Good morning, and welcome to the First Horizon National Corp. 2nd Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Ms. Aarti Bowman. Please go ahead.
Thank you, Brandon. Please note that the earnings release, financial supplement and slide presentation we'll use in this call are posted in the Investor Relations section of our website atwww.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, Ryan Jordan and our CFO, BJ West. Additionally, our Chief Credit Officer, Susan Springfield will be available with Brian and BJ for questions. I'll now turn it over to Brian.
Thank you, Artie. Good morning, everyone. I appreciate you joining us. Feel very good about the Q2 results and the progress that we've made. Also very excited about the completion of our Capital Bank integration, which I'll touch on in a few minutes.
Our results for the quarter showed steady loan momentum and continued strong credit quality. Our pipelines at the end of the quarter are very strong. In fact, they're up significantly from where they've been running in the last 6 months. We're also pleased with our deposit trends, which saw very good momentum in our customer activity on the deposit side. You'll hear BJ talk more about our targets long term later in the slides, but we hit an 18% ROE in the quarter and close to a 125%, I think a 122% ROA for the quarter.
And both of those are right at where we expect to be for the next couple of years. And so we're excited about the progress there. I mentioned the Capital Bank integration. We completed the integration on Memorial Day weekend, the systems integration on Memorial Day weekend of I can't remember which month May. And very pleased with that.
A lot of work went into it. The great deal of effort over the last several quarters, really going back almost a year with planning operating models and then conversion integration testing and so on and so forth. Very, very pleased with the results of that integration. We had very strong support for our customers and feel very good about the way that all came together. It was a huge team effort and I really do appreciate the effort of all of our bankers and technologists and so on and so forth that pulled that off.
In the next couple of years, we're excited about the ability to realize on the synergies and the opportunities of the Capital Bank integration and the Capital Bank merger. The Capital Bank markets are outstanding and we think they put us in some of the best markets in the Southeast, if not in the country. And we'll be focused over the next couple of years on capitalizing on those opportunities and continuing to improve our business models, ensuring the best customer experience that we can deliver to customers, enabling us to really grow the business organically and profitably over the next several years. We think we have a great opportunity to continue to deploy capital in these growth markets and these organic efforts, particularly in the Carolinas, Mid Atlantic and South Upstate South Carolina. So we're excited about that.
We all think we're well positioned to deliver strong returns over the next couple of years. You'll hear more about that from BJ. And we think we're going to continue to operate in a very strong economic environment for the foreseeable future. We think we're in great markets and we think we have a position a franchise is positioned very, very well for good growth over the next couple of years. So with that, I'll turn it over to BJ and I'll come back and take a few wrap up questions before we take some comments later.
BJ?
Great. Thanks, Brian. Good morning, everybody. Let's start the review of the financials on Slide 5. For the Q2 in 2018, reported EPS was $0.25 dollars $0.36 on an adjusted basis.
The difference between reported and adjusted results in the quarter were mostly merger related expenses and the impact of those on both pre tax and after tax income as well as EPS are shown on the bottom right of the slide. The accelerating adjusted EPS growth up 6% linked quarter or 24% linked quarter annualized was just what we expected based on our continued organic business momentum, strong net interest income growth and net interest margin expansion and the increasingly impactful EPS contribution from the Capital Bank merger. Starting with the positive NII and NIM trends, NII grew 3% linked quarter and the NIM expanded by 10 basis points to 353. Even excluding the positive impact of purchase loan accretion, NII was up 2% and the core NIM expanded nicely by 6 basis points to 3.33%. We accomplished this net interest income and margin improvement through continued pricing discipline with strong loan betas continuing to more than offset increasing deposit pricing pressures.
Continued balance sheet growth also helped in the quarter with loan and deposit growth up 1% and 2% on an average basis respectively linked quarter. Importantly, non interest bearing deposits were up 2% on an average basis and 3% period end, reflecting our continued focus on growing our relationship deposit base. Our balance sheet is strong and our intentional focus on managing the totality of the margin, which includes optimizing the growth and mix of our loan and deposit portfolios, along with appropriately pricing our loans and deposits, continues to work to our advantage. Expense discipline remains strong across the franchise. As expected, we realized $12,000,000 of merger related cost saves in the quarter and expect this number to continue to increase each quarter throughout the next several quarters.
Credit quality remains excellent with no provision in the quarter, only $2,000,000 of net charge offs and Capital Bank credit performance continuing to be strong as expected. Speaking of the Capital Bank merger, let's turn to Slide 6 for an update. We remain more confident about the deal today than when we announced it last year and we're pleased with how it's going and adding meaningfully to our strategy and financial performance as well as growth. As you can see, we now estimate EPS accretion at more than twice the original announcement due to great execution on things that we can control like higher cost saves and tangible revenue synergies as well as benefiting from tax reform. As we previously discussed and Brian just mentioned, we completed our systems conversion over Memorial Day weekend and we're ready to roll with growth in our newer markets.
Our cost saves are right on track. We achieved $12,000,000 cost saves in the Q2. And if you do the math, that means we have roughly 55 percent of the $85,000,000 in cost saves in the expense run rate today. So a lot of earnings power already captured, but also more earnings growth to come. Our revenue synergies really accelerated in the 2nd quarter.
