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First Horizon National (NYSE:FHN)
Q3 2018 Earnings Conference Call
Oct. 16, 2018 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator 

Good morning and welcome to the First Horizon National Corp. third-quarter 2018 earnings conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Aarti Bowman of investor relations.

Please go ahead.

Aarti Bowman -- Investor Relations

Thank you, Cole. Please note that the earnings release, financial supplement, and slide presentation we'll use in this call 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 materials and our most recent annual and quarterly report.

Our forward-looking statements reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings 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.

Bryan Jordan -- Chief Executive Officer

Thank you, Aarti. Good morning, everyone, and thank you for joining us. I'm pleased with our third-quarter results. We delivered strong returns and improved efficiency.

We demonstrated positive operating leverage with solid earnings, continued cost saves, and excellent credit trends. We showed growth in our specialty areas and in our new markets and we effectively deployed capital. Our returns continue to be strong. Adjusted ROTCE was about 18% and adjusted ROA was at 1.21%.

We're on track with our merger-related cost saves and our adjusted efficiency ratio is at 64% in the third quarter of 2018, and we expect it to continue to trend down as we realize additional efficiencies. We strengthened our capital ratios with the sale of our Visa B shares. Our tangible book value per share increased from net income as well as from the gain on the sale of the Visa shares to $8.58. Loan and deposit growth were steady.

We had good pipelines and we're expecting continued commitments to fund up over the remainder of the year. It's important to note, in our slides, you'll see that we did some repositioning in the balance sheet and reduced outstanding low spread, low value of single-product relationships by over $350 million in the quarter. We're seeing good momentum from our specialty areas, and I'm encouraged by the trends in our new markets and in the Mid-Atlantic -- excuse me, the new markets in the Mid-Atlantic and South Florida. We're focused on capitalizing on the organic growth opportunities in our new markets that have strong economies and attractive demographics.

We see very good opportunities there. We do have a good platform to serve our customers that is differentiated and we think we can continue to build our specialty areas on a broader basis. With that, I'll turn it over to BJ and let him walk you through the quarter, and then I'll have some closing comments before we open up for questions.

BJ Losch -- Chief Financial Officer

Great. Thanks, Bryan. Good morning, everybody. I'll start on Slide 5 with our financial results.

In the third quarter, our reported EPS was at $0.83, which included our previously announced Visa sale gains. Excluding that gain in the acquisition-related expenses, adjusted EPS was at $0.36. Third quarter reflected solid performance with adjusted pre-tax income driven by positive operating leverage with adjusted revenues up 1% and adjusted expenses down 1%. On the revenue side, NII declined around $5 million linked quarter, driven primarily by two factors that total about $7 million: number one, lower loan accretion quarter to quarter, which was about $4 million as a change; and about $3 million of impact from the auto loan sale we announced in the second quarter.

This was offset by a gain that we had on the sale of some trust preferred loans as well as higher fixed income revenue. Fixed income ADR was up about $75,000 a day from second to third quarter to $544,000. The expense decline was driven by continued incremental realization of merger cost saves. We did, however, make some incremental marketing-related investments in the quarter, which we expect will help generate momentum heading into the fourth quarter and 2019.

Turning to Slide 6. As we previously announced, in early September, we sold our remaining Visa B shares in the quarter for an after-tax gain of $161 million, which was a positive $0.49 impact to both EPS and tangible book value per share. And as you can see on this slide, this gain, along with our earnings growth in the quarter, meaningfully increased our tangible book value per share and our capital ratios. Linked-quarter tangible book value per share was 8% higher than in the second quarter, up $0.64 to $8.58 with $0.49 from the Visa B gain and an additional net increase of $0.15 from retained earnings.

TCE to TA increased 58 basis points to 7.12%, and our CET1 ratio rose almost 90 basis points to about 9.9%. Turning to net interest income and net interest margin trends on Slide 7. You'd see the linked-quarter ins and outs, with NII and NIM down mostly from lower accretion in the third quarter and the expected impact of the 2Q '18 sales of subprime auto portfolio. On the liability side, although total deposit costs were up from 2Q to 3Q as deposit competition continues to be high, we did see a moderation in our deposit cost increase as expected.

Our cumulative deposit beta since the start of rate hikes in 3Q '15 is at 36%. For that same time, loan betas were at 66%, far outpacing the deposit beta movement. As we have discussed before, we are continually managing our balance sheet in totality with an intentional focus on optimizing the mix and growth of our loan and deposit portfolios over time, along with appropriately pricing our loans and deposits to deepen relationships and improve the performance of our margin. To that end, we will continue to press our advantage in our attractive specialty lending businesses, deepen our deposit customer relationships, and take advantage of the floating rate nature of our loan portfolio to maintain and improve our margin over time.

Taking a look at loan growth dynamics on Slide 8. We see that our specialty banking areas continue to demonstrate strong growth with linked-quarter annualized growth across those aggregate businesses of about 12%. Loans to mortgage companies were up 11% linked quarter. And although industry mortgage origination volumes were down, we've been able to grow the business by increasing market share.

As usual, we expect fourth quarter to be down from the seasonally strong home purchasing months of the summer and fall but believe we have opportunity to even further increase market share gains over time. Asset-based lending was up 3% linked quarter, primarily driven by existing customer expansion of line utilization. In our growth markets, we're seeing ongoing success with our strategic efforts in Middle Tennessee, where we posted 2% loan growth linked quarter. As you know, we're continually focused on maximizing the economic profitability of our businesses.

And while the regional bank has seen some net growth over the course of the year in the range of 3% to 4% annualized from a loan perspective, it has come while we've been optimizing the balance sheet by exiting lower spread relationships, as Bryan mentioned. Over the course of this year, we've reduced our low spread loan balances by about $360 million. This has cut our regional bank loan growth by roughly half of what it could have been. This is the right thing for the balance sheet long term and has improved loan yields by 73 basis points in those portfolios alone.

