Good morning, and welcome to the First Horizon National Corporation first quarter 2018 earnings conference call. All participants will be in 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 touch-tone phone. 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, Investor Relations. Please go ahead.
Thank you, Debbie. 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 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, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings materials and in the slide presentation for this call, and is reconciled to GAAP information in those materials. Also, please remember that this webcast on our website is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan, and our CFO, BJ Losch.
Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions. I'll now turn it over to Bryan.
Thank you, Aarti. Good morning, everyone. Thank you for joining us. 2018 is off to a very good start. I'm pleased with the results we saw in the first quarter, and excited about the momentum we see going into the second quarter and the remainder of the year as we come close to completing our integration, which we'll touch on a little bit later. During the quarter, we saw good economic activity and good customer activity underlying our balance sheet and income statement. Our balance sheet trends, including credit quality, were good during the quarter. BJ will talk more about it, but our net interest margin was improved partially by rising rates and partially by the impact of the Capital Bank merger. We have begun to capitalize on both merger synergies, revenue, and expense, and I'll touch on that again in a couple of minutes.
I'm pleased that after nine years, for the quarter, we hit our and exceeded our adjusted return on equity Bonefish target of north of 17% on ROTCE. That's an area that we think we can be in for the next several quarters, given the strong outlook on the economy and continued good credit quality. We expect as we look into the remainder of the year that the FOMC will continue to raise rates, not a whole lot different from market expectations, another time or two this year in 2018. The Tax Reform Act, while it's still early, does seem to have an underlying positive effect on confidence and customer sentiment. We continue to see what looks like the benefit of reduced regulation in the economy and customer activity. We don't have any expected impact in our view at this point of tariffs.
We think they're likely to be avoided or minimal. It could be more significant, but at this point, we don't see it affecting the economy very much over the next several quarters to year. As I mentioned a minute ago, we're making good progress on our merger integration and synergies. We still expect to realize 50% of our cost saves this year. There is some impact in the first quarter, and BJ will touch on that. We're already seeing and capturing revenue synergies as well. Our integration teams have done a really fantastic job and a tremendous amount of work to prepare for our customer conversions later this quarter, late May timeframe. We're looking forward to those system conversions.
In preparation for those conversions in May, our bankers have done a tremendous amount of work, not only training, but reaching out and talking to our customers, helping them understand the process that we're going through, preparing them to look for written communication, and basically in an effort to minimize the adverse impact of going through an integration. On our consumer side, we've made over 50,000 contacts with customers so far. Interestingly enough, several of them have turned into cross-sales or additional opportunities. It's always a good sign when you talk to your customers. In summary, we're optimistic about the remainder of the year. We're optimistic about the integration planning and our conversion coming up. We think that the business is on track to perform very well over the remainder of this year going into 2019.
With that, I will stop and turn it over to BJ, and then I'll come back for questions later.
All right. Thanks, Bryan. Good morning, everybody. I'll start on slide five. For the first quarter in 2018, we reported EPS of $0.27 or $0.34 on an adjusted basis. The results, we believe, reflect strong trends due to a full quarter's benefit from the Capital Bank deal, positive net interest income trends, ongoing expense discipline, and stable, and quite good asset quality. Notable items in the quarter were $31 million of acquisition-related expense and a $3 million gain from a property sale. If you turn to slide six, we remain very pleased with the Capital Bank deal, like Bryan said, and relative to our original assumptions, we feel even more confident today about its strategic and financial value. When we announced the deal last year, we anticipated that it would accelerate the achievement of our Bonefish targets by the end of 2019.
Today, we show achievement of all of our Bonefish targets on an adjusted basis in first quarter of 2018, and we expect that performance to continue. Continued strong results in the First Tennessee business and early positive ones from the Capital Bank integration, coupled with the added benefit of lower taxes and higher interest rates, has significantly enhanced our return and profitability profile. We're far from declaring victory. As Bryan alluded to, our systems conversion is going well and remains on track for the latter part of second quarter of 2018, and we are committed to making that a smooth transition for our customers and our employees. We're also on track to achieve our higher cost save target of $85 million, and we expect about half of that amount to realized in 2018 with the full benefit in the run rate by first quarter of 2019.
