantic or Texas?

In terms of Mid Atlantic we think growth in the commercial real estate group in Mid Atlantic see some growth there. We continue to hire some RMs in the Mid Atlantic region that focus on core commercial and so we are pleased with the outlook there. In terms of Texas as I mentioned earlier, we have booked business in Texas. We have got commercial, commercial real estate and energy. But we are growing cautiously in Texas watching the effect of energy on the Houston market. But our bankers do have that we’ve hired their great group, have long term relationships with key companies that have been in business for a long time. So we do see a good opportunity in the future for continued growth in Texas and Mid Atlantic.

I’ll add to Susan's comment as well. We feel good about our growth prospects all across the franchise and I will piggy back on the comments about Texas. Susan and a number of us were in Texas the other night meeting with a group of customers and advisory board members. And to a person we came away very, very impressed with the team that’s on the ground there. But the advisory board that they put in place, customers that we are building relationships with. Jessica asked earlier about exposure to energy lending, we think we are hitting that market in the right place and we’ve started to build good relationships with very high energy companies. And so that’s a micro cause of the example that, we think there are good opportunities for us to grow this core business in a measured and thoughtful fashion with high quality relationships and do it in a way that build the balance sheet that we are proud of for the long term.

Alright, thanks for taking my questions.

Our next question comes from Jefferson Harralson of KBW. Please go ahead.

Hey, thanks. I guess kind of a follow up on Emlen's question on the ROTE question. You guys talked about structural change and the possibility for structural change but yet you are guiding to flat expenses, are you thinking about, are you going to be making structural change by reinvesting those into producers or is it just structural changes going home more years down the road. Again how we are thinking about expenses given that the rate environment may stay low and you may have a slower timing getting to your ROTE targets?

Yes Jefferson, this is Bryan. We can give you a few examples; one, we are investing in people. We are hiring good people. I just talked about the build out and the team we’ve hired in Houston and we continue to hire in all of our markets Nashville, Middle Tennessee is another great example. And in this environment there is more -- there is not a lot of inflation. Labor costs have been trending up and we think that is sort of a reality of the business. So, we are investing in people, we are investing in technology that sort of gives to the new environment. We have got incremental investments going into the new and emerging technologies to replace some existing stuff and sort of take us through the next level. So, there is a little bit of a bridge and we think longer-term that will yield greater efficiency. We think overtime that in an effort to control the quality of CS have a smaller footprint in terms of absolute number of branches in the franchise and things of that nature. So it is sort of working both sides of the level. We don’t want to cut off momentum in the franchise but we want to be thoughtful about that control, cost controls for the long-term.

And Jefferson, this is BJ, I am going to just add a little bit more. We have got four major drivers. Our margins are in rise [ph] charge offs, our fee income of total revenue and our efficiency ratio. So, even though we think there is a lower rate environment we did think that over the next couple of years where all rate increases is just not as high as what we would have thought for the last several years. So, margins we believe on Bonefish is going to go up. We are going to grow loans, we are going to control deposit cost, our margins are going to expand. Our charge offs as far as the eye can see we think that the credit environment is benign. And looking at our balance sheet consumer and commercial we think the lower end of our current targets maybe even lower than our lower end of return targets are there. So from the risk adjusted margin basis we think that we continue to grow. Expenses as we talked about being flat in 2016 doesn’t mean that they are not levered, meaning over the next several years I want us to target anywhere from two to four times operating leverage, revenue growth over expense growth. That is going to help our efficiency ratio. So we have plenty of opportunities to do that. And the last driver of returns is on the denominator which is capital. And Bryan talked a lot about us being able to get back into the buyback arena. And we will look for opportunistic ways to do that. But we also think that we have got compelling opportunities overtime to put that capital to work via acquisition which will incrementally improve our ROAs on an acquired business and drive higher returns. So, we are constantly again looking at controlling what we can control. The drivers are shifting but we still feel confident that our path to getting to those types of returns that Bryan talked about are achievable for our business.

Okay, great, thanks a lot guys.

Our next question comes from Ebrahim Poonawala of Merrill Lynch. Please go ahead.

Good morning guys.

Good morning.