Over time, replacing these loans will have a nice impact on our overall yields and free up balance sheet for higher return lending. As you can see on Slide 9, credit trends remain excellent. Net charge-offs were at $2 million in the third quarter, flat from the second quarter. Provision was also at $2 million and the allowance to loans remains steady at 68 basis points.

Turning to Slide 10, I'll quickly give an update on the Capital Bank merger. Our cost savings remain on track with $16 million in cost saves achieved, as expected, in the third quarter. And that means about 75% of the costs are now in the run rate and should be substantially in the run rate fully by the end of this year. Revenue synergies increased again with $31 million of annualized year-to-date deals closed or in process.

And as Bryan and I have both mentioned, we've started to see some promising signs of growth from our newer markets in the Carolinas, what we call Mid-Atlantic and South Florida. Our retail deposits in those markets were up 5% and 3% linked quarter, respectively. And as we've discussed before, now that our merger integration activities are behind us, we're confident in our ability to profitably grow both loan and deposit relationships in these markets, and we expect those positive trends to continue. Wrapping up on Slide 11.

We're very pleased with where we sit with our return profile and that profile that we had built for sustainable returns going forward, with the return on tangible common equity at almost 18%, our return on equity at 10.7%, and our return on assets at 1.21%. With these results, we're already right at or exceeding our medium-term return targets we laid out in May and continue our improvement toward our efficiency ratio goal of 60% or below, which will drive continued improvement in our returns to shareholders. So with that, I'll turn it back over to Bryan.

Bryan Jordan -- Chief Executive Officer

Thank you, BJ. In summary, I am really pleased with the third-quarter results and excited about the opportunities that we have ahead of us. We are optimistic about the fourth quarter and 2019 and feel very good about our ability to continue to drive strong returns in the business. The economy continues to be stable, customer sentiment continues to be good, loan pipelines have strengthened into the fourth quarter.

So, we're optimistic as we look into the remainder of this year and into 2019. Word of thanks to all of our employees for all of their hard work, not only wrapping up the integration late in the second quarter and into the third quarter, but also the hard work to serve our customers and we appreciate that. As a reminder, we're holding our Investor Day on November 6 in Nashville. We'll be providing more information about, not only our strategy, but our execution plans with our executive team in attendance.

If you need details, please reach out to us directly. With that, Cole, we'll now open it up for any questions. 

Questions and Answers:

Operator 

Thank you. [Operator instructions] And the first question comes from Steven Alexopoulos from JPMorgan. Please go ahead.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey. good morning, everybody.

Bryan Jordan -- Chief Executive Officer

Hi, Steve.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I want to start on the deposit side. I'm looking at the increase in deposit cost. I was surprised to see the degree of increase in the commercial interest, which were up 25 bps quarter over quarter. Can you give some color on why we saw such a big increase there? Was it all related to the prior increase you had done in larger account balances?

BJ Losch -- Chief Financial Officer

Hey, Steve. Good morning. It's BJ. I think on the commercial deposit side, the competition has really since the beginning of this cycle, been much more heated than the consumer deposit side.

So, there's not really a material change in what the competition looks like there. There is high competition both on the earnings credit rates as well as the business interest-bearing accounts. So, there wasn't anything that was out of the ordinary in the quarter. It's just continued increased competition.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And, BJ, thanks for calling out pretty good growth in Florida and the Carolinas on the deposit side. Give some perspective what types of deposits are you raising and what's the cost of those in those markets.

BJ Losch -- Chief Financial Officer

Yes. So, it's our normal mix. We're getting -- obviously, we're leaning in in those markets to establish ourselves a little bit more strongly coming out of the integration. And we've gone out, as you might expect, with some money market and CD offers that we thought were attractive.

But that is also bringing in core checking account relationships as well. And I would tell you that the deposit betas that we saw in the Mid-Atlantic and Carolinas in terms of those retail deposits are actually in line with what we saw across the rest of the footprint and in Tennessee. So, in aggregate, our portfolio mix isn't materially different than what we're seeing elsewhere nor are our betas, which is highly encouraging to us. So, we expect to be able to continue to drive positive momentum and deposit growth in those markets.

We're putting some of that marketing-related investment that I mentioned earlier to work in those markets to again establish a foothold, establish a brand and grow core deposits over time. And as we've talked about previously, what we'd love to see is those markets further establish with meaningful deposit growth there over time, such that we could replace our market index deposits from a funding perspective and continue to enhance relationships and improve our margin.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And how are you thinking about the core margin here in 4Q?

BJ Losch -- Chief Financial Officer

I would characterize my view as stable going into the fourth quarter. I'd say that the margin was largely in line with what we would have thought and maybe a hair less than what we would have thought, and so I see it as relatively stable.

Operator 

And our next question comes from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Bryan Jordan -- Chief Executive Officer

Thank you, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I guess, just first question around capital management strategy. I'm not sure, BJ or Bryan, who wants to take it, but I get -- I think you recently again reiterated your focus on the 8% to 9% CET1. You've got a bump from the Visa gain, as you mentioned earlier. And I'm just trying to understand your appetite to buy back stock given that it felt like -- a quarter ago in July, you felt the stock was cheap.

You're down about 10% to 15% since then. And I'm just trying to gauge the management's urgency in being able to deploy about $230 million in remaining buyback authorization.

Bryan Jordan -- Chief Executive Officer

Hey, Ebrahim. This is Bryan. I'll start, and if BJ wants to add on -- we do think that there will be opportunities and now maybe one of those to be opportunistic in repurchase stock. We monetize the Visa gains, we bolster the capital ratios, we had a sense from a lot of feedback that we were screening low on a book -- price-to-book as well as how price-to-book and low on tangible capital to total asset ratios.

And that created a bump with the hidden capital we knew that was there. But as we look into the future, we think our capital ratios are sufficient. We have given a great deal of information about our stress testing. We published it in the third quarter, so you got that out there.