After only four months since consummating the deal at the end of November, we have roughly $5 million of annualized revenue synergies closed or in process so far versus our goal of $25 million-$30 million over the next few years. Moving on to slide seven. Both our net interest income and net interest margin were up, driven by the impact of a full quarter of Capital Bank loans and loan accretion and the increase in short-term rates. In 1Q18, the reported NIM was 343 basis points, up 16 basis points from 4Q17. We saw a combined six basis point increase from the impact of a full quarter of the Capital Bank balance sheet, as well as the rate hike and accretion further enhanced the NIM by 16 basis points. Turning to the next few slides, let's look at loan and deposit trends.
Starting with loan growth on Slide 8, we saw broad-based loan growth in markets such as Middle Tennessee, West Tennessee, and Texas with growth in specialty lending areas such as private client asset-based lending and healthcare. While loans to mortgage companies had a seasonal decline, our year-over-year growth in that business was 19%, reflecting significant market share gains we have made in the business. Competition remains high, but we continue to grow in a disciplined and profitable manner on the left side of the balance sheet. Moving on to Slide 9. Our franchise provides us a solid base of customer deposits on both the consumer and commercial side, and we're focused on growing our deposit base and improving our mix over time.
From the first rate hike of this cycle in third quarter of 2015, our overall deposit beta is 27%, excluding our market index deposits, our beta on consumer and commercial relationships deposits is 15%. Clearly, so far through the cycle, we've seen historically low rate competition. Like others in the industry, we believe that we may be reaching an inflection point in the cycle and deposit competition will likely increase. As that competition continues to heat up, we plan to remain focused on protecting our existing deposit base with relationship pricing and our expanded presence in newer markets such as the Carolinas and Florida afford us significant opportunities to both aggressively acquire new consumer deposit relationships and grow commercial deposits with our strong treasury services offerings. Moving on to asset quality on Slide 10. Our credit trends remain excellent.
Net charge-offs were at just $1 million in the quarter with an overall provision credit of $1 million in the quarter. The allowance to loans ratio is at 69 basis points, roughly flat to the fourth quarter. Our Capital Bank portfolio is performing as expected, and in the near term, we expect the credit environment to remain benign. Wrapping up on Slide 11. We announced our original Bonefish targets in early of 2009 at a time that was very uncertain for us in the banking industry as a whole. Our leaders and employees over the last several years have done an excellent job to put us in a position today to have delivered on those aspirational targets.
As Bryan said, with the continued strong performance and growth opportunities across our franchise, coupled with positive tailwinds such as Tax Reform, rising rates, a balanced regulatory agenda, a healthy economic outlook, and a benign credit environment, we expect our performance to continue strengthening as a result over the next few years at or above our various Bonefish metrics. We are confident in our ability to control what we can control and in whatever operating environment we face, our goal going forward will be to consistently deliver top quartile performance, and we're well-positioned to do so. With that, I'll turn it back over to Bryan.
Thank you, BJ. Again, I'm pleased with the results in the first quarter. Our bankers, our technology and operations teams are making great progress on the integration. Our customer activity calling efforts continue to be very good. I think we're very well positioned to grow the balance sheet profitably and with discipline and deliver strong industry-leading returns over the long term. I want to take this opportunity, and will take this opportunity to thank our employees across the organization for the great work that they're doing. Many of them working very long hours, nights, and weekends to prepare us for the integration and doing it in a way that will minimize the impact on our customers. Thank you for the great things that you're doing. With that, Debbie, we'll now take any questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Steven Alexopoulos with JPMorgan.
Hey, good morning, everybody.
Hey, Steve.
I wanted to first follow up on BJ's comment that deposit costs appear to be reaching an inflection point. BJ, could you tell us exactly what you're seeing that's leading you to that conclusion?
Yeah. Thanks, Steve. Good morning. Over the last, I'd say maybe 3 or 4 months, maybe a combination of the expectation of more rate moves than what the market may have anticipated, as well as the benefits of Tax Reform. We have seen a significant pickup in deposit competition. It hasn't necessarily been in posted base rates, but a lot of it has been in relationship pricing, and exception pricing and people walking into our branches with various offers as well as on the commercial side. We plan to take a very active approach in protecting and growing our customer base. We consider ourselves a relationship business, particularly in the bank, and we will continue to serve our customers appropriately and fairly, with deposit pricing.
With that, we will also take the opportunity in these new markets, like the Carolinas or Florida, where we don't have quite the share that we do in Tennessee to really go out and meaningfully acquire new deposit relationships that we can then grow and build over time as well.
BJ, following up on the deposit comments, how are you thinking about the NIM in 2Q and really in 2 buckets, the core NIM and then scheduled accretion?