We have now generated $17,000,000 of annualized revenue synergies, up from 1st quarter's amount of 5,000,000 dollars representing a significant increase in number of deals from 36 deals closed or in process in the Q1 to now 306 at the end of the Q2. The revenue synergies are largely driven by expanding customers and products in 3 main areas. Number 1, through capital bank referrals to our specialty banking business lines. Number 2, bigger balance sheet capacity to serve customer relationships in both the Capital Bank and First Tennessee franchises and number 3, consumer lending and mortgage opportunities on balance sheet. Turning to Slide 7, as I discussed earlier, we saw strong net interest income growth and net interest margin expansion in the quarter, and this slide gives you a bit more context and color on that.
Stepping back and recognizing the significant improvement we've seen over the last 5 quarters is impressive. If you look at the bottom right hand chart, from 1Q 2017 to 2Q 2018, our reported NIM has expanded 61 basis points from 2.92 to 3.53 and our core NIM is up 41 basis points 2.92 to 3.33. Those increases are driven by balance sheet growth, net benefit from short term rate hikes as our loans repriced faster than our deposits and the additional benefit of purchase loan accretion. Particularly related to betas, it's important to remember that there are 2 types of betas, loan betas and deposit betas. And since the beginning of the rate hike cycle, our loan betas of 71% have far outpaced our deposit betas of 32% and the deposit beta number includes a large increase that we saw in the current quarter.
And as we discussed on our Q1 call, we saw the anticipated increase in deposit pricing competition and also as we discussed on the Q1 call, we responded appropriately to keep our pricing, specifically our relationship pricing, competitive and commensurate with the long term nature of the relationships we like to build with our customers. Managing mix and pricing holistically like this across the entire balance sheet allowed us to again expand the net interest margin and we will continue to look to do so. Turning to loan growth on Slide 8, we are pleased with the good net loan growth we saw in the quarter despite making some intentional moves with the balance sheet. Total loans were up 1 percent on an average basis and 2% period end despite intentional moves to optimize the balance sheet that created a growth headwind of about 1%. Our specialty banking areas again demonstrated strong growth.
We especially saw strength with loans to mortgage companies where we're gaining market share up 32% on a linked quarter basis. In addition, our restaurant franchise finance business saw a strong 5% linked quarter growth on strong deal closings as did our healthcare businesses, up 7% linked quarter. Private client also saw strong linked quarter growth of 5%. From a revenue synergy perspective, this is where the adoption of Capital Bank's in house mortgage platform across our entire franchise has helped to boost our consumer lending capabilities and on balance sheet growth. Our loan portfolios in Tennessee continue to show steady growth and our efforts in Middle Tennessee in particular continue to gain momentum where we posted 4% loan growth linked quarter.
As expected, our loan growth in our Capital Bank markets was somewhat slow due to the merger integration and conversion activities in the first half of the year. With what we see in the pipelines, we expect that growth will start to improve in those markets in the back half of this year. The 1% growth headwind I mentioned was created by intentionally running off another $60,000,000 of non strategic loans, selling $120,000,000 of subprime auto loans acquired through the Capital Bank merger and exiting another $150,000,000 of low relationship value loans year to date. All of these growth numbers and the repositioning of the loan book demonstrate our continued focus on improving economic profit, and we will continue to grow profitable relationships and products to improve our portfolio mix. Moving on to asset quality on Slide 9.
Credit trends remain excellent. Provision was 0 in the quarter and net charge offs were at only $2,000,000 in the quarter. We saw a 32% decline in criticized loans to pass grade, mainly from an upgrade of approximately $310,000,000 of TRUPS loans, and we continue to expect the credit environment to remain benign for the foreseeable future. Slide 10 gives you a sense of just how much growth in profitability and improvement in efficiency has occurred over the last several quarters. While our steady improvement on key bonefish metrics as well as EPS growth was good before, the combination of continued strong momentum in the existing First Tennessee business, the addition of Capital Bank and its associated financial benefits and tax reform have all worked together to accelerate our growth trajectory.
Looking at our performance over the last 6 quarters, starting just before the Capital Bank merger was announced and seeing the excellent improvement in key Bonefish metrics shows the tremendous growth we have seen. Adjusting for the merger related costs, our core operating performance is very strong. EPS in 1Q 2017 was $0.23 Today, we reported $0.36 of adjusted earnings, an increase of 57%. Return on tangible common equity was 10.3% in 2016. Today, our adjusted ROTCE is 18.2%, an 800 basis point improvement.
Our ROA is up 40 basis points from 87 bps to an adjusted 1.22%. Our net interest margin is up from 2.92 in 1Q 2017 to today's 3.53 total NIM, up 60 basis points or up 40 basis points on a 3.33 core NIM. And our efficiency ratio has improved from 72% to 65 adjusted with more cost saves and improvement to come. With more cost saves, revenue synergies and growth to come, we will continue to improve our profitability and growth profile. So wrapping up on Slide 11, our 2nd quarter performance was very pleasing to us and very strong, and we're pleased with the trajectory that it provides for us the rest of the year and into 2019.
And our key priorities over the near term are clear. We will deliver on our higher earnings accretion from Capital Bank via the cost saves and revenue synergies. We will maintain strong performance across our markets and build momentum with our newer organic growth opportunities in the Carolinas and Florida, and we will continue to enhance relationships to drive customer acquisition and retention. And with that, I'll turn it back over to Brian.