And we think that with priorities for loan growth, organic growth being number one, managing capital is probably our number two priority as we look into the remainder of this year and into 2019. So, we do think that there will be attractive opportunities to buy stock and we do have the authorization to do it, and we fully intend to use it as appropriate.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Would just add -- go ahead.

BJ Losch -- Chief Financial Officer

I would add, Ebrahim. I mean, if you look at where our return profile is, and we're confident that we can continue to maintain and improve that into 2019 and then you juxtapose that with what our forward earnings look like, what our price-to-book, what our price to tangible book looks like, and we're very bullish on where we're taking the company and this could very well be a great opportune time to buy back some of our shares.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So, is it fair to assume that we're still seeing the 8% to 9% CET1 is where you're targeting capital ratios? Or is the TCE 7% also something that you're going to triangulate too when thinking about capital management?

Bryan Jordan -- Chief Executive Officer

Ebrahim, this is Bryan. We still -- we primarily focus on the CET1 ratio, the 8% to 9% is what's in the bonefish. The reason we focus on that is all balance sheets are not created equally and a 7% ratio is an even more blunt instrument. And when you look at the risk weighing of our assets, particularly the $2.5 billion -- $2 billion, $2.5 billion of average assets associated with our fixed income business, there's very, very little risk in that and it shouldn't and it doesn't draw very much capital.

So, we manage more around CET1, we think that's a good framework, we think that's adequate capital. And we'll use those ratios to manage our capital allocation going forward.

Operator 

And our next question comes from John Pancari from Evercore. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Morning.

Bryan Jordan -- Chief Executive Officer

Hey, John.

John Pancari -- Evercore ISI -- Analyst

All right. First, on the credit quality side, I've noticed you flagged a credit that moved on to nonperformers in the quarter. That contributed to the, it looks like, $20 million increase in MPAs. How -- can you give us a little bit of color on that? Was that -- what was the size of the credit, what's the industry? Did you put aside any incremental reserves against it or take any charge-offs? Thanks.

Susan Springfield -- Chief Credit Officer

Hey, John. It's Susan. Yes, it was a $24 million credit in the financial services industry. We did -- it had previously been a classified credit, I believe it was in the nonperforming in the third quarter.

And we did not take any charge-offs, but we have reserved some against it.

John Pancari -- Evercore ISI -- Analyst

OK. And you said it was financial services credit?

Susan Springfield -- Chief Credit Officer

Yes.

John Pancari -- Evercore ISI -- Analyst

OK. All right. And then on that topic, any incremental -- any -- indicative of any incremental inflows you expect on that front?

Susan Springfield -- Chief Credit Officer

No. Actually, that one was really an isolated incident. I'm really pleased with what I'm seeing as it relates to asset quality, kind of the PD -- average PD grade actually improved quarter over quarter. Our -- pushes our probability default rate grading for commercial portfolios.

So, we're continuing to see strong asset quality, and that was just an isolated downgrade.

John Pancari -- Evercore ISI -- Analyst

OK. Thank you. And then separately, on the margin, I know you gave us some expectation for relatively stable for the fourth quarter. How are you thinking about it in terms of a general trajectory through -- or for 2019? I know it's a little bit further off and you're probably going to talk about it in your Investor Day, but how should we think about it? I mean, are we going to see some incremental expansion as we get some additional moves by the Fed? Or are we still looking at relatively stable as we move through '19?

BJ Losch -- Chief Financial Officer

Hey, John. It's BJ. Yes, we'll talk a little bit more about it at Investor Day as well, but we are continually trying to position our balance sheet to improve the margin over time. If you start with our continued asset sensitivity and our outlook for Fed increases, we would think there's probably one late this year and at least one more next year.

And with our asset-sensitive balance sheet, that provides a tailwind, number one. Number two, our loans to mortgage company business continues to perform well. So even though industry mortgage originations are starting to moderate as the long end of the curve is moving higher, we think their ability to take market share is going to provide us tailwind as well, and so we expect that to continue. Number three, we are very, very focused in our banking business on DDA growth.

It's DDA growth in consumer and it's DDA growth in our commercial businesses, including our specialty businesses. And we have confidence in our execution plans to be able to do that. And as you well know, our ability to drive DDA is our most profitable way to improve the funding side of our balance sheet. And so we're going to be very, very intently focused on that, and those three things we think will help continue to support the margin.

And the last will be, as our loan growth continues into 2019, based on what we're seeing on the balance sheet and how disciplined we are, we think that that can continue to help us incrementally improve the margin as we've taken out these lower spread relationship portfolio -- loans as well. So, we've got several levers that over time we think that we can continue to help improve the margin.

Operator 

And the next question comes from Casey Haire with Jefferies. Please go ahead.

Casey Haire -- Jefferies -- Analyst

Thanks. Good morning, guys. Wanted to touch on the loan growth outlook. How do you guys -- how are pipelines here at the end of the quarter? And then specifically, the $360 million of runoff year to date, is that some -- is that still -- have you worked through most of that? Or is that still a headwind that we're going to have to adjust in coming quarters?

BJ Losch -- Chief Financial Officer

Yes. Well, I'll start with the runoff that we had. There were a couple of different areas of the business, and it wasn't, by the way, to be clear, simply Capital Bank-related portfolios that we were repositioning. It was also First Tennessee-related portfolios.

In aggregate, we were repositioning our balance sheet to be able to take advantage of other things that we saw. But it was loan portfolios that had yields in the 2% to low 3% ranges at the beginning of the year, which we just felt like we're not accretive to us and as Bryan said really single-product relationships that we didn't have an opportunity to deepen. So, we took the opportunity to take those out and move ahead. We're always optimizing our balance sheet like this.

But I would tell you that in terms of the magnitude of the repositioning that we've done over the first three quarters, that magnitude of change will not continue to occur. We've largely repositioned most of what we wanted to do with some of the larger buckets. And so going forward, it would not be nearly as visible.

