Good morning, and welcome to the First Horizon National Corp third quarter 2018 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.
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 reports. Our forward-looking statements reflect our views today, 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.
Thank you, Arti. Good morning, everyone, thank you for joining us. I'm pleased with our third quarter results. We're delivering strong returns improved efficiency. We demonstrated positive operating leverage with solid earnings, continued cost saves, excellent credit trends. We showed growth in our specialty areas in our new markets, we effectively deployed capital. Our returns continue to be strong. Adjusted ROTCE was about 18%, adjusted ROA was at 1.21%. We're on track with our merger-related cost saves, our adjusted efficiency ratio was at 64% in the third quarter of 2018, 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, 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, then I'll have some closing comments before we open up for questions.
Great. Thanks, Bryan. Good morning, everybody. I'll start on slide five with our financial results. In the third quarter, our reported EPS was at $0.83, which included our previously announced Visa sale gain. Excluding that gain and 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 of 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 six. 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. As you can see on the 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 seven. You 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 2Q18 sale of the 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 2015 is at 36%. For that same time period, 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 eight, 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. Although industry mortgage origination volumes are 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 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.
While the regional bank has seen some net growth over the course of the year in the range of 3%-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 nine, 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 remained steady at 68 basis points. Turning to slides 10, I'll quickly give an update on the Capital Bank merger. Our cost savings remain on track with $16 million of cost saves achieved as expected in the third quarter. 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. 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. 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've built for sustainable returns going forward. With a return on tangible common equity at almost 18%, a return on equity at 10.7%, and a 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 towards our efficiency ratio goal of 60% or below, which will drive continued improvement in our returns to shareholders.
With that, I'll turn it back over to Bryan.
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 in 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. We're optimistic as we look into the remainder of this year and into 2019. A 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 appreciate that. As a reminder, we're holding our Investor Day on November 6th 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.
Thank you. We will now begin the question- and- answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question comes from Steven Alexopoulos from JPMorgan. Please go ahead.
Hey, good morning, everybody.
Hey, Steve.
Hi, Steve.
I want to start on the deposit side. In looking at the increase in deposit costs, I was surprised to see the degree of increase in the commercial interest, which were up 25 basis points 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?
Hey, Steve. Good morning. It's BJ. I think on the commercial deposit side, the competition has, really since the beginning of the cycle, been much more heated than the consumer deposit side. 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. There wasn't anything that was out of the ordinary in the quarter. It's just continued increased competition.
Okay. BJ, you guys are 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?
Yeah. It's our normal mix. Obviously, we're leaning in in those markets to establish ourselves a little bit, more strongly coming out of the integration. We've gone out, as you might expect, with some money market and CD offers that we thought were attractive, it's also bringing in core checking account relationships as well. I would tell you that the deposit data 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. 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. 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. As we've talked about previously, what we'd love to see is those markets further established 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.
Okay, that's helpful. How are you thinking about the core margin here in Q4?
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, maybe a hair less than what we would have thought. I see it as relatively stable.
Our next question comes from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.
Good morning, guys.
Hey, Ebrahim.
Go ahead.
I give this first question around capital management strategy. I'm not sure if B.J. or Bryan, who wants to take it, but I think you recently again reiterated your focus on the 8%-9% CET1. We've got a bump from the Visa gain, as you mentioned earlier. 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. We're down about 10%-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.
Hey, Ebrahim, this is Bryan. I'll start, and if B.J. wants to add on. We do think that there will be opportunities, and now may be one of those to be opportunistic and repurchase stock. We monetized the Visa gain. We bolstered the capital ratios. We had a sense from a lot of feedback that we were screening low on a price to book as well as high on price to book and low on a tangible capital to total assets ratios. That created a bump with the hidden capital that we knew that was there. 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've got that out there.
We think that with priorities for loan growth, organic growth being number 1, managing capital is probably our number 2 priority as we look into the remainder of this year and into 2019. 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.
Got it. Would you say?
Yeah.
Go ahead.
I would add, Ebrahim, if you look at where our return profile is, we're confident that we can continue to maintain and improve that into 2019, then you juxtapose that with what our forward earnings look like, what our price to book, what our price to tangible book looks like, we're very bullish on where we're taking the company. This could very well be a great opportune time to buy back some of our shares.
Is it fair to assume that we still think the 8%-9% CET1 is where we are targeting capital ratios? Is the TCE 7% also something that you're going to triangulate to when thinking about capital management?