Sure. We made it a point to break out the core NIM and the scheduled accretion so that people could clearly have a view of what our organic performance is going to be relative accretion. I think as you know, accretion, we have to reforecast every quarter based on expected cash flows and repayments, et cetera, like that. Generally speaking, accretion will decline quarter-to-quarter over time. We will expect that to decline in terms of quarterly impact by a couple million dollars, maybe a quarter over the next several quarters. In terms of our organic NIM, I think we're still asset sensitive. We still see benefits on the left side of the balance sheet from rising rates because of our floating rate book.
We'll also be very mindful of what we just discussed on deposit pricing as well to protect, defend, and grow our deposit base. We're confident that we can manage both of those well. I expect that our NIM will continue to get modestly better, but we'll manage it very closely.
Okay. That's helpful. I want to shift gears. If we look at C&I loan growth, it was a little bit soft in the quarter. Bryan, what are you seeing your commercial customers doing with the benefit of lower taxes now? Are they paying down loans? Are they expanding? Any color will be appreciated.
Yeah. Steve, and I'll let Susan add as well. The customer activity that we see across the franchise is still very good. There's not been a big shift because taxes hit so late in the year for tax-related activity. I would say our bankers and my customer contacts, I would characterize as overall positive. We still see continued optimism about the economy and the outlook. I mentioned the tariff issue. We've heard that a time or two and people that are sensitive to the price of steel or aluminum, for example. Overall, customers are looking at the economy as being very strong. They're looking to hire qualified people. I would say, we see a little bit of trend of pulling some deposit balances down and investing that in businesses and overall, balance sheet strengthening.
I would characterize the financial results we've seen from calendar 2017 versus 2016 as generally being stronger than that's a sign of a strong and improving economy, and that optimism is carrying forward. We think while the balance sheet growth was largely offset by declining mortgage warehouse finance activity, which tends to be seasonal in the first quarter, we're optimistic about pipelines and the outlook for 2Q and beyond. Susan, anything you want to add?
Yeah, I would add a few things. The few payoffs that we saw in the quarter were largely M&A, but we are also seeing opportunities on the M&A side. There is also some non-bank competition out there putting out Term Loan B and private placement structures. When we feel it is prudent, we will compete with them, and if not, we will let those roll off. We did have some very good period end quarter-over-quarter growth. With the merger last quarter, the average can be a little bit noisy, but on a period quarter-over-quarter basis, good growth in franchise finance, Asset-based lending, core commercial across several markets. BJ and Bryan mentioned these earlier, but Middle and West Tennessee, as well as our core Mid-Atlantic. In addition, for the first quarter this year, in terms of new production, we were actually up over 20% from the same quarter last year.
For new production, we also saw good activity in franchise finance, Asset-based, Mid-Atlantic, both Legacy First Tennessee and Legacy Capital, Middle Tennessee, West Tennessee, and healthcare. We feel very good about where we are positioned as it relates to the outlook for loan growth.
The next question comes from Brady Gailey with KBW.
Hey, good morning, guys.
Morning, Brady.
On slide 11, you have the Bonefish targets laid out. They remain unchanged, and specifically like your ROA of 1.1%-1.3%, and then the ROTCE of 15% plus. I know we talked about this a little bit last quarter, but it seems like, with Tax Reform, those could be moved higher. On the ROTCE, you're already well over 15%, and you're right in the middle of the ROA guidance. You still have higher rates that are going to push that up, and then some CBF costs there. Just wondering how you're thinking about those two metrics on the Bonefish and if y'all are thinking about maybe updating and increasing those targets longer term.
Thanks, Brady. This is Bryan. As I pointed out, after nine years, we just hit them this quarter. I want to make a couple of points about it because you asked a very good question. I would tell you that our primary focus has been on merger and integration. We use the Bonefish in many ways. If you step back from it, BJ and I both pointed out that these goals have been out there for nine years. What we tried to do with the Bonefish was to do a couple of things, or several things, really. It was to give you some sense about what we thought the earnings power of the franchise was over the long term.
We wanted to give you a sense of our risk profile, how much we would lever capital, what kind of margins and credit risk we expected to take, and give you some sense of how we were going to create returns into profitability. You may recall when we originally rolled those Bonefish targets out, we had 15%-20% ROEs. There was a period where we, and probably many others, were a lot less optimistic about the industry getting back to those profitability levels. As you pointed out, the Bonefish targets have been impacted by Tax Reform, and they'll be further impacted by higher interest rates. At some point, through the economic cycle, they'll be impacted by higher credit costs.