Susan Springfield -- Chief Credit Officer

Then on the pipeline and production side, we've actually seen a significant increase in production in the specialty businesses, core commercial, commercial real estate of about 13% quarter over quarter since third quarter production was strong, and that's even excluding mortgage warehouse. If you include mortgage warehouse on our production quarter over quarter, it was up about -- the production is up about 30%. So, we feel well-positioned as we go into the fourth quarter. And the the pipelines, really across multiple areas, including the Capital Bank market, the Carolinas, and Florida, many of the specialty businesses are reporting strong pipelines for fourth quarter.

Bryan Jordan -- Chief Executive Officer

There's -- Casey, this is Bryan. September was our strongest month of the year in terms of production, and as Susan said, very good pipelines going into the fourth quarter. I wouldn't characterize personally the repositioning of the portfolio as a headwind. As BJ noted in his opening comments, our margin on that business that we replaced it with is 73 basis points higher.

I think it's important to note, when you look at our balance sheet, that we're not driving just the cosmetics or the size of the balance sheet, we're driving the profitability of the balance sheet and return on the capital that we have deployed in it. So, while it may be what appears to be a headline, the top-line loan growth in terms of profitability, it's the right decision to position the balance sheet from a more profitable relationship-oriented perspective. So, I just want to fine tune, I wouldn't characterize it as a headwind.

Susan Springfield -- Chief Credit Officer

And then one additional point about optimizing these exit kind of single-product relationships, and we've looked at this over time, asset quality performs better with customers where you have deeper relationships, and you have insight into treasury management cash flows, etc. So in addition to improved margins, we also believe that over time that improves assets somewhat.

Casey Haire -- Jefferies -- Analyst

OK, understood. I guess, in keeping with the profitability, BJ, and following up on your comments on perhaps optimizing the market index funding side, is that something that you guys are actively prioritizing higher? And is there a loan-to-deposit ratio -- at 91% or so is OK? How -- what's the appetite to take that higher to pay down -- to optimize the higher cost market index deposits?

BJ Losch -- Chief Financial Officer

Yes. So, it's obviously a high priority for us. As we've talked about the last couple of quarters, we would like to replace as much of that market index over time as we possibly can. It's going to take a while, right, because we've got to build our portfolios in particularly in the newer markets to be able to replace it.

But personally, I would love to see deposit growth outpace loan growth because I think that we would improve our margins and our net interest income by doing that. But we're comfortable with a 90-ish percent loan-to-deposit ratio that doesn't make it uncomfortable, nor would something a couple of basis points higher if we saw good profitable loan growth. So you'll probably hear more from us on Investor Day around that topic, but we continue to focus very intently on trying to optimize our funding mix, and that's one way to do it.

Operator 

And our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning.

Bryan Jordan -- Chief Executive Officer

Good morning.

Ken Zerbe -- Morgan Stanley -- Analyst

I guess, maybe starting off with loan growth, if we could. It's -- I guess, Slide 8, it looks like you do certainly have pockets where you're seeing some strong growth. But I guess, average loans in total of 0.2%, again, I understand the runoff portfolio that we were talking about earlier. But what is the biggest headwind to growth at this point? And also kind of as we look out over the next year, like does that accelerate? Like what drives that meaningfully higher than where it is today? Thanks.

Bryan Jordan -- Chief Executive Officer

Ken, this is Bryan. I'll start. I don't see anything that is particularly a headwind to loan growth. We have very good calling activities, we see very good strength across all of our markets.

In some ways, optimism or pipelines picked up in some of these markets late in the quarter. That said, we are thoughtful about what we put on the balance sheet, the risk and the reward that we take when we enter into a relationship. There are pockets where structure and pricing have gotten to points that we decide that we can't be competitive at those levels. And so you might characterize that as the headwind.

I characterize that as just managing the balance sheet for one you're going to like long term. And so I don't see anything that is particularly a problematic area. I just think we're trying to be smart about the business we book. We're managing it for profitability, we're using the balance sheet to support relationships.

And we -- as we look into the fourth quarter and we look into 2019, we think something in that mid-single-digits area is still a reasonable way to think about the growth potential of our balance sheet.

Ken Zerbe -- Morgan Stanley -- Analyst

Gotcha. OK, that helps. And then just a question back on the NIM being stable next quarter, what underlying assumptions you're making about the accretion income as part of that? And should we expect the accretion income to continue to decline from here? Or is this just going to remain volatile given sort of accelerated payoffs?

BJ Losch -- Chief Financial Officer

Hey, Ken. It's BJ. I think we -- our loan accretion, in any given quarter, probably peaked in the second quarter where we had $18 million. This quarter, we had $14 million.

I would expect that it continues to step down by a couple -- $2 million, $3 million a quarter over the next several quarters. And so that would certainly be a headwind to the margin.

Operator 

And our next question comes from Brady Gailey from KBW. Please go ahead.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

So, if you look at the efficiency ratio, you saw some improvement down to 64%. I know that you have kind of a longer-term goal of sub-60%. you still have some cost saves coming from CBF in the fourth quarter of this year and into next year. Do you think that you can get the efficiency ratio at that 60% or better level as you exit 2019?

BJ Losch -- Chief Financial Officer

That's our goal. That's where we're driving for. And again, it will be a combination of overall positive operating leverage. Bryan and Susan both talked about some of the momentum we've got, we believe, going into fourth quarter.

I talked a little bit about what we're trying to do to drive profitability out of the funding side of the balance sheet. We're continuing to take costs out of the organization from the merger saves and we'll be very disciplined, as we have been, about what we spend money on going into 2019, such that we're continuing to improve that efficiency ratio. As you've seen over the last five, six quarters, we've improved it by 700 basis points or more. And that's clearly one of our main priorities -- is to continue to improve the profit margin of the company.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. And then on the M&A side, CBF has been closed for a few quarters now. You've got almost all the cost saves realized, a little more to come. But Bryan, are you ready to start thinking about another potential acquisition?

Bryan Jordan -- Chief Executive Officer

Brady, this is Bryan. Short answer is no. We're focused on execution on organic opportunities. We think that we have tremendous opportunities and momentum in the footprint that we have, and we want to capitalize that and continue to build our business model and focus on those markets.