Ebrahim, this is Bryan. We primarily focus on the CET1 ratio. The 8%-9% is what's in the BONF pitch. The reason we focus on that is all balance sheets are not created equally, a 7% ratio is an even more blunt instrument. When you look at the risk weighting of our assets, particularly the $2.5 billion of average assets associated with our fixed income business, there's very little risk in that, and it shouldn't, and it doesn't draw very much capital. 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.
Our next question comes from John Pancari from Evercore. Please go ahead.
Morning.
Hey, John.
First, on the credit quality side, noticed you flagged a credit that moved on to non-performers in the quarter that contributed to the, looks like $20 million increase in NPAs. Can you give us a little bit of color on 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.
Hey, John, it's Susan. Yes, it was a $24 million credit in the financial services industry. It had previously been a classified credit, but it moved into non-performing in the third quarter. We've not taken any charge-offs, but we have reserved some against it.
Okay. You said it was a financial services credit?
Yes.
Okay. All right. On that topic, any indicative of any incremental inflows you expect on that front?
No, actually, that one was really an isolated incident. I'm really pleased with what I'm seeing as it relates to asset quality. The average PD grade actually improved quarter-over-quarter, which is our probability default grade rating for our commercial portfolio. We're continuing to see strong asset quality, and that was just an isolated downgrade.
Okay, thank you. 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 for 2019? I know it is a little bit further off than you are going to probably talk about at your Investor Day, how should we think about it? Are we going to see some incremental expansion as we get some additional moves by the Fed? Are we still looking at relatively stable as we move through 2019?
Hey, John, it's BJ. We will talk a little bit more about it at Investor Day as well, 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 is probably one late this year and at least one more next year. With our asset-sensitive balance sheet, that provides a tailwind, number one. Number two, our loans to mortgage company business continues to perform well. 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 a tailwind as well. We expect that to continue. Number three, we are 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. We have confidence in our execution plans to be able to do that. As you well know, our ability to drive DDA is our most profitable way to improve the funding side of our balance sheet. We are going to be very intently focused on that. Those three things we think will help continue to support the margin. The last will be as our loan growth continues into 2019, based on what we are 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 have taken out these lower spread relationship loans as well. We have got several levers that over time, we think that we can continue to help improve the margin.
The next question comes from Casey Haire with Jefferies. Please go ahead.
Yeah. Thanks. Good morning, guys.
Morning.
Wanted to touch on the loan growth outlook. How are pipelines here at the end of the quarter? Specifically, the $360 million of runoff year to date, have you worked through most of that, or is that still a headwind that we're going to have to digest in incoming quarters?
Yeah. Well, I'll start with the runoff that we had. There were a couple of different areas of the business. 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. 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 were not accretive to us. As Bryan said, really single product relationships that we didn't have an opportunity to deepen. We took the opportunity to take those out and move ahead. We're always optimizing our balance sheet like this.
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. Going forward, it would not be nearly as visible.
On the pipeline and production side, we've actually seen a significant increase in production in the specialty businesses core commercial real estate of about 13% quarter-over-quarter. Third quarter production was strong. That's even excluding Mortgage Warehouse. If you include Mortgage Warehouse, our production quarter-over-quarter was up about 30%. We feel well positioned as we go into the fourth quarter. The pipelines really across multiple areas, including the Capital Bank markets, the Carolinas and Florida. Many of the specialty businesses are reporting strong pipelines for fourth quarter.
Casey, this is Bryan. September was our strongest month of the year in terms of production. 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 margins 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 the return on the capital that we have deployed in it. While it may be what appears to be a headline to 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. I just want to fine-tune.
I wouldn't characterize it as a headwind.
One additional point about optimizing when you 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 flow, et cetera. In addition to the improved margins, we also believe that over time, that improves asset quality.
Okay. Understood. I guess in keeping with the profitability, BJ, I am following up on your comments on perhaps optimizing the market index funding side. Is that something that you guys are actively prioritizing higher? Is there a loan-to-deposit ratio at 91% or so is okay? What's the appetite to take that higher to pay down to optimize the higher cost market index deposits?
Yeah. It's obviously a high priority for us. As we've talked about the last couple 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, and particularly in the newer markets, to be able to replace it. 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. We're comfortable with a 90-ish % loan-to-deposit ratio. That doesn't make us uncomfortable, nor would something a couple basis points higher if we saw good profitable loan growth. You'll probably hear more from us on Investor Day around that topic.