Just had one follow-up question, Bryan so I think just listening to your answers, if rates don’t really go meaningfully anywhere over the next year or two I think you and the rest of the industry are stuck in a tough spot. Going back to your comments around sort of looking at MOE [ph] do you see discussions increasing as you sort of looked through all banks are probably going through the budgeting process for next year and outside a big improvement in the macro they are going to be facing the same challenges that you are. I am just wondering what is the likelihood of lot of banks reaching that same conclusion over the next three to six months, maybe see a more meaningful pickup as you said low premium region activity which makes a lot of sense strategically?

You know I will speak for us, I won't presume to speak for the industry. But I think if rates don’t go up I think it is a tough revenue picture and in all likelihood that maybe true for the industry as well. I think from a rational or intuitive perspective I think that the -- if we are right in our thoughts about sort of a structural change I think that is the logical conclusion and I think people have to be thinking about how we see some consolidation. Because greater assets on your existing cost base and taking out efficiencies is the way to improve returns and to drive profitability. So I don’t know that the budgeting cycle drives that. I think there are always a number of drivers and management teams and boards. I’ll think about things very, very differently but I think if we are right about lower interest rates over an extended period of time and the cost structure that you need for investment in technology and changing a business models is right, you are likely to see an environment where there are greater opportunities for M&A. And my -- effective to hope or expectation is that it makes sense for the industry to think about how we do lower premium value accrued in transactions for shareholders over the next year or two.

That’s helpful and with just a quick one on credit BJ, you mentioned about provisioning impact this quarter, it looks like overall reserve release also picked up a little bit versus the prior quarter, like how much more room we have either from a dollar standpoint or the level ratio standpoint before we see any leveling off?

I think we got -- we look at this in detail every quarter as you might imagine. And so, things can change but the way that we’ve been seeing the performance of the portfolios overtime particularly our non-strategic portfolio where balances are running off, and credit is performing pretty well, we see continued reserve release overtime in our consumer portfolios in non-strategic. So we would expect that to continue. If you actually look at regional bank business, our reserve coverage has stayed largely steady and so we would expect that to continue and maybe even grow modestly as we continue to grow loans. But you should see a continued bias towards reserve releases due to the run off non-strategic portfolio.

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Good morning Jennifer.

Thank you, hi. Just curious on your perspective on the national economy. There was a New York Times article I think this week on the building been there. Bryan do you think it is starting to get over heated anyway or how do you feel about it?

It doesn’t feel like its overheating when you look at what's going on in national. There is a great deal of momentum. It is drawing people from all over the world. Tourism is fantastic. There is a lot of growth, there is a lot of corporate growth there. And then you find data points here and there about piece of real estate sold for a lot here and there. But it doesn’t on the whole feel like its overheating to us. We see Nashville being a very long-term sustainable driver of growth throughout the state in the middle part of Tennessee. I just have a pretty good win and its back right now and I think it is important for our business but it is also important for our state. So, we are not overly concerned about it at this point.

Okay, thank you very much.

Sure thing.

Our next question comes from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Good morning Kevin.

Good morning everyone. Bryan there has been a lot of questions this morning on asset sensitivity and the margin but I am going to throw a one more in there and it is just more to look at it from a bigger picture. You guys tend to always be listed as one of the top banks when people rank asset sensitivity and you always have that slide, that list of latent income in the asset sensitive balance sheet and have always dealt with questions by saying you want to keep that asset sensitivity for when rates rise. But now with where we’re if I am hearing your tone right here and coupled with the fact that you guys always talked about controlling what you are controlling, how much of that the margin disparity is really your control and your conscious choice on keeping that asset sensitive position because you guys thought rates are rising versus a more permanent just structural difference in your balance sheet. In other words if you wanted to couldn’t you really peel back the asset sensitivity more aggressively and get your margin closer to a peer margin. Because it seems like when you look at the Bonefish metrics that's the one that is the farthest off from where you want to be? And it seems like… well we are hearing both, they were hearing two things. We are hearing when rates rise there is going to definitely be that benefit but you are also acknowledging that maybe quite some time. So, just…