So in short, no.

Operator 

And our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Bryan Jordan -- Chief Executive Officer

Good morning.

Jared Shaw -- Wells Fargo Securities -- Analyst

I guess, just following up on the loan transition comments from earlier. How are the markets, the new CBF markets, transitioning? Are they on track with what you wanted to in terms of moving away from CRE and into the C&I side? And should we expect to see the pipeline in those markets increasing?

Susan Springfield -- Chief Credit Officer

Yes, Jared. We are seeing a very good shift in terms of additional focus on core C&I from the existing teams that we have that are very strong. In addition, we're recruiting new bankers in both Carolina and in Florida, who's focused on C&I, core commercial relationship building. And as we mentioned earlier, the pipelines in the Carolinas and in South Florida are strong going into the fourth quarter.

Then we had particularly good production Mid-Atlantic, which is our Carolinas Capital Bank market in the third quarter. So, we're pleased with where we are and the opportunities in those markets that are dynamic and vibrant and growing. We're also pleased with our ability to attract strong bankers from many different institutions that have potential clients that they could bring over, over time.

Jared Shaw -- Wells Fargo Securities -- Analyst

Thanks. And then on the fixed income business, it was good to see the growth of the ADRs there. How did that play out sort of within the quarter? And as we saw the 10-year start moving at the end of the quarter, was that -- did that ramp up moving through the quarter? And is that sustaining itself so far through fourth quarter?

Bryan Jordan -- Chief Executive Officer

It bounced around throughout the quarter. Third quarter in the fixed income business is, in any year, volatile just because of the month of August and everything that's happening around holidays and vacations. It bounced around. Activity was a little bit or probably on average in September, but it was up and down throughout.

And we've seen the same trends continue a little bit a year even into the start of this fourth quarter.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator 

And our next question comes from Rob Placet from Deutsche Bank.

Rob Placet -- Deutsche Bank -- Analyst

Hi, good morning.

Bryan Jordan -- Chief Executive Officer

Good morning.

Rob Placet -- Deutsche Bank -- Analyst

Middle Tennessee, Nashville is a market that you've seen the growth in over the last number of years. I was just curious if you could talk about the success you've had there and how translatable that is, that strategy is in new markets in Carolinas? And then any differences in strategy, say, in Nashville versus the Carolinas?

Bryan Jordan -- Chief Executive Officer

Yes, this is Bryan. I think that's an important point. And we articulate optimism about the opportunities in Mid-Atlantic. In South Florida, for example, we firmly believe that the model that's been executed in Middle Tennessee over the last handful of years is a really good example of how we're going to continue to grow and to gain share in those markets, Mid-Atlantic, South Florida.

In addition to the demographic similarities, it is a model that we know works, it's proven and we fully intend to deploy it. So, the lessons that we use to grow in Middle Tennessee are going to be the same things that we're going to deploy in the growth markets in Mid-Atlantic and South Florida and it does give us an optimism.

Rob Placet -- Deutsche Bank -- Analyst

OK. Thanks.

Bryan Jordan -- Chief Executive Officer

One final point on that, which is that will be one of the topics that we'll talk about in the Investor Day, so I'll tease the Investor Day a little bit.

Operator 

And our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, thanks. Good morning.

Bryan Jordan -- Chief Executive Officer

Hey, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey. Question on the synergies. You called out $31 million in annualized revenue and 471 deals closed or in process. Can you maybe give us an example of what one of those deals might be, one or two of those deals might be? And then curious how much more potential you see?

Susan Springfield -- Chief Credit Officer

We have several different types of synergy opportunities, Jon. Let me give you a couple of different ones that we were already executing on and we believe there are more out there. For existing clients, either in legacy First Tennessee or Capital Bank, in terms of hold limits and where we like to be, obviously, it's a bigger balance sheet. When there are opportunities to take on additional exposure on the lending side against the Fed opportunity to do that without going over limit, that's one example.

The opportunity to broaden relationships, and we touched on this earlier about how important it is from a return standpoint but even performance, the opportunity to offer treasury management products to clients. So, as an example, I know there's opportunity with a lock box for an existing customer in the Capital Bank franchise where we had other products that we didn't have that, an opportunity to expand there. And then the third one I would bring up, and all of these are opportunities within synergies, would be the opportunity to private client banking where we offer wealth management and private client lending to customers, executives, and owners of businesses. And then last but not least would be our specialty lending verticals that we've had in the core First Tennessee franchise for a while, the opportunity we're seeing were furled into those specialty businesses from our bankers in the Carolinas and Florida, so asset-based lending, franchise finance, mortgage warehouse lending.

So, we're seeing opportunities for referrals as well.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Good. And more to come? You expect more to come from these opportunities?

Bryan Jordan -- Chief Executive Officer

Jon, this is Bryan. I think we've just scratched the tip of the iceberg here. I think we have a tremendous amount of opportunity, as Susan articulated, across a broad number of fronts, whether it be treasury management and P card to expanded balance sheet and referrals to specialty businesses. Take the ABL business, for example.

Capital Bank's credit profile was much like ours. The ABL capabilities and the tools we have there will give us greater opportunities to call in these markets and expand our growth opportunities. So, we think there are quite a few opportunities left and we'll continue to build on them.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. And then a quick one for BJ. I don't know if you mentioned this, I may have missed it. But the reduction of low spread loan balances for the quarter, was that about a $200 million headwind? I'm just looking back through some of my notes, is that about right for the quarter?

BJ Losch -- Chief Financial Officer

No, no. It was $360 million in total year to date. I would say that it was probably a little less than $100 million for those low spread, low value. And then remember, we sold the subprime auto, which was about $100 million.

So, in aggregate, those were a couple hundred million in the quarter.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Yes, good. Thank you.

Bryan Jordan -- Chief Executive Officer

Sure. Thanks, Jon.