Thank you, BJ. Again, I'm pleased with our second quarter results and excited about our momentum going into the second half of twenty eighteen and twenty nineteen. Thank you again to all of our employees and customers for their dedication as we've made the changes needed to build and expand our platform. And thank you to our team for all the hard work they did in completing the integration. To those of you that had an opportunity to participate in the perception study we completed recently, thank you for that.
That will be useful feedback for us. On November 6, we will hold an Investor Day in Nashville and hope that many of you will be able to join us in person, if not by a conference call. We'll be providing more information about our strategy and execution plans at that conference with our executive team in attendance. So I hope you'll put that on your calendar. With that, Brandon, we'll now open the call for questions.
Thank Our first question comes from Steven Alexopoulos from JPMorgan. Please go ahead.
Hey, good morning, everybody.
Good morning, Steve. I wanted
to start on expenses, which came in above at least what we were looking for this quarter. Given the additional cost saves that were realized and then capital markets revenues were down quarter over quarter. I'm trying to better understand why adjusted expenses increased a bit. Was there anything unusual in the quarter? And was this above your internal forecast?
Hey Steve, it's BJ. No, this was right on our internal forecast. There's nothing special about it. There were several smaller things, pension cost assumption adjustments and some strategic hires and some incremental costs related to that, as well as several other smaller items, but nothing out of the ordinary. We believe that our expense discipline remains very strong across the franchise.
And so we expect that our expenses will continue to be flat to down as we're realizing more of our cost saves.
Okay. So going forward, Vijay, we should just build off the $2.85 adjusted and then put in the additional cost saves.
That's a good base.
Correct. Okay. And then on the margin, I didn't think you disclosed this. What was the scheduled versus accelerated
accretion in the quarter?
If you look, Steve, on Slide 7, it gives you the total accretion. We would have expected probably around $10,000,000 of scheduled accretion. And so there was obviously about $8,000,000 of unscheduled accretion, excuse me.
Okay. So about half of the 21 basis points?
Yes. That's right.
Okay. And then, Vijay, the yield curve is getting pretty flat. How do you think about the NIM, like core NIM moving forward?
Yes. So I think we're incredibly pleased with what we saw in this quarter. And so if you look at it over the last really since the beginning of the rate hike cycle, we have proven out the asset sensitive balance sheet that we thought we had with our loan betas repricing far faster than our deposits. And if you look over the last couple of years and what we've done, we've been able to keep deposit rates very low. But as we talked about, deposit competition has been heating up.
We responded appropriately as we talked about doing. We've got to manage this company for the long term to keep our relationships with our customers strong so that we can even grow further. And so all of that competition heating up and we still expanded the core NIM by 6 basis points in the quarter. That's really, really good performance and serving of our customer relationships across our company. If you look forward on our core NIM, you've got to start with taking out what we saw from the subprime auto sale, which we have on Slide 8, where we exited loan portfolios that we thought was not within our risk profile and not strategic for us, that had about a 5 basis point impact on the margin.
And so if you start there, we think the rest of the year based on what we're seeing in our pricing discipline on the loan side as well as the deposit side that we can continue to see the core margin expand by maybe a couple of basis points throughout the rest of the year.
Our next question comes from John Pancari with Evercore. Please go ahead.
Good morning.
Good morning, John.
On the Capital Markets business, just wanted to see if
you can comment a little
bit more around the impact on the ADR came in particularly low this quarter. What do you see in there? And what's your outlook there? What type of improvement should we expect or do
you think that it could remain down here for a little while?
Hey, Don, it's BJ. It's a tough market for fixed income. All the headwinds that that business could possibly face are occurring. The direction of rates is not helpful. The level of rates is still low.
A positive economy means more interest in equities and loan growth versus fixed income and there's very, very little volatility. So it's just a tough market. The positive thing for us is that it is what it is. The regional bank earned right through it. We continue to grow our EPS as a franchise and one day FTN is going to help us again like it's helped us in the past, but that day is not today.
So we're continuing to focus on the banking business and the great strength and growth opportunity we have there and we'll continue to earn through any headwinds we have in the fixed income business. Hey, John, this is
I'm sorry, this is Brian. Add to what BJ said, it is a difficult and low volatility environment. And seasonally, the second and third quarters are a little bit slower just because of the summer months. We don't expect a tremendous amount of improvement in the back half of this year, but as BJ said, it's still a business that we think is a nice fee income business. This turbulence that we have with the unwinding of QE, the flat yield curve, Fed raising rates will pass and we'll get back to a more normal interest rate environment.
Don't ask me to put a calendar on the wind, but I don't think it's forever. So I think you shouldn't expect a whole lot of change. We'd expect some modest improvement in the back half of this year, but it wouldn't be a tremendous amount.
And on that point, what is breakeven for the business when it comes to ABR? Are you losing money at this level? And then separately, at what point do you think about strategic options for it at all? Are you at that point at all? Or is this something just long term that you're it's par for the course and you're in it for the long term?
Well, yes. And for the quarter, we had a slight loss. I think it was down $27,000 $800,000 pre tax net loss for the quarter. So it's not a whole lot of $10,000 or $20,000 a day puts you back in a breakeven. So yes, it was a little bit of tiny drag in the quarter.