We continue to focus very intently on trying to optimize our funding mix, and that's one way to do it.
Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead.
Great. Thanks. Good morning.
Good morning.
I guess maybe start off with loan growth, if we could. I guess slide eight, it looks like you do certainly have pockets where you're seeing some strong growth, but I guess average loans in total up 0.2%. Again, I understand the run-up portfolio that we were talking about earlier, but what is the biggest headwind to growth at this point? Also as we look out over the next year, does that accelerate? What drives that meaningfully higher than where it is today? Thanks.
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, and 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. So you might characterize that as a headwind. I'd characterize that as just managing the balance sheet for one you're going to like long term. So I don't see anything that is particularly a problematic area out there.
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. 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.
Got you. Okay. That helps. Then just a question back on the NIM being stable next quarter. What underlying assumptions are you making about the accretion income as part of that? Should we expect accretion income to continue to decline from here, or is this just going to remain volatile given sort of accelerated payoffs?
Hey, Ken, it's BJ. I think 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 two, $3 million a quarter over the next several quarters. So that would certainly be a headwind to the margin.
Our next question comes from Brady Gailey from KBW. Please go ahead.
Hey, good morning, guys.
Morning, Brady.
If you look at the efficiency ratio, you saw some improvement. It's now down to 64%. I know that you have kind of the longer-term goal of sub-60. You still have some cost saves coming from CBF in the fourth quarter of this year and then into next year. Do you think that you can get the efficiency ratio at that 60% or better level as you exit 2019?
That's our goal. That's what we're driving for. Again, it'll 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 the 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 cost 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. That's clearly one of our main priorities, is to continue to improve the profit margin of the company.
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. Bryan, are you ready to start thinking about another potential acquisition?
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. In short, no.
Got it. Thanks, guys.
Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good morning.
Morning.
Morning.
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? Should we expect to see the pipeline in those markets increasing?
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 Carolinas and South Florida who focus on C&I core commercial relationship building. As we mentioned earlier, the pipelines in the Carolinas and in South Florida are strong going into the fourth quarter. We had particularly good production Mid-Atlantic, which is our Carolinas Capital Bank market, in the third quarter. 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 time.
Great, thanks. On the fixed income business, it was good to see the growth in the ADRs there. How did that play out sort of within the quarter? As you saw the 10-year start moving at the end of the quarter, did that ramp up moving through the quarter, and is that sustaining itself so far through fourth quarter?
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 better probably on average in September, but it was up and down throughout, and we've seen the same trends continue a little bit here even into the start of the fourth quarter.
Great. Thank you.
Our next question comes from Rob Placet from Deutsche Bank. Please go ahead.
Hi, good morning.
Morning.
Middle Tennessee, Nashville is a market you've seen good 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 strategy is in your new markets in Carolinas. Any differences in strategy, say, in Nashville versus the Carolinas.
Yeah, this is Bryan. I think that's an important point. When we articulate optimism about the opportunities in Mid-Atlantic and 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. 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. It does give us that optimism.
Okay, thanks.
One final point on that, which is, that'll be one of the topics that we talk about in the Investor Day. I'll tease the Investor Day a little bit.
Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning.
Hey, Jon.
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? Then curious how much more potential you see.
We have several different types of synergy opportunities, Jon. Let me give you a couple of different ones that we're already executing on. We believe there are more out there. For existing clients, either in legacy First Tennessee or for Capital Bank, in terms of hold limits and where we like to be, obviously it's the bigger balance sheet. When there are opportunities to take on additional exposure on the lending side, it gives us that opportunity to do that without going over limits. That's one example. The opportunity to broaden relationships. 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.
As an example, I know there's opportunity with a lockbox for an existing customer in the Capital Bank franchise where we had other products but we didn't have that, an opportunity to expand there. The third one I would bring up, all 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. 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 referrals into those specialty businesses from our bankers in the Carolinas and Florida. Asset-based lending, franchise finance, Mortgage Warehouse Lending. We're seeing opportunities for referrals as well.
Okay, good. More to come? You expect more to come from these opportunities?
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. You 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. We think there are quite a few opportunities left, and we'll continue to build on them.
Okay. 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?
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. Then remember, we sold the subprime auto, which was about $100 million. In aggregate, those are a couple hundred million.
Okay.
In the quarter.