Operator 

And our next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose -- Raymond James -- Analyst

Thanks for taking my questions. Just wanted to follow up on the specialty lending growth. Susan, you mentioned some of the areas. Can you kind of size some of those opportunities for us, where you stand in the buildout of some of those different businesses and maybe where you're looking to hire both in those businesses and the core franchise.

I know there's a bank in Nashville that obviously put on a lot of press releases here about hires. Just wanted to get the outlook for you guys. Thanks.

BJ Losch -- Chief Financial Officer

Yes, so I'll start. It's BJ. So really, our most profitable lending business is our loans to mortgage company business, and we continue to look for ways to expand that. That's one of our top priorities.

But across asset-based lending, loans to mortgage companies, franchise finance business in particular, those businesses in aggregate have less than 5% national market share. And so we have huge opportunity over time to continue to build out teams, different specific sub-niches within those lines of business. And we're very optimistic that we can do that. And as we've talked about before, the reason that we like those businesses is that we see higher risk-adjusted returns on those.

They have excellent efficiency ratios within those businesses. There's fewer more focused competitors in those areas because you have to know how to lend to those specific clients, so not all banks can do it. And so we see a little bit more rationality that we might see in some other lending areas. So, all of that really pushes us toward trying to allocate more resources to that growth.

And if you look over the last five years, our specialty lending businesses have grown 150% in terms of balance sheet growth, over $6 billion. And that's excellent growth and it's been growth that's been very profitable, and we expect that we will continue to grow those types of business double digits and make more -- make less out of the balance sheet even more profitable.

Michael Rose -- Raymond James -- Analyst

That's great color. And maybe just following up on that, excluding the runoff of the nonstrategic, do you guys still think at the core bank that mid-single-digit growth rate is kind of in the cards as we think about next year?

BJ Losch -- Chief Financial Officer

Yes, we certainly think so. So, some of the repositioning of the balance sheet that we talked about this year has muted some of that growth. I think if you look at the regional bank itself, I think we're seeing maybe 3% to 4% annualized growth, but that was roughly cut in half by some of the repositioning of the portfolios. And so going into next year, total balance sheet growth in the mid-single digits is very reasonable for what we see.

Michael Rose -- Raymond James -- Analyst

That's helpful. Maybe just one final one for me. It's still a couple of quarters out, but any initial thoughts on the impact of seasonal for you guys? Thanks.

BJ Losch -- Chief Financial Officer

Yes. It's, number one, a very frustrating thing. And if any of you are knowledgeable on why we would want to change this and had told the FASB that, I'd love to hear it because I think it can be very disruptive. But nevertheless, we will be prepared for it going in.

It's -- we don't have any specific impacts to share with you in terms of the magnitude of the change in our day one reserves or what it will look like on our P&L. But we are in line just slightly ahead with our planning of being prepared for seasonal. But hopefully, if something does change in the dialogue, it does continue to happen such that we can maybe land it in a more helpful place for both investors and banks before it's actually implemented.

Bryan Jordan -- Chief Executive Officer

Michael, this is Bryan. I would add to what BJ said. I strongly agree with the comments I read that Jamie Dimon made last week, I think, that it will be procyclical. I think this is an accounting convention that will be procyclical.

I don't think it's going to be particularly helpful to understanding financial statements. And to sort of reiterate BJ's point over a minute or so ago, to the extent that investors have strong views on the validity of whether this makes sense or not, you need to express it to the accounting standard writers. They keep saying when we talk to investors who are demanding this and it doesn't. I can't find that groundswell of support.

I just think it's not good for the economy. I don't think it's good for customers long term. And I think, ultimately, it's not going to give investors any better understanding of financial statements.

Operator 

And the next question comes from Geoffrey Elliott with Autonomous Research. Please go ahead.

Geoffrey Elliott -- Autonomous Research -- Analyst

Good morning. Thank you for taking the question. First, just a little clarification. When you were talking about the NIM staying stable in the fourth quarter, that was for core NIM, right? Just wanted to clarify on that.

BJ Losch -- Chief Financial Officer

That's right.

Geoffrey Elliott -- Autonomous Research -- Analyst

Thank you. So, just in terms of asset sensitivity, you kind of mentioned that a few times as a positive on the conference call. But I guess, given the discussion about the stable core NIM into year end and given that Slide 7 shows a negative impact from rates, days and other in the slide deck, can you kind of help us by quantifying that asset sensitivity that used to be a useful chart in the slide deck, but it seems to be gone the last couple of quarters? Just how much of a benefit is there still from rising rates?

BJ Losch -- Chief Financial Officer

Aarti is sitting here pointing and laughing at me because I thought that we didn't need that anymore now that we need it. The asset sensitivity hasn't much changed from when we had that graph in there. There's been modest mix shifts, as we would have expected, particularly in the deposit portfolio. As rates had started to rise, a little bit more of a shift into money market and money market into CDs, which would dampen asset sensitivity.

But in terms of the lending that we're continuing to do, it's predominantly floating rate. And so in aggregate, our asset sensitivity hasn't meaningfully changed, and so we would expect the same types of net increases that we had seen before. Maybe I think -- I'm trying to recall. I think it's maybe $8 million annualized for a 25-basis-point move.

Something like that. It's roughly the same.

Geoffrey Elliott -- Autonomous Research -- Analyst

I guess, the reason for asking is it doesn't really feel like it's been coming through the last couple of quarters. In the comments on 4Q, stable core NIM kind of suggest there's not much benefit there in 4Q. So, William, what's the piece that I'm missing there?

BJ Losch -- Chief Financial Officer

Yes. So, I would tell you that the last two quarters have really -- the difference has been the deposit beta. So, the deposit beta, of course, from 3Q '15 to the first quarter of '18, let's say, was very, very low. And if you actually go back, we would have beat those asset sensitivity metrics that we put out on that graph before.