In terms of the business in the long term, we never say never. But as we look at the business and we look at the interest rate environment that we're in and the fact that we've been in this business well over 80 years. We like the business, it's fee income oriented. We think we have an expertise and a market niche that will be very valuable over time. And the other thing to keep in mind is this is a counter cyclical business.
When the interest rate environment and the economy turns because of the interest rate environment, this business is very strong. And if you think back about the results in 2,008 and 2 1009, you saw the very countercyclical benefits. So one way to think about it is in some ways it's a hedge to credit costs going back up. So we look at the business, we look at the capital we have allocated in it, we look at the leadership and the product and our market positioning. And while it's not performing where we would like it to be today, we're not content to just not focus on that.
We're working on controlling costs and improving results. We don't think it's a break the glass situation.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning. In the beginning of the call, you mentioned that loan pipelines were up pretty significantly over the past 6 months. Can you just give us some color on where you're seeing the strength and what the potential headwinds could be as we move in the back half of the year as many more strategic or portfolio sales? Thanks.
Yes. Judy, do you want to take that?
Sure. Yes, we're seeing some very good strength in our loan pipelines. One thing too I would note, the month of June in terms of new production was the strongest month we've had this year. So in addition to the pipeline for the second half of the year, we saw some really good production the last month of the quarter. Mid Atlantic is particularly strong in terms of pipelines.
We're also seeing strong pipelines out of our specialty businesses, Middle Tennessee, Houston. So we're pleased with the pipeline. Cree also has a strong pipeline. You asked about potential headwinds that would be the one area in terms of pipeline headwind in terms of commercial real estate. Although the pipelines are strong, we did see our pull through rate on commercial real estate drop just a little bit, but that's because of risk adjusted profile and the underlying structure of those credits.
So we continue to book new business in commercial real estate. But that's the one area I think we'll watch due to the heavy competition as it relates to pricing structure.
Okay. So assuming all else equal, should we expect or anticipate similar levels of loan growth, net loan growth over the next couple of quarters?
Yes. We still expect the mid single digits in loan growth here. Michael, this is Brian. I'll add to Susan's comments. It really I was in Artful.
I guess it's hard to describe the amount of energy that goes into completing the integration and the inward focus that's required for that. And as Susan said, we saw it picking up as we got closer to the integration completed that June was stronger. The pipelines were up now and they're probably close to 20% from the 6 month average. So we feel good about the sustainability of loan growth at this point.
Okay. And then maybe just one more follow-up, just as it relates to some of the deposit strategies that you guys have talked about in the Florida market specifically, where do you stand with that and how much more could we expect to see in terms of deposit specialist campaigns, things of the like? Thanks.
Yes. So it's C. J. In the Q2, like I talked about and likely telegraphed in the Q1, we took some actions at the beginning of the second quarter to increase our relationship pricing. So for the higher tiers, particularly around money market pricing, we moved those up to $50,000 and up.
We made fairly meaningful moves in our pricing to retain customer relationships and start to grow them. We've had 90% to 95% retention rate on those balances since those moves, which has been excellent. We've also instituted some acquisition pricing, particularly in our newer markets like South Florida or Mid Atlantic, little bit in Middle Tennessee, to again look to acquire new customers with an emphasis on getting the checking relationships obviously as well. And so we've seen good success out of that, good feedback from our customers, and we expect that that will continue to allow us to grow. I don't think that we'll see quite the deposit beta quarter to quarter that we saw this quarter.
But so it will come down, but we will continue to respond appropriately to protect our customer relationships. And again, have to look at the totality of the margin. Deposit betas is one piece of it. We have 26% of our loan of our deposit mix in non interest bearing DDA. That is a tremendous help and our sales people continue to focus on serving customers in a core way with relationship checking deposits And to the extent that we were going to serve those customers from a rate perspective or a money market perspective, we will do so.
But in the context of a larger relationship, and we will continue to look to expand the margin appropriately by leveraging the asset sensitive balance sheet on the loan side that we've got.
Our next question comes from Casey Haire with Jefferies. Please go ahead.
Thanks. Good morning. Wanted to follow-up on the deposit strategy. It was my understanding that you guys would lean into some of your new markets with some promotions and acquisition type pricing. But I thought the other part of that was to get some positive mix shift on the funding side and pay down some of the borrowings and market index, which are obviously higher cost.
And obviously, the short term borrowings were up. Just wondering what the outlook is for some of your higher funding cost categories?
Hey, KC, it's BJ. Yes. So as Brian talked about, South Florida is one of our main areas that we think that we can really create some meaningful headway over the next couple of years to grow deposits there in a way that we can replace the market index deposits and build customer relationships down there, be aggressive and actually improve our overall deposit mix. But as you know, the first half of the year, our people in South Florida were very focused on taking care of customers, doing merger integration and merger conversion activities. So we had to give a little bit of time for them to be able to do that.
As I just said, we did institute some aggressive pricing, particularly in South Florida, in the second quarter to help start to get our name out there, give our salespeople something to acquire customer relationships and sell. And we're confident that organically we can do that going forward over the next several quarters. But again, it's going to take a little bit of time and we're confident that we can do that.
Casey, this is Brian. To BJ's point, we converted the systems on you've got 2 things going on. You've got customers who are trying to deal with the differences in statements and online banking and mobile banking and technology because a lot of folks visiting the branches and you've got a tremendous number of people who've done a lot of training on new systems who are now using those on a day to day basis. So we had a heavy ambassador program. So we had a lot of intense activity in our branches really until the middle of let's call it the middle of June.