BJ and our finance team and our bankers, our business leaders, have really done a great job using the Bonefish to manage profitability, how we think about the business, how we think about risk and reward, how we price relationships and customer transactions. Through all of that, I would say that Bonefish has become a verb in the organization. It is a tool that people use day in, day out, and they talk about whether something Bonefishes or whether it doesn't Bonefish. I think that's a real positive thing. As I look at the question of fine-tuning it, I have a couple of thoughts, and it hasn't been a priority to date for the following reasons. One, we have said consistently, once we adjusted from the 15 to 20, we said 15 plus. We don't look at 15 as a ceiling.
We look at that as a floor in terms of profitability. Two, the activity in the organization and the way we think about the business is to maximize shareholder value, and that is to drive the greatest return that we can given the risk profile that we've articulated, and to do that in a way that maximizes value over the long term. While I've talked about the Bonefish as a tool for management decision-making, it's a tool that's used in addition to others. Our business leaders think about consistently, how do they double the value of their franchise over the next five, six years? We use that as a tool. It feeds data. At this point, we have not put a lot of energy into whether we change that or not.
We think that, as you point out, there is a very good likelihood, given our outlook and what sounds like your outlook on the economy in the foreseeable future, that we can be in the high teens in ROTCE and higher up on the ROA scale that we've laid out. Don't feel a strong need right now to go out and adjust those goals because again, it's not a ceiling, it is a floor, and we're going to push to drive as much return as we can, given our articulated risk tolerance.
Okay. On loan growth, I know the seasonality of the mortgage warehouse impacted period end balances. Even if you strip that away, loans were down a little bit. I know you've talked about loan growth kind of longer term in the mid to high single-digit range. Does that still feel appropriate for the rest of 2018 and into 2019?
I'd say in general, yes is the answer. Part of what we're doing as we go through the integration activity and planning, we are making shifts in terms of the way we can form our policies and the way we look at our portfolio management and portfolio limits. We also got a lot of activity dedicated. I'd say that has had some marginal impact on loan activity. As Susan articulated, I thought pretty well, the activity across the franchise is encouraging. I think that will move up, and as you see the seasonality in our mortgage warehouse finance business improve in the second and third quarters when more home buying activity occurs. I think you'll see us in sort of that mid to high. I'd say just sort of mid-single digits in terms of loan growth.
All right. Last one for me. BJ, I think last conference call, you mentioned $30 million of yield accretion would be a good number for this year, that you've taken almost half that, around $14 million in 1Q. Maybe just an update on how you're thinking about accretable yield levels this year.
Yes. I think, we did have a little bit more accretion in the first quarter than what we would have thought. I would tell you that, again, as I said at the beginning, what you're doing with purchase accounting accretion is looking at the aggregate loan book that's purchased and trying to estimate cash flows over the next several years and estimate them by quarter based on prepayment rates, and et cetera. I think it takes a couple quarters post a deal and post those marks to really get a good cadence on how much accretion you're going to have and when and so on. This quarter, obviously, we had a little bit more than what we would have expected at the end of the fourth quarter. We'll recast those cash flows again, as we will every quarter, to look ahead.
Generally speaking, I think for 2018, we will have more than that $30 million, for sure. Again, it'll start to, again, go down a handful of millions every quarter over the next several quarters as it starts to run off, would be our expectation to that.
Great. Thanks, guys.
Thank you.
Thank you.
The next question comes from Ken Zerbe with Morgan Stanley.
Great. Thanks. Good morning.
Good morning, Ken.
Just going back to the deposit competition comments that you made. I know you're saying that you want to offset that with sort of customer relationships, I guess how meaningful can those, I guess, impact your deposit pricing? It seems to me it mitigates some of the higher-end deposit pricing or takes some of the edge off, if you will, the increases. It sounds like you're still going to have meaningful increases in deposit costs if the industry still has deposit cost increases. Is that a fair assumption?
I think, Ken, where we start is that we are proud of the relationships that we have with our customers, and we want to treat them fairly and as competitively as possible, while also optimizing our ability to pay for all of the infrastructure costs and make an acceptable profit for shareholders. We balance all of those things. I think we've done a good job to date. I think we'll do a great job going forward. What I was getting at was, clearly, deposit competition has picked up. If you look at historically, after the Fed starts raising rates, the first 50, 75, 100 basis points of moves are a little more muted in terms of price increases. We've seen that, and it's actually been lower than previous cycles.