We would have been ahead of them. Last couple of quarters, because we were defending our deposit base, the deposit betas were higher, which dampened the sensitivity. But over time, particularly when rates -- short rates ultimately moderate and stop increasing, we think that, that again will help us in terms of our net asset sensitivity. And so I think, Jeffrey, it's a question of timing.

But over time and through a cycle, we think our asset sensitivity is intact.

Operator 

And our next question comes from Tyler Stafford from Stephens Inc. Please go ahead.

Tyler Stafford -- Stephens, Inc. -- Analyst

Good morning, guys.

Bryan Jordan -- Chief Executive Officer

Good morning.

Tyler Stafford -- Stephens, Inc. -- Analyst

I wanted to start just on the mortgage warehouse and obviously a good quarter there, and the deck talked about market share gains driving that volume. I'm just wondering if you can talk about the pricing or the yields in that business today? And just curious if you're seeing any spread degradation at all just given the mortgage share gains.

BJ Losch -- Chief Financial Officer

Yes. So, it's still our highest yielding portfolio on the commercial side. Do you have that?

Susan Springfield -- Chief Credit Officer

Yes, this new yield is 5.46% for the quarter.

BJ Losch -- Chief Financial Officer

So, it's almost 5.50% in terms of yield, and so very healthy. I would generally say though that as we've continued to build market share, of course, there are certain instances where we've leaned in and gotten a little bit more aggressive than the portfolio yields to try to acquire balances. But that rate volume trade-off has been a net positive for us, of course, and so we would expect that type of momentum to continue. We'll always look to increase our share at a profitable rate.

And I will tell you that Bob Garrett and our loan-to-mortgage company team and business out there do a phenomenal job of managing economic profit and managing returns on individual relationships, such that we're giving fair pricing to our clients, but also making sure that the bank gets paid for using our balance sheet as well. So, we expect those yields to continue to go up, particularly as -- when rates do rise because it's a very short term oriented rate business. And so we're very pleased with how it's performing.

Susan Springfield -- Chief Credit Officer

In addition to that, we've seen some really good deposit opportunities within the mortgage warehouse lending business, and so calling on those customers and talking with them about deposits. And then one last thing as it relates to market share growth and mortgage warehouse, it's been a combination of an increasing client count. So client count mortgage warehouse, even just quarter-over-quarter, was up about 5% year-over-year. We're up about 15% in terms of numbers of clients.

And then in select cases, we're increasing some loans to existing customers. So, we like the business and we like both the lending side and the deposit opportunity is better there as well.

Tyler Stafford -- Stephens, Inc. -- Analyst

Very helpful. And do you have what the 5.46% comparable yield would have been in 2Q?

Susan Springfield -- Chief Credit Officer

5.44%.

Tyler Stafford -- Stephens, Inc. -- Analyst

OK. And then just lastly, BJ, you mentioned the stock looks attractive based on your forward earnings profile. You guys just reported on $1.28 annualized EPS quarter. You've got 75% on the CVS cost savings now in the run rate.

And at some point next year, I would imagine the headwind of normalizing higher credit costs and then some margin -- GAAP margin at least, headwinds from declining accretion and funding pressures. So, I'm just curious, what's the biggest driver or drivers that you see internally from an earnings inflection that will be the biggest driver to an improved forward-earnings trajectory that you see?

BJ Losch -- Chief Financial Officer

Hey, Tyler. Just to clarify, $0.36 times four is $1.44.

Tyler Stafford -- Stephens, Inc. -- Analyst

Yes. I took out some of the onetime items in there, the drops and some other items.

BJ Losch -- Chief Financial Officer

That doesn't drop to $0.20. But regardless, that -- I'll stay with what we got, which is a $0.36 run rate right now. We talked about loan growth and what we thought the outlook was for there on this call. So, we feel pretty good about what we can do going into next year.

We've repositioned the balance sheet for stronger profitability going forward. We still got asset sensitivity that we believe can come through. We're starting to see good deposit growth, particularly out of the newer markets, which will certainly help us in terms of our funding mix. And again, overall, we are very, very focused on positive operating leverage.

And those things I just said will drive the top line while we continue to get a full year's worth of benefit next year in expenses. And sitting here today, our expectation would be that expenses would be down next year, primarily due to the cost saves while we continue to move the top line up. So, we'll be very focused on making sure that, that happens going into next year, and that should obviously be helpful to expanding the earnings side. On the denominator of the EPS, as we talked about earlier, given where our evaluations are, we think it's a very attractive time for us to look at share buybacks.

And so we're looking at both sides of that equation to continue to improve our earnings per share profile.

Bryan Jordan -- Chief Executive Officer

Tyler, this is Bryan. I'll just add to BJ's comments. We have a lot of clarity about where our calling efforts are. We recognize -- and our bankers did a great job through the integration, but when you're doing the integration in the first half, first really three quarters of the year, focus goes on to the blocking and tackling in the short term and not to calling efforts in growing the business.

We see that turning, we see the momentum pick up. And as we see the business unfolding in 20 -- fourth quarter and 2019, we're significantly confident that we have a pretty good outlook for the remainder of this year and the turn of next year.

Operator 

And our next question comes from Brock Vandervliet from UBS. Please go ahead.

Brock Vandervliet -- UBS Securities -- Analyst

Thanks. Good morning. I guess, just probably following up on that question. Bryan, you touched on FTN securities and didn't sound like a resounding endorsement in terms of the business volume and cadence you're seeing there.

You've got a bit of a long march ahead in terms of more rate hikes until you get to a more favorable tailwind for that business. And I mean, parting with that would certainly give you a leg up on the efficiency ratio and other metrics. And how does that kind of fit in?

Bryan Jordan -- Chief Executive Officer

Well, Brock, that's a business that we like. And we had a slide in a deck for a presentation we made mid -- early, mid-September. And it shows that business is countercyclical. So, if you look at it from our perspective, one, it is a business that has done very well in returns on capital for many, many years.

We're comfortable with it. We've been in the business close to 100 years than not, and so we understand it will -- that is countercyclical. And when credit does start to deteriorate in the industry, we will see a pickup in that. And we've seen it historically, we will see a pickup there.