Yep, good. Thank you.
Sure.
Thanks, Jon.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
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 build-out of some of those different businesses and maybe where you're looking to hire both in those businesses, in the core franchise? There's a bank in Nashville that obviously put out a lot of press releases here about hires. Just wanted to get the outlook for you guys. Thanks.
I'll start. It's BJ. Really our most profitable lending business is our loans to mortgage company business. We continue to look for ways to expand that. That's one of our top priorities. Across asset-based lending, loans to mortgage companies, franchise finance business in particular, those businesses in aggregate have less than 5% national market share. We have huge opportunity over time to continue to build out teams, different specific sub-niches within those lines of business. We're very optimistic that we can do that. 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. Not all banks can do it.
We see a little bit more rationality than we might see in some other lending areas. All of that really pushes us towards trying to allocate more resources to that growth. If you look over the last five years, our specialty lending businesses have grown 150% in terms of balance sheet growth, over $6 billion. 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 the left side of the balance sheet even more profitable.
That's great color. Maybe just following up on that, excluding the runoff of the non-strategic, 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?
Yeah, we certainly think so. Some of the repositioning of the balance sheet that we talked about this year has needed some of that growth. I think if you look at the regional bank itself, I think we're seeing maybe 3%-4% annualized growth, but that was roughly cut in half by some of the repositioning of portfolios. Going into next year, total balance sheet growth in the mid-single digits is very reasonable for what we see.
That's helpful. Maybe just one final one for me. I know it's still a couple of quarters out, but any initial thoughts on the impact of CECL for you guys? Thanks.
Yeah. 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. Nevertheless, we will be prepared for it going in. 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'll look like on our P&L. We are in line to slightly ahead with our planning of being prepared for CECL. Hopefully, something does change and the dialogue 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.
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. To sort of reiterate BJ's point of 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 standards writers. They keep saying when we talk that investors are demanding this, 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.
I think ultimately, it's not going to give investors any better understanding of financial statements.
The next question comes from Geoffrey Elliott with Autonomous Research. Please go ahead.
Good morning. Thank you for taking the question. Just a little clarification. When you were talking about the NIM staying stable in the fourth quarter, that was the core NIM, right? Just wanted to clarify on that.
That's right.
Thank you. Just in terms of asset sensitivity, you kind of mentioned that a few times as a positive on the conference call. I guess given the discussion about the stable core NIM into year-end, and given that slide seven shows a negative impact from rate stays and other in the slide deck, can you kind of help us by quantifying that asset sensitivity? There 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?
Aarti is sitting here pointing and laughing at me because I told her 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've expected, particularly in the deposit portfolio as rates have started to rise, a little bit more of a shift into money market and money market into CDs, which would dampen asset sensitivity. In terms of the lending that we're continuing to do, it's predominantly floating rate. In aggregate, our asset sensitivity hasn't meaningfully changed. 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.
I guess the reason for asking is it doesn't really feel like it's been coming through the last couple of quarters. The comments on 4Q stable core NIM kind of suggest there's not much benefit there in 4Q. What's the piece that I'm missing there?
Yeah. I would tell you that the last two quarters have really the difference has been the deposit beta. The deposit beta, of course, from Q3 2015 to the first quarter of 2018, let's say, was very low. If you actually go back, we would have beat those asset sensitivity metrics that we put out on that graph before. We would've been ahead of them. Last couple quarters, because we were defending our deposit base, the deposit betas were higher, which dampened the sensitivity. Over time, particularly when short rates ultimately moderate and stop increasing, we think that again, will help us in terms of our net asset sensitivity. I think, Geoffrey, it's a question of timing, but over time and through a cycle, we think our asset sensitivity is intact.
Our next question comes from Tyler Stafford from Stephens Inc. Please go ahead.
Hey, good morning, guys.
Morning.
I wanted to start just on the Mortgage Warehouse, obviously, a good quarter there, the deck talked about market share gains driving that volume. I was just wondering if you can talk about the pricing or the yields in that business today. Just curious if you're seeing any spread degradation at all, just given that market share gains.
Yeah. It's still our highest yielding portfolio on the commercial side. Do you have the-
Yeah. The yield is 546 for the quarter.
Yeah. It's almost 550 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. That rate volume trade-off has been a net positive for us, of course. We would expect that type of momentum to continue. We'll always look to increase our share at a profitable rate. I will tell you that Bob Garrett and our loans and 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.