So as BJ said, we're really just now in a position to start leveraging some of those strategies in the back half of this year.
Okay. So you do expect those borrowings to work down in the back half of the year and that's baked into your core NIM expansion?
We will continue to try to shift deposit mix more towards customer deposits. Absolutely.
Okay, great. And just to clarify on the loan growth front, the $150,000,000 of strategic exits and the subprime portfolio from CBF. Is that I mean, have you picked off everything that you don't want from CBF? Or is there more opportunities for these types of headwinds going forward?
In terms of aggregate portfolios and portfolio sales, that's probably correct. What we are also doing is making sure that we're focusing on profitable growth opportunities with core relationships and we'll continue to do that. That's just good management of a company and its relationships and the balance sheet. So that kind of stuff will continue, but discrete, bigger loan sales, I don't see any at this point.
Anything you see going forward ought to be excuse me, ought to be transaction by transaction.
Our next question comes from Robert Placid with Deutsche Bank. Please go ahead.
Yes. Hi, good morning. Just a question on the new markets you picked up with Capital Bank, specifically the Carolinas and South Florida. I guess, what are your ambitions in those markets just in terms of size and presence there over the medium and then over the longer term? I guess, do you foresee yourselves getting significantly larger kind of in those markets over the next couple of years?
Yes. This is Brian. We're really excited about the opportunity that the Capital Bank Markets present to us. They are outside of Tennessee. They are very much look and feel a lot like the markets we're
accustomed to serving.
You'd have to argue that some just the dynamics of the expanded footprint. We're excited about the positioning that Capital Bank had in those markets and feel good about our ability to build off of that. Some of that is our ability to bring additional products and services and Vijay talked about some of that when he talked about revenue synergies earlier, but bringing our treasury management products, bringing wealth management and overlaying a broader product set. While our branch footprint and branch density in those markets starts by necessity at a lower place. We don't think that branch activity will be the big driver or branch density will be the big driver of our ability to grow in those markets.
We will be, as we have said in the past, very strategic and looking for bankers that we can bring on to platform that we can leverage the footprint that we have that we can grow targeted in a targeted fashion and do it in a way that produces high quality services and products for our customer base and allows us to continue to expand and build on the momentum that Capital Bank had started to generate. So as we look at those markets, we think that they will be our primary focus over the next couple of years, just aggressively building our business through customer acquisition and bringing in strategic hires to capitalize on the footprint and the opportunity it presents. So in a word, we're excited about it.
I'd also add, we have really good blueprints for how to grow in lower share markets that have great opportunities. Nashville and Middle Tennessee is a great example of how our company has already done it. 4 or 5 years ago, we started with an intentional plan to be different in that market versus the other markets where we had number one market share. And in 5 years, we've far outpaced the market growth in terms of loan and deposit growth. And the balance sheet is 70% larger than it was 5 years ago and our name and our recognition and our ability to attract talent is far greater today.
We can transport that exact blueprint to Raleigh, to South Florida, to Charlotte, to Greensboro, North Carolina, and that's exactly what we intend to do.
Our next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks. First question, just with the Capital Markets business
and I'm
looking at Page 13 of your supplement. Can you just remind us like how much of those expenses are actually variable? Because I guess with the fall off in the revenues, I would have expected more or a lower non interest expense to go along with that, but it looks like they only went down a couple of $1,000,000 despite a much larger revenue decline.
Yes. So Ken, it's BJ. About 70%, 75%, I believe, of the expense base there is variable. But you get to a point where there's just not much more you can do to move it down. And Brian alluded to earlier, the leadership team out there has done an excellent job taking out as much fixed cost as we possibly could.
The variable cost obviously hurts in terms of our sales people, but that's the way the model works. Our variable compensation has come down, but at some point there is a fixed level of cost that's very difficult to get out. And as was asked earlier, what's the breakeven ADR, we're at about it right now. It's just a very difficult market. The management team is doing a great job trying to manage through it.
Like I said before, when that comes back, we will see the expansion in our revenues much faster than the expansion in our expenses and it will be helped to us, but just not today. Got it.
Okay.
And then switching gears, just
in terms of the interest bearing deposit beta, I calculated an 89% deposit beta there. I suspect going into the quarter, you probably wouldn't have predicted an 89%, but the question really is as we look forward to next quarter, right? And I understand the reasons why it was high this quarter and some of the actions you're taking this quarter. But on a go forward basis, if the market does remain competitive, if what is there anything that would stop the beta from theoretically being 89% again next quarter? Thanks.
Hey, Ken, it's BJ. So we would have absolutely expected this beta this quarter. That's why we talked about it on the Q1 call. I actually said inflection point in deposit competition and that's what we saw. I think if you look back on that slide, the reason we show since rate hikes is that there wasn't a lot of moves at all.
And we could be very disciplined based on what we saw with our customer relationships and the discussions that we had and the competition, etcetera. We are very intent on watching that and trying to optimize the profitability of the company with building long term relationships with our customers. So said a different way, we had 80 some percent interest bearing deposit beta in the quarter. If we had had 10%, 15% increases since the beginning of the rate increase cycle, we'd be having a different conversation. We just started to see it really in earnest over the last couple of months.