It will be a countercyclical offset. And in many ways, I think an advantage for us in that, while credit costs are going up across the industry and ours will as well, we have an offset to that. Given that, we're not particularly panicked about the outlook for the next two or three or six quarters. We feel good about the business, we feel good about the team and what they're doing to control costs and to drive profitability in the business.

And so, it's a business that we're comfortable with, we like the capital allocation, we think it's a good countercyclical balance and we're committed to driving it.

Brock Vandervliet -- UBS Securities -- Analyst

OK. And separately, as a follow-up, on the provisioning and the provisioning tempo that's kind of oscillated from small negative to small positive. When do we -- when should we -- how should we think about that normalizing?

Susan Springfield -- Chief Credit Officer

At this point, Brock, we continue to see asset quality remains excellent, and we continue to have runoff in the nonstrategic portfolios. So, we'll see obviously some opportunities to relate nonstrategic. We used the models and we believe that our -- we've got good coverage as it relates to the allowance. If the economy were to turn, credit quality started deteriorating obviously, you'd see that build.

But at this point, I see that provision remains rather stable across the next few quarters based on what we know today.

Operator 

And our next question comes from Christopher Marinac from FIG Partners. Please go ahead.

Christopher Marinac -- FIG Partners -- Analyst

Thanks. Good morning. Bryan, you had mentioned a while ago about the repositioning not being a headwind. So, just kind of on tagging on to looking at ROA and ROTCE particularly, as you have outlined on Slide 11, do we get a catch-up coming soon just as a timing that sort of gets the ROA a little bit stronger then obviously as you play out 2019, see where that can go.

It just seems that you're earning in your zone on the return on tangible common but just a little bit below on the ROA. Just want to reconcile the timing of that.

Bryan Jordan -- Chief Executive Officer

Yes, I think you'll start to see it improving in the fourth quarter and into 2019, particularly as you realize the additional cost saves, which also affect the overhead efficiency ratio. But you should see both of those ratios continue to improve. The capital, we did increase the capital buffer in the middle of this quarter so it's starting at a higher level of capital. But from an ROA perspective, we would expect that to continue to improve into 2019.

Christopher Marinac -- FIG Partners -- Analyst

OK. Great. And then is it possible to compute a core loan yield? You may have mentioned that in a prior question. Just want to go back to that.

BJ Losch -- Chief Financial Officer

Quarter-on-quarter loan yield?

Bryan Jordan -- Chief Executive Officer

Yes.

BJ Losch -- Chief Financial Officer

I don't have it in front of me, but we can get that.

Bryan Jordan -- Chief Executive Officer

The short answer is yes.

BJ Losch -- Chief Financial Officer

Yes.

Christopher Marinac -- FIG Partners -- Analyst

OK. We can file, come back with the...

Bryan Jordan -- Chief Executive Officer

Yes, we can do that. It's the defining core may be the hard part. If you just excluded nonstrategic, we could probably do that fairly quickly.

Christopher Marinac -- FIG Partners -- Analyst

Very well, guys. Thank you so much for the time.

Bryan Jordan -- Chief Executive Officer

All right, Chris. Thank you.

Operator 

And our next question comes from Matthew Keating from Barclays. Please go ahead.

Matthew Keating -- Barclays Capital -- Analyst

Great. Thank you. Just a quick follow-up on the company's asset sensitivity, please. I know last quarter, we talked about deposit betas moderating from 2Q levels in the back half of this year.

As you think about deposit betas in Q4, do you think that what we saw in Q3 is a reasonable expectation? And then separately, perhaps you could quantify the impact of the more muted move in LIBOR this past quarter had on loan yields. Thanks.

BJ Losch -- Chief Financial Officer

Hey, Matt, it's BJ. So, on the deposit, I think in terms of betas, I would venture to say that 2Q was probably our high watermark. 3Q clearly moderated, and I would hope and expect that 4Q would be flat to further moderate from 3Q levels. And so that will be helpful, of course, to the core margin in the fourth quarter.

What was the other question, Matt?

Matthew Keating -- Barclays Capital -- Analyst

Thanks, BJ. And the other question would be -- honestly, LIBOR's movements have been a bit muted in the third quarter, but it looks like it's ticking up from here. And so do you think you'll see obviously that net benefit should flow through, I guess, is my -- so the question is really like how big of an impact, I guess, did the more muted movements have on loan yields, if you're able to quantify that at all?

BJ Losch -- Chief Financial Officer

Yes. I think if you look at our reconciliation on the NIM slide, we had something, I think, called rates, days, and others, which was about 4-basis-point-decline that a couple of basis points of that was related to the LIBOR ultimately.

Matthew Keating -- Barclays Capital -- Analyst

Great. Thanks very much.

Operator 

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

Bryan Jordan -- Chief Executive Officer

Thank you, Cole. We appreciate your taking time to join with us this morning. Again, I'll encourage you, if you have not already, please join us for our November 6 Investor Day in Nashville. Please reach out to Aarti and let us know.

We have a lot of good information that we'll cover. We'll have our management team there going through the business, and we'll spend more time talking about our outlook for the remainder of this year, but also for 2019 and beyond. Please feel free to reach out if you have any follow-up questions. I hope everybody has a great day.

Thank you.

Operator 

[Operator signoff]

Duration: 69 minutes

Call Participants:

Aarti Bowman -- Investor Relations

Bryan Jordan -- Chief Executive Officer

BJ Losch -- Chief Financial Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

John Pancari -- Evercore ISI -- Analyst

Susan Springfield -- Chief Credit Officer

Casey Haire -- Jefferies -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Rob Placet -- Deutsche Bank -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Michael Rose -- Raymond James -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

Tyler Stafford -- Stephens, Inc. -- Analyst

Brock Vandervliet -- UBS Securities -- Analyst

Christopher Marinac -- FIG Partners -- Analyst

Matthew Keating -- Barclays Capital -- Analyst

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