We think there's an inflection point now, since we're at 125 basis points of moves, that it could get more price competitive, and we'll be prepared for that. Whatever actions we need to take to protect, and grow our relationship deposits, we'll do so. It remains to be seen exactly how big that impact will be, because we have good, solid customer relationships that aren't simply based on price. Our people have an extraordinary say in that and do an excellent job serving customers. We'll be prepared to defend the balance sheet as much as we need to.
Ken,
Yes.
This is Bryan. Just to say what BJ said a slightly different way, but I think consistently, is that the industry, I thought, created a fair amount of lag last year in deposit pricing relative to what people would have modeled as betas. What we expect is that, as BJ articulated very well, that some of that lag, not all of it, but some of that lag may migrate out over the course of 2018. We're still sensitive to what deposit pricing competition is. As BJ said, we want to make sure that we're competitively priced and that we're offering a fair relationship-based price to our customers. We want to be in a position where we're competing on a level playing field.
All we're really articulating is that some of that lag that was captured in 2017 is likely to drift out as rates and deposit competition start to percolate a little bit more in 2018 and beyond.
Great. Okay, that's helpful. Just last question. Can you just remind us, did Capital Bank materially change your asset sensitivity? If not, do you expect it to over time? Thanks.
Again, it's BJ. It reduced our asset sensitivity. They were round figures, roughly half as asset sensitive as the legacy book was. That did dampen asset sensitivity. As you can see on slide seven in the bottom, we still give you the net sensitivity impact that we would expect on a shocked balance sheet, and this balance sheet does include Capital Bank as well. If you were to compare it to some of our past graphs without Capital Bank, you would've seen a modestly higher impact. I would also remind you that these shocks are based on kind of through-the-cycle assumptions. As Bryan said, we've certainly seen some lag so far at this point, depending on how much of that lag comes out, these could be higher or lower.
Great. All right. Thank you very much.
Sure.
The next question comes from Ebrahim Poonawala.
Good morning, guys.
Hey, Ebrahim.
Just the first question, wanted to clarify on the mortgage warehouse. BJ, it was up 20% year-over-year. Is that how we should think about that business for the year? I mean, obviously, volumes are going to be a little bit challenged because of refi slowdown in the first quarter. Just want to make sure we don't go too ahead of ourselves in terms of expectation on that business for the year.
Yeah. 20% increase year-over-year would be fantastic, but I'm not sure I'm ready to declare that yet. I think as Bryan alluded to earlier, we expect that we'll see the same seasonality as we've seen in the past, which would be buying season in the spring and into the summer builds those balances in that business for the second and third quarter. They drop back off in the fourth to the first and come back. We expect to see that. If you take a step back and you look across full year 2017 for full year 2018, we absolutely believe that we could see good outstanding growth because of the great work that our folks in that business have done to earn more market share at a time when competition has significantly heated up and originations in the industry have come down.
We're optimistic that we can see year-over-year growth, but it's going to follow that seasonal pattern quarter-to-quarter.
Fair to conclude, and I know it changes real time, but fair to conclude where you expect mid-single digit overall loan growth, this should at least be towards in the higher single digits, if not double digits?
On mortgage warehouse specifically.
Yep
The overall?
On the warehouse specifically.
Yeah, I would say so.
Could you remind us what the pricing on this is? I know that creates some volatility in the core NIM. When we look at, I think loan yields were about 453 this quarter. Is that going to be accretive or dilutive to the NIM increased balance from the warehouse?
It'll be accretive.
Yeah, definitely accretive. It's one of our highest-yielding portfolios. Keep in mind, in that business, we from time to time, will take advantage of opportunities we have with customers and customer relationships to grow. Part of that business, if we're trying to gain market share, we will try to be more aggressive on price, and at other times we won't. It just depends on where the opportunity lies, but in aggregate, it is at almost 5% in terms of yield on our portfolio. From a commercial perspective, one of our highest-yielding portfolios, and we expect that to continue.
Ebrahim, this is Bryan. Bob Garrett.
Yeah
The team that manage that warehouse business are extraordinarily disciplined and thoughtful, and they have very great, good, strong relationships with their customers. We've seen very good work on their part to expand and deepen relationships with customers, including efforts to grow deposits, the deposit funding in the business. While pricing is one tool, it has to do with availability of credit and utilization of those credit lines. It is a profitable, high return business for us, and that team does a really good job of balancing all that out. In short, it will be accreted to our margin if we do see outsized growth there.