We responded appropriately, but I'll say it again, we manage the net interest margin, which includes the loan mix, the deposit mix, the deposit betas and the loan betas. And as a testament to our people and the pricing discipline, we expanded the core margin by 6 basis points even with knowing that we were making an investment in our deposit relationships. And we think that we can continue to expand the margin because of our asset sensitive balance sheet on the loan side and because we're going to manage deposit beta smartly.
As we've said earlier in the year, I think it was in our Q1 call, we had seen the tremendous amount of lag that had been created industry wide. And as we really moved into 20 18, we started to see that lag come out and you're experiencing some of that. So the beta in any one quarter may be higher or lower depending on how that moves. But as BJ said, we measure it or excuse me, we manage it in concert with the margin. And in some sense, betas are like loan growth percentages for a short period of time.
We can manage them to anything. You can give us any target when you manage it to that, but you wouldn't necessarily like the balance sheet long term. We take a long view of that and we want to make sure that we're pricing our liabilities, our deposit base in a competitive fashion that recognizes and rewards the relationships with customers and builds long term relationships and stability in that deposit base. So while anything is theoretically possible, I suppose we don't expect betas to run at that level as we move into the back half of this year.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning guys. Good morning, Brady.
So I know we've already talked about accretable yield, but and I know that the prepayment accretion can be hard to forecast, but levels were total levels were $18,000,000 this quarter that was up from about $14,000,000 last quarter. Is $18,000,000 what you would consider a good run rate for the next couple of quarters? Or do you think that will dip back down closer to the 1Q level?
Yes, it will come back down. The interesting dynamic is looking at this and for those of you that have followed accretion, particularly in the couple of quarters, it's very, very difficult to get a beat on exactly where it's all going to settle out. And so in the Q1, we actually had 21% more loan payoffs and therefore accretion coming through unscheduled in terms of actual loans. But this quarter, we had 3 loans that were large in size, just 3 that drove the majority of the increase between the $14,000,000 and the $18,000,000 So we do believe that, that $18,000,000 is going to come down. And we expect scheduled accretion more in the $9,000,000 to and whatever we print over the next couple of quarters is going to be the unscheduled accretion.
I think the other thing to keep in mind is when we see unscheduled prepayments and a loan payoff, that rate mark is really the income that's coming back in terms of accretion. But going forward, if we replace that, which is really not at a market rate, with a market rate loan in some of the growth markets that we're talking about, we're actually net improving our core net interest margin by doing so. So we're getting the benefit of accretion today and we're also going to get incremental benefit loan by loan on that accretion tomorrow because it's going to come back in the core NIM at a higher rate. So we continue to manage this closely. It's real income and we think there's a lot of opportunity both there and in our core growth going forward.
All right.
And then, I mean, just looking at the stock price, it's down, I think, 13% or 14% year to date. You all have not repurchased any stock in 1Q or 2Q. And I know it's tough. I mean, you're sitting here with the TCE ratio of 6.5%. But just updated thoughts on how you think of a buyback from here?
Yes. So one thing I will mention is we did actually retire 2,400,000 shares in the quarter. So you'll see our period end shares go down. That's an effective buyback. It's related to a dissident shareholder matter that we took care of and chose to retire those shares.
So that's in effect a buyback of $47,000,000 But going forward, quite candidly, we do think that there's opportunity to look at share buybacks given where we've traded. And so we will look to do that as we go forward. We've got plenty of capacity and authorization from the Board. We think our capital levels are strong commensurate with the balance sheet that we have. And so, yes, where we're trading, that certainly is an option for us that we're going to aggressively look at.
Brady, this is Brian. To add to that, as I've alluded in my opening comments, we think that with our focus on organic growth opportunities over the next couple of years, the excess capital that we can't deploy in the businesses and the markets that we've talked about earlier is by necessity going to be put into the program to repatriate your APAC capital to shareholders. So in our view, the stock price has gone on sale a bit and we think there will be opportunities to retire. As BJ said, we had an opportunity to retire roughly $40,000,000 or so worth of stock this quarter and we'll look for opportunities to buy some stock back over the next couple of quarters as well.
Our next question comes from Marty Mosby with Vining Sparks. Please go ahead.
Thanks. And I appreciate the timing I could actually participate this quarter. So I was excited that you moved it back just a bit. Brian, I want to ask you a question because this has been something we've dealt with, with Huntington and with KeyCorp as they've gone through this purchase accounting accretion. And what you see is that right now you've got this $18,000,000 which is temporary.
Eventually that goes away as they convert to the loan portfolio. But what everybody on the outside kind of sees is $18,000,000 it's a hole that just evaporates. When in reality, what it is, is in my mind almost an acceleration of the accretion that you get from expense synergies, which you still have $12,000,000 of in revenue synergies, which BJ you mentioned even just as you move the loans over, you get the incremental net interest income. So timing wise, is that $18,000,000 kind of runs down. It seems like the $12,000,000 would be able to at least buffer going back to the $10,000,000 run rate pretty quickly because that $12,000,000 will be here in the next several quarters and then the revenue synergies.
I just want to make sure you kind of thought of that concept the same as I just outlined it.
Yes, Marty, I'll start. This is Brian. It's as BJ said, the accretable yield is always one of the difficult things to estimate and always difficult to talk about in these integrations. And rates have moved higher since we did the marks and as Vijay said, as a loan prepays, you're replacing it with an asset at a higher yield. So in essence, you've got the accretable yield that's flowing through and I guess that's bringing through a little bit of future period earnings.