I will start and then I will let BJ sort of pick it up. It is probably a little more in our control. There is -- we believe that it is easier to manage a balance sheet that is asset sensitive or has asset sensitivity for a number of reasons. There is a decision to be more or less asset sensitive that we can manage fairly easily. I said a year or two ago we are in our sixth year of rates going up in two years and now we are in our seventh or eighth year of it. And in all likelihood we have concluded that they are just not going to, rates are just not going to go up as fast or as far as we think. So, we are likely as I said pull that sensitivity back. There is a benefit of pulling that back. As you said it does improve margins in the short run because you put on higher yields when you take more duration risk. You have less benefit that you capture when rates go up, so essentially you are just pulling that benefit forward. So, it is more manageable. I don’t think you would ever see us go away from a position where we are less than asset sensitive. We would always try to be asset sensitive. We would try to -- we will manage that up or down depending on where we are in terms of Fed funds at any one given point of time or interest rates at any one given point in time. But we do have some flexibility about how we manage it. It is not structural to the balance sheet.

And I would also add that we have strategically thought about which businesses we want to be in and which businesses we want to grow which leads us towards a more commercially oriented, more specialty lending oriented balance sheet that is going to in this environment be inherently more short-term floating rate based or indexed. And so that is going to probably relative to others in their business mix take 15 basis points or so off of our net interest margin just by the way that we have chosen to do business. Now the other thing that I think we talked about is net interest margins importantly that we also look at risk adjusted margin. And that takes you through the kind of the risk that we are taking. We have a very high quality portfolio consumer and commercially we believe. And quite frankly in today's benign credit environment, everybody looks good. And so, if credit stays good then yes, our risk adjusted margins are going to look modestly worse because of how we have positioned the balance sheet for our customer accommodation. But I have a high degree of confidence that when there is a credit crisis we perform much better. We do get more yields. Our risk adjusted margin gets a lot better relative to peers and we are very pleased that we kept the balance sheet as clean and as well priced as we have. So, there are certain trade-offs and like Bryan said we will take some of it off and we will see more near-term income. But it won't hurt us as much in the future.

Our next question comes from Geoffrey Elliott of Autonomous Research. Please go ahead.

Hello there, thanks for taking the question. But I wondered if you could discuss slide 14, can you walk through on how you got to the Bonefish ROTC and in particular the changes you made to that slide at one of the recent investor conferences?

Hey Geoffrey, it is BJ. I am sorry I missed the last part of your question.

Yes, so slide 14 which is the walk through from the current ROTC to the target Bonefish ROTC, you updated some of your moving parts at one of the conferences last month and I wondered if you could walk through, kind of talk us through how your thinking has been changing on the different components?

Yes, so Geoffrey this is Bryan. You are going to get me in trouble because you are saying I didn’t do a good job there. We’ll talk after this conference. Yes, so what we have tried to do is make this dynamic as we execute the uncertain things. So really what changed that you were seeing at Bryan's conference last month was we captured more efficiencies in our infrastructure which is that first block. We are capturing opportunities for growth in Houston, Middle Tennessee, Mid Atlantic, and other specialty lending businesses. So as we look at it relative to our current ROTC to where we are going over the next couple of years that shifts the opportunity for that block. We are improving economic profit. Bryan showed a slide I believe that showed our economic profit, 30% plus year-over-year. And so we are moving the needle on that. All of those things are controllable. The other three are less controllable and you’ll probably see as we update that top lock going down based on the conversation that we’ve had. But quite frankly I think that optimized redeployed capital goes up, kind of like what I was talking about before. What we can control we’ll try to control. So if rates aren't there that’s not a lever we can pull but we will work to deploy our capital in ways that will help us continue towards our target.

But I guess on the specifics of what has changed between this quarters presentation and the 2Q presentation, it looks like that optimized deployed capital component has come down from 1% to 2.5% benefit to 40 to 90 bits benefits. And then the fixed income benefits has gone from 1% to 2.5% down to 0.7 to 2.2. So I just wondered if there is anything that you have seen either intend your ability to deploy capital or in terms of the opportunity in that fixed income business that makes you think the opportunities is more?