We did actually increase the number of clients in mortgage warehouse lending by about 15% year-over-year.
Our next question comes from Jared Shaw with Wells Fargo.
Hi, good morning.
Morning.
Morning.
Looking at the CBF acquisition, the cost saves, it seems a little surprising, I guess, after the systems integration in 2018, that would still be another year before we saw the remaining cost saves. Can you just Give us a little bit of a timeline on how we can expect to see those cost saves coming in over the next few quarters, and then what's still expected for 2019?
Hey, Jared, it's BJ. I think maybe there's a little misunderstanding in how I said it. I apologize if so. What we were saying is we still expect $85 million of cost saves, which is up from $65 at deal announcement. We expect half of it to be in the run rate and in our numbers in 2018. By first quarter of 2019, all $85 million of that annualized would be in the first quarter run rate, if that makes sense. Said a different way, we expect that all of the cost efficiencies that we expect out of the deal to be out by December 31st, 2018, such that we have a clean efficiency run rate into 2019.
Okay, great. That's good clarity. Thank you.
Sure.
Then, just sort of looking at the capital markets business in the face of continued pressure on ADVs, are there any thoughts to changing your approach to the capital market space?
Yeah, this is Bryan, Jared. We've been adjusting in that business for really a couple of years. While it's disappointing levels of activity for several quarters now, I think we're on the right track in making adjustments. Part of it is a tremendous focus on controlling costs and controlling the cost. There's some fairly significant shifts in the way that business is being done. We are making some shifts and making some investments that we think will make us more relevant and profitable in that business over time. We've also seen good activity, and we've spent most of our time talking about the merger with Capital Bank. Our integration and merger with Coastal Securities about a year ago this time has gone very well.
That has resulted in a tremendous amount of opportunity, we think, for the future in terms of opening up additional product to our existing customer base, but also opening additional services to the Coastal traditional products, so the customer suite. We're optimistic that the changes that we can make in that business will improve the profitability. These cycles, the fixed income markets run in cycles. We expect that it will be difficult for the remainder of 2018. We do think, though, that as rates begin to stabilize and the Fed looks at a more neutral policy on rates relative to raising or lowering, that that activity will pick up some and that we're well positioned for that.
To get to that better profitability, though, you are looking for growth in revenue, not just continued expense control?
Absolutely, yes.
Great. Thank you.
Yes, sir.
The next question comes from Jennifer Demba with SunTrust.
Thank you. Good morning.
Jennifer.
Two questions. First of all, Bryan, could you elaborate on the investments you're making in fixed income to make you guys more relevant and profitable? Second, could you just update us on your future M&A interest at this point?
Yeah. Just to make sure I clarify your question, I'll answer the first investment question first. The investments are in run rate investments that are embedded in the run rates you see in the fixed income business. They're not outsized investments. They're investments in how we use technology in the business, how we make information and trading data more available to our sales force as well as to customers and things of that nature, which we think will create greater transparency and greater liquidity. We're also continuing to invest in our research capabilities and the tools that really differentiate us, our ability to provide analytics around ratings on municipal securities, for example, where financial institutions can't rely on the major rating agency. Tools like that. That's all embedded in our run rate. It's not incremental to what you see in our fourth first quarter run rate.
The clarification question, when you asked about future M&A activity, are you referring just to the fixed income business or more broadly? I can answer it both ways.
Broadly.
Broadly, okay.
Across the company.
Yeah. I would say in a phrase, we're focused on integrating Capital Bank, and that is our primary objective. I don't know what the M&A landscape is likely to look like in the future. We don't think we have to do anything, and given current law, and we can go into whether Senate Bill 2155 actually gets enacted and approved by the House and signed by the President. Under existing law, we still deal with a $50 billion threshold. That has some impact on our short-term thinking about it. Long term, we think M&A is a tool to use, but it's not the only tool to use to grow the business.
We think that if there are opportunities that are good attractive markets that allow us to improve the demographics of our business or the funding mix of the business and can be done in a disciplined fashion, certainly we will consider it. Right now we're focused on integrating Capital Bank and not really thinking about what may be next beyond that.
Are there any particular markets that would be more enticing to you over the long term?