As you suggest, I think BJ has got a slide in the deck that shows cost savings to date. I think we're at $12,000,000 I think it shows in the $16,000,000 area over the next couple of quarters moving to the $22,000,000 range and the $85,000,000 threshold next year. So on a quarterly basis, we'd expect another $10,000,000 in cost savings on a quarter run rate by the time we get to this time next year. So yes, I think you could put the 2 off. I think the accretable yield creates some volatility around net interest income that is sometimes hard to talk about and maybe more difficult to model than anything else in the income statement that we have today.
But as BJ alluded, that will level out over time. I think the most important part not to lose the most important point not to lose is the fact that our core NIM was up 6 basis points. That excludes accretable yield this quarter and last quarter. If you just look at the core, improving the profitability of the balance sheet is our objective and we feel very, very good about the progress we've made
there. And Marty, I'd also add kind of to your point. I think it's a great way to look at it because it's looking at the forest through the trees, right? You've got we've got accretion that's coming in that's real income that we've already paid for that's benefiting our margin. It's offsetting softness in our fixed income business that will eventually come back.
We've got multiple growth opportunities that are strong in the specialty businesses. We're about to ramp up growth opportunities in the Carolinas and Florida markets. So this speaks to the balanced business model that we've got such that we've got multiple levers that can play off each other that in aggregate continue to give us growth opportunity from an EPS perspective, a balance sheet perspective and a revenue perspective. And I think it's important to keep all those concussions
in sight.
And then, P. J, when you look at the opportunities for margin expansion, it's interesting because you have you do have the capital markets area. And if you look at trading asset line where you see the yield, it's about 100 basis points higher than your securities yield, which the trading account is the current yield where banks are buying bonds today because it turns over every quarter. And the securities portfolio is a conglomeration of over time. That opportunity over the DDAs that you talked about is kind of the rounding up effect.
How do you think you can kind of close that gap? And would you be willing because you have the steepness of the curve between the real short end versus a 2 year be willing to go up the curve, deploy some of your liquidity and take advantage of what the yield curve is giving you, which is the you don't have to go much past 2 years to get almost everything you can out of it. So couple of things there that I think could also create some earnings levers to your margin as you go over the next year.
Yes. So it's a good point, Marty. A lot of our trading balances right now are really related to our SBA loans and our coastal loan filled for sale. So they're part and parcel of running that business. Quite candidly, I think we'd rather deploy our excess liquidity into profitable loan relationships where we can.
And we think we have ample opportunity as we've talked about across all of our businesses. And so I think most likely we'll look to continue to deploy those there in opportunities in the Carolinas, Florida, Tennessee and the specialty businesses.
Our next question comes from Jennifer Demba with SunTrust. Please go ahead.
Thank you. Question on specialty lending, those have grown nicely for you over the last several quarters. Could you give us a sense of what the balances are in each of those operations and the kind of growth you're looking for in the next 1 to 2 years there as well? Hi, Jennifer. This is Susan.
I'll walk through that. As we said earlier, we do think our specialty businesses have some good growth opportunities. In terms of healthcare, our healthcare groups are roughly in the $700,000,000 range. Again, good opportunities there, both on the kind of core healthcare and also sponsor backed healthcare. As it relates to Asset Based Lending, a business that we've been in for over 30 years, which performed very well during the downturn, we're at about $1,900,000,000 in terms of balances there.
We feel like there's great opportunities in asset based lending for us. We continue to focus on core asset based lending, factoring relationships and it's a very well run business with good growth opportunity. Mortgage warehouse lending, as you know, was up. It's a strong pro form a for us in $1,900,000,000 in terms of balances. I also want to point out that in mortgage warehouse lending, we continue to grow that customer base as well.
If you look at the number of clients in mortgage warehouse lending, we're up almost 17% in terms of numbers of clients year over year in mortgage warehouse lending. We're also continuing to call on those customers for deposits. So we believe it's a business that can become even more important for us as it relates to raising deposits. Our energy business, while it's still at a relatively low level in the Houston in the Houston market, it's about at the $230,000,000 Good business for us. It's one where you need to be disciplined, which we remain disciplined in that.
So we do see some really good opportunities, strong pipeline there. Franchise Finance continues to be a good business for us. It showed actually 11% quarter over quarter average to average balance growth. That is a very well run business. We continue to look at the metrics there.
Believe there'll be some good opportunities. We are watching some competition, do some things that we may not want to compete against, but we're still finding good opportunities to grow. So those are really our core. And then commercial real estate, I talked about earlier. We're roughly flat in our commercial real estate portfolio, kind of year over year, quarter over quarter.
That's adjusted obviously for the Capital Bank transaction. But we again, we've got a strong pipeline in commercial real estate. We're continuing to do good business with existing customers and some new bank customers brought on by our capital partners. So we feel like it's still a very important business for us, but one where we will remain disciplined as it relates to portfolio diversification in terms of product type and geography. So overall, specialty banking continues to be incredibly important for us and one that we support.
I'll also add, Jennifer, just for future reference, if you look at Page 15 in the appendix of the earnings slides in the upper left hand side, it breaks out our average regional bank commercial loans, which were in aggregate $16,000,000,000 So we give you all the percentages there that breaks down all of our different specialty businesses if you want that for future reference.