Good question. Fixed income is going to -- that’s probably going to be the block that is used the most is based on what you see in the current environment and trying to project that out a couple years in terms of what we think we can make is very difficult. It is very hard to see past 90 to 180 days in that business. So I wouldn’t spend a ton of time honestly on the movement in that particular block but sounds like we got to do a better job of thinking about how to update this slide for you. So we’ll think through better ways to make it clear.

Our next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

Hi, good morning. Just to circle back or close the circle maybe on the transition to more of an asset neutral position or interest rate neutral position, looking at the duration of the securities portfolio this quarter came down, became more asset sensitive, the cash went out, how should we be looking at sort of the pacing of maybe looking at an extension of the securities portfolio duration or the pay down of cash whether that’s into more purchases or more buybacks over the next few quarters?

It is BJ. I think we got -- I think you should expect that our securities portfolio will get larger. So just buying additional securities will be one way that will dampen that sensitivity relatively quickly. The second is we’ve got about roughly $50 million of gains, so we can do things like on swaps. We could extend the duration that we are looking at which is all of the things that we are considering to dampen that sensitivity and bring more near-term income. So those are the what I call relatively easy ones. That ones that take a little bit more time are customer related fixed to float, to float to fixed swaps and those types of things as opportunities arise. We’ll start to do that overtime but they are supposed to that mentioned things that we are thinking about right now.

As you look at that excess cash over the next few quarters should we, are you thinking that that's more into buybacks or more into just getting the balance sheet a little bit bigger and maybe supplementing some more borrowings for buybacks?

So the excess cash we expect in the fourth quarter is really mostly related to what we normally see as seasonal build up at year end from commercial clients as well as other balance sheet positioning types things that we will do as we go through our outgo planning in the fourth quarter. So, some of it like I said will likely be deployed into incremental securities buying but even with that contemplated we still see a hefty build up in excess cash. I wouldn't necessarily tie it to buybacks. That’s not really what we are building the cash for but what is growing, so we will be looking at buybacks to execute as well.

And our last question comes from David Darst of Guggenheim Securities. Please go ahead.

Hey, good morning. So you are commenting on your regaining number one market share in Tennessee looking at the data the FDIC clause, most of that in Memphis but could you maybe kind of reallocate that across the state or other types of businesses where you met success in growing relationships?

Yes, I think David if you actually look back in the slide presentation you can see a breakdown by West Tennessee, Middle Tennessee, and East Tennessee. And so you can see where all good performance. Again page 18, thank you Susan, we are then we are focused on Middle Tennessee and growing that and so you can see that we out grew the market. I may have this wrong but its generally corrected. I think over the last four years we have outpaced the market in terms of growth. So we are pleased that we are gaining share there. Underneath East Tennessee I believe that [indiscernible] strong performer. We are seeing good solid growth as I talked about before. From an economic profits perspective we think deposit gathering is highly critical and so even though deposits aren't worth nearly as much they usually are, our bankers have done a good job understanding the impact of that and sort of capturing that has been a heavy focus in addition to the great loan growth that we’ve seen.

Okay and then I guess the magnitude of the growth and in dollars did occur at West Tennessee is that core relationships across the franchise or is that success in Memphis and West Tennessee market?

Yeah, no, thanks David, good point. We had back on slide 11 a bullet point that we really didn’t hit that we should highlight. We lose about half a billion dollars of corresponding banking clients balances from Fed funds versus purchase category to a commercial deposit category so that was about half a billion dollars of growth and that was all in West Tennessee. There was a little bit of build up from our insured network deposits that we used as they hold sale funding vehicles so that was part of it. But with that said we still saw a very solid growth in West Tennessee as well because of the emphasis that we have on economic profit and deposit gathering.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for any closing remarks.

Thank you Carrie. Again very pleased with the results we saw in the third quarter, pleased with the momentum that we see in the business, and you’ve heard from us a number of times today we are committed to driving long-term value in this franchise, doing it in a high quality way and see good momentum as we move into the fourth quarter and look at the opportunities. And there is a still a relatively difficult operating environment for financial services in 2016. Thank you for joining us this morning. If you have any follow-up questions or need additional information feel free to reach out to Aarti or any of us. I hope everyone has a great weekend and again, thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.