Well, the Mid-Atlantic franchise continues to be a very attractive marketplace to us, Capital Bank has taken our toehold and expanded that, so we feel better about that. If we had opportunities to do fill-in in those markets, that would be attractive. Potentially in the South Florida market, we still have a lot to learn about South Florida banking. While Capital Bank has given us a small presence there, we do think the deposit and the funding demographics of South Florida are very attractive. If you look at the mix of our balance sheet, we think about the funding aspects of M&A about as much as anything, simply because we have these big specialized businesses that generate attractive assets but don't always self-fund. So we think anything that could fill in from a funding perspective is an attractive opportunity as well.
That doesn't tend to be as geographically centric as it is the type of institution that you might have an opportunity. Again, back to the larger point, right now we're focused on integration, and we'll see what unfolds with the legislative landscape and what the opportunities in 2019 and beyond may be.
The next question comes from Michael Rose with Raymond James.
Hey, thanks for taking my questions. Just a clarification on the accretion this quarter, the $13.7 million. How much of that was scheduled versus accelerated?
About 10 or so maybe was scheduled, something like that.
Okay, that's helpful. One thing I didn't hear talked about in terms of the loan growth outlook or at least for this quarter with the impact in Texas and in Florida, can you give us a sense of what you guys expect and where the portfolios stand in both those states and maybe the expectations for the next couple quarters or years? Thanks.
Sure. We're actually seeing great growth out of our Texas bank. We had a 9% quarter-over-quarter growth in the Texas market, pretty evenly divided among the three major businesses that we have there, core C&I, commercial real estate, and energy. That team has done a great job of bringing in great relationships, a full relationship in many cases. We continue to be optimistic about the future growth in that Texas market. As it relates to Florida, as Bryan said, we're still learning about the South Florida market, but we do believe there'll be good opportunities for us to grow loans over time as we get up to speed on the different industries that are there. We have some very good, strong bankers at Capital Bank in the South Florida market, both on the C&I side and the commercial real estate side.
We're very pleased with the relationships that they'll continue to be able to attract.
Do you have a sense for what the balances are in each of those states? Both those states were impacted by the hurricanes. Are you guys starting to see any recovery efforts, particularly with Capital Bank in South Florida and contributing to loan growth? Thanks.
Yeah, as it relates to Texas, we're at about a $600 million in terms of balances, and as I mentioned, it's pretty evenly divided among those three. We had very little direct customer impact in Texas related to the hurricanes and actually probably view that more as an opportunity, both frankly in Texas and South Florida, as there will be some rebuilding and reinvestment opportunities related to some of the damage. There was obviously in terms of more damage overall in Florida. South Florida had some damage. We had very few customers directly impacted. There will be opportunities for us to grow there as well.
Okay, that's helpful. Maybe just one more for BJ, just back to the accretion. I think at the outset you said, or last quarter you said that the total accretion that you expected to realize from Capital Bank was about $80 million. Is that number still a good number to use, or with the recast of the cash flows, is there an expectation that number will be higher?
I don't remember saying that number. I think we did kind of try to give a guesstimate of what you might see for full year 2018. I think we said we saw a little bit more in this quarter than we expected, and we'll recast that, et cetera. Accretion comes in over the next several years in different ways. In terms of the aggregate accretion, it's somewhat finite. It's just a question of when it comes in. All of that to say we have probably the best visibility at this point in 2018. Again, it's coming in a little bit higher than what we would have thought 90 days ago. We expect that might still be the case, but that, again, it'll come down quarter to quarter over the next several quarters and years.
Great. Thanks for taking my questions.
Sure.
The next question is from Tyler Stafford with Stephens Inc.
Hey, good morning, guys.
Tyler, good morning.
Hey, just one more clarification question on the loan growth. The mid-single-digit loan growth comment for the year, is that at the Regional Bank?
Yes.
Yeah.
Okay. Since the mortgage warehouse is within the Regional Bank segment and you expect that high single digit to low double-digit growth there of the warehouse, that would be included in the mid-single digit growth expectations at the Regional Bank, is that?
Yes.
Yeah
is that the right way to think about? Okay. Then you have, call it $250 million-$300 million of runoff at the consolidated from the non-strategic portfolio?
Yeah, it may not be.
It's probably a little lower.
Yeah.
It's a little bit lower than that.
Yeah, it's gotten down to just over $1 billion, so it's probably smaller than that.
Okay. I think it was down like 70 this quarter. You annualize that was the 280. That's how I was getting that.