Our next question comes from Jeffrey Elliott with Autonomous Research. Please go ahead.
Good morning. Thank you for taking the question. Maybe a quick one on the NIM and the core NIM comments you've given specifically, just so we're all clear. So 333,000,000 in 2Q take out 5 basis points from subprime also to get to 328,000,000 and then build up a couple of basis points over the rest of the year to kind of 3.30 ish at year end. Is that what you're saying?
I just want to check everyone's kind of got that message right or am I following something wrong?
Yes. That's right.
And then on the capital side
That means margin expansion is what we're talking about on a core basis.
Got it. And then on the capital side, can you remind us where you stand in terms of Visa shares? Could you sell some of those to fund buybacks given that you kind of feel the stocks on sale right now?
Yes. So we've still got about, I think, $1,100,000 of Visa B shares. If you just looked at conversion rates relative to A shares, it's maybe worth $240,000,000 $250,000,000 pre tax are pretty substantial, what I call contingent common equity that's on our balance sheet at 0. So it's not free to trade. We look for opportunities to be able to monetize that and we'll continue to do so.
But that's good dry powder, if you will, for us to either buy back our own stock, as we discussed before, add to our capital levels. So to me as a CFO, that always sits at the forefront of my mind When I'm looking at our TCE to TA or our CET1 or our total capital ratios, I consider that very much a part of what our capital structure is and we look to optimize it. So we're not a long term holder necessarily of Visa, but we want to make sure that we get the appropriate value out of it for the company and for our shareholders.
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Hi, good morning. Thanks for taking my question. Wanted to just cover credit. You've had this tailwind pretty consistently of very low or negative or 0 provisions. Can you give us any sense of when that becomes more normalized and what we should be looking at here going forward?
Sure. As you know, we've had the benefit of the runoff in the non strategic portfolio and that portfolio continues to perform well in addition to the fact that it's running off. So we've had reserve releases in the non strategic portfolio that have continued to offset some provision that we've had in the bank. I will note that the level of reserves in the core bank remains steady quarter over quarter. We continue to see excellent asset quality across the board.
So I'll point out a few things in the regional bank. You've got some things in your slides on the overall company, includes non strategic. We talked about non performing assets being down 9% total corp. They're down 14% quarter over quarter in the regional bank, so very, very strong. We also saw some positive grade migration.
The Regional Bank, which is inclusive of the Capital Bank merger, we had non pass loans declined by 7.5% quarter over quarter. As you know, our net charge offs remain very, very low. We do at some point, not in the foreseeable future because everything looks very, very strong with numbers like I've just reported. At some point, you could see credit normalize again at the point in time we start to see that if we saw grade migration that would factor into our ALLL model in terms of average loss rates, you would see us take the appropriate action to increase that provision. But for now, we're seeing excellent credit quality across the company's regional bank and again the continued strong performance in wind down and non strategic.
Our next question comes from Christopher Marinac with FIG Partners. Please go ahead.
Thanks. Good morning. I know we could all debate the precise calculation of deposit data, but I was just thinking that the number cited by an earlier caller was a little high. So just was curious if the moves on deposits this quarter kind of buy you flexibility for the beta to be a little bit more moderated in the next quarter or 2, just given what we're seeing so far in Fed funds?
Yes. Hey, Chris, it's BJ. So thanks for that clarification. It depends on what denominator you use for the fed effective rate. So we would have seen a lower one too.
The short answer is yes. As we talked about earlier, we think the deposit betas won't be as high as what we saw this quarter because it was more of a step up, right? If you look back over the last several quarters of our deposit rates paid, particularly in consumer interest. They are relatively flattish to very modestly up over the last couple of years. And then we had a meaningful increase when we started to see increased deposit pricing competition.
So it was a stair step. We don't think that it's are our ability to grow, etcetera. So yes, quarter to quarter, we think the deposit beta has come down, but we will always respond appropriately to protect our relationship balances. So it will be a wait and see. But again, going back to the margin, we are very focused on managing the totality of the margin.
And that's what we're going to focus on regardless of what we have to do with deposit betas. We're going to protect our customer relationships.
Great. That's helpful. Thanks for that. And just a follow-up on the kind of Bonefish ROA. I saw from June that the upper end is now 145.
What does it take to get there? And I guess looking out a few quarters, how confident are you that it's achievable at that upper end?
Yes. So we think it's very achievable at the upper end, and that's what we're striving for. As Brian talked about, we're very nearly after 1 quarter of putting out those updated nearer term targets. We're close to the bottom level of that already. And based on our growth trajectory that we see, cost saves continuing to come in, revenue synergies being realized.
We think that we think that and the credit environment continuing to remain benign. We think that we're going to continue to march towards that $145,000,000 over the next, let's say, 12 to 24 months.
This concludes our question and answer session. I would like to turn the conference back over to Brian Jordan for any closing remarks.
Thank you, Brandon. Thank you all for participating on the call this morning. We are very excited about having the systems integration, integration completed and moving into the execution phase. We feel very, very good about our positioning in our new markets and the opportunities that we have to grow with our markets and our customers. Again, I appreciate the tremendous commitment and dedication and hard work of our folks all across the franchise to complete the systems integration.
Please feel free to reach out to any of us if you have any further questions or need any additional information. With that, thank you and I hope you have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.