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. We're very pleased with how it's performing.
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. One last thing as it relates to market share growth in Mortgage Warehouse, it's been a combination of an increase in client count. Client count in 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. In select cases, we're increasing some lines to existing customers. We like the business and we like both the lending side and the deposit opportunities that are there as well.
Very helpful. Do you have what the 546 comparable yield would've been in 2Q?
544.
Okay. Just lastly, BJ, you mentioned the stock looks attractive based on your forward earnings profile. You guys just reported a 128 annualized DPS quarter. You've got 75% of the Capital Bank cost savings now in the run rate. At some point next year, I would imagine the headwind of normalizing higher credit costs and then some GAAP margin, at least headwinds from declining accretion, and funding pressures. 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?
Hey, Tyler, just to clarify, $0.36 times four is $1.44.
Yeah, I took out some of the one-time items in there, the trucks and some other items.
That doesn't drop it $0.20. Regardless, 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. 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've 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. Again, overall, we are very focused on positive operating leverage. 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.
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. 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 valuations are, we think it's a very attractive time for us to look at share buybacks. We'll be looking at both sides of that equation to continue to improve our earnings per share profile.
Tyler, this is Bryan. I'll just add to BJ's comment. 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 the calling efforts and growing the business. We see that turning, we see the momentum pick up. As we see the business unfolding in 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.
Our next question comes from Brock Vandervliet from UBS. Please go ahead.
Thanks. Good morning. I guess just probably following up on that question. Byian, you touched on FHN Financial, and it 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. Parting with that would certainly give you a leg up on the efficiency ratio and other metrics. How does that kind of fit in?
Well, Brock, that's a business that we like. We had a slide in a deck for a presentation we made early-mid September, and it shows that business is countercyclical. 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, and we've been in the business close to 100 years than not. We understand it well. It is countercyclical, and when credit does start to deteriorate in the industry, we will see a pickup in that. We've seen it historically. We will see a pickup there. It will be a countercyclical offset. 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 cost and to drive profitability in the business. 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.
Okay. Separately, as a follow-up, on the provisioning and the provisioning tempo that's kind of oscillated from small negative to small positive, when should we, how should we think about that normalizing?
At this point, Brock, we continue to see asset quality remains excellent, and we continue to have runoff in the non-strategic portfolio. We'll see probably some opportunities to release in non-strategic. We use the models, and we believe that 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. At this point, I see the provision remaining rather stable across the next few quarters based on what we know today.
Our next question comes from Chris Marinac from FIG Partners. Please go ahead.
Thanks. Good morning. Bryan, you had mentioned a while ago about the repositioning not being a headwind. Just tacking 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, to 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. I just want to reconcile the timing of that.
Yeah. 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 will also affect the overhead efficiency ratio. 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. From an ROA perspective, we would expect that to continue to improve into 2019.
Okay, great. Then, is it possible to compute a core loan yield? You may have mentioned that in a prior question. I just want to go back to that.
Core loan yield?
Yeah.
I don't have it in front of me, we can get it to you.
Short answer is yes.
Yeah.
Okay, that's fine. I'll circle back.
We can do that. Defining core may be the hard part. You just exclude it non-strategic, we could probably do that fairly quickly.
Very well, guys. Thank you so much for the time.
All right, Chris. Thank you.
Our next question comes from Matthew Keating from Barclays. Please go ahead.
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? Separately, perhaps you could quantify the impact that the more muted move in LIBOR this past quarter had on loan yields. Thanks.
Hey, Matt, it's BJ. On the deposit, I think in terms of betas, I would venture to say that 2Q was probably our high watermark. 3Q clearly moderated, I would hope and expect that 4Q would be flat to further moderate from the 3Q levels. That will be helpful, of course, to the core margin, in the fourth quarter. What was the other question, Matt?
Oh, thanks, BJ. The other question would be, obviously, LIBOR's move was a bit muted in the third quarter.
Yeah.
It looks like it's picking up from here. Do you think you will see, obviously, that benefit should flow through, I guess, how big of an impact, I guess, did the more muted move have on loan yields, if you're able to quantify that at all?
Yeah, 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 four basis point decline. I'd say a couple basis points of that was related to LIBOR ultimately.
Great. Thanks very much.
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, Cole. We appreciate you taking time to join with us this morning. Again, I would encourage you, if you have not already, please join us for our November the 6th 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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.