Yeah.
Okay. All right. It would be a little bit lower than that. All right. Can you help me on the held for sale loan balances and how to think about those? They were, call it, $770 million this quarter, up $600 million year-over-year. Just from a seasonality perspective or the actual balance of that, how do we think about that? Those yields on that were up, call it, 145 basis points quarter-over-quarter to 668. What kind of drove that up and what's kind of the expectation for that going forward? I think that helped the core margin quite a bit.
Yeah. Tyler, those are really related to FTN and a little bit more specifically to the Coastal acquisition and loans held for sale as it relates to government guaranteed loans that we'll hold. If you look at it year-over-year, that's what the increase is, and we would expect those types of levels to fluctuate, of course, but continue to be at those types of levels.
You said the yields should hold on that?
Yes. The yields are going to move around, and yields on government guaranteed loans do move relatively in lockstep with rates and rising rates. Yeah, those yields should continue to perform where they are, and if rates rise, they should be a little bit better.
Okay. Got it. Then just on the expenses, were there any one-time items, either negative or positive, on the expense side this quarter? Is this kind of a good run rate for the expense base? Obviously before the CBF cost savings.
Yeah. We broke out the $31 million or so of acquisition-related expenses as a notable item. Then we had, actually it wasn't an expense, a gain on sale from an office building that we had. Other than that, there's not anything that would be in the run rate that would be more one time in nature that's material.
The next question comes from Brock Vandervliet with UBS.
Hey, thanks for taking my question. I was just wondering if as you come through this vortex of integrating this acquisition and given all the questions on earnings power and things, if you've thought about potentially having a special forum, an investor day or something like that to engage with investors to really give us more detailed sense of earnings power on the backside of this integration.
Hey, Brock, this is Bryan. I hadn't thought about the integration as a vortex. That's a neat visual. You're right, it is hard. When you're looking at our numbers today, we understand you had one month of Capital Bank in the fourth quarter, you have one month of income statement. Average balance sheet is a difficult thing to calculate. You've got full quarter, and then we're ramping up our cost saves, and we've got merger charges. That's an interesting suggestion, and we'll take that and think about it. I think that might make some sense. I think as we get through the integration, get to the back half of the year, that's something that we ought to think real hard about.
Yeah, I think that'd be great. I think given where you are, it's often how you tell the story, not just the numbers themselves, especially right now. Great. Thank you.
You're welcome. To your point, it's not the numbers. There's an awful lot going on in our business in addition to the integration, I think it's an interesting way for us to sit down and focus and tell the story for a day or so.
Great.
The next question comes from Christopher Marinac with FIG Partners.
Thanks. I had a follow-up question on accretion real quick. BJ or Bryan, does the regional bank yields reflect the same accretion that we see at the holding company? Could we kind of backdoor into a similar kind of core yield and core margin for the regional bank?
Yes.
Okay. On the loan yield basis of the regional bank, would that kind of core change linked quarter be sort of in the mid-teens? Would that be a fair way to think about it?
I'd have to go back and look at it, Chris.
Okay.
We can follow up with you, if you'd like, with Aarti.
That would be great. Not a problem. Just a separate follow-up, just has to do on the conversion on the systems side. When that is completed, does that give you more capabilities on the digital side for digital banking and products, or do you have additional investments on top of the integration that you'll be making this year?
Hey, Chris. This is Bryan. It really won't change our core capabilities today. They're essentially on the digital side, particularly on the consumer, and to a large extent, on the treasury management side. It's migrating. Well, really, in total, it's migrating to the First Tennessee system. Our capabilities won't be enhanced, but they won't be diminished in that integration. There are several things that have been put on the back burner as we focus on integration that will follow along that will enhance our capabilities. To my response to Brock's question about an investor day, you really touch on an important topic. If you look at the amount of change that's going on in the business, particularly in the digital side, we think there is always a fair amount of change that will be required or enhancement that will be required in our technology platforms.
The way we think about the investments that we'll have to make is, how do we save over here so we can make investments over there in our technology platform? I think, we will enhance continuously the digital capabilities, both around transparency, executing transactions, et cetera, et cetera, for our customers. That will be a continuous part of our business, we think, for the next five, 10 years at a minimum.
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, Debbie. We appreciate your time and your interest this morning. We appreciate your support. Please reach out to any of us or Aarti if you have any questions. Thank you for being with us, I hope you all have a great weekend.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.