First Horizon Corp
NYSE:FHN
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First Horizon Corp
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Good morning and welcome to the First Horizon National Corporation First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note 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 on the Investor Relations section of our Web site 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 web cast on our Web site 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, and I am 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 I will 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 will touch on that again in a couple of minutes. I am 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, [indiscernible] time or two this year in 2018. The Tax Reform Act, while it's still early, does seem to have underlying positive effect on confidence in customer sentiment, and 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 there is 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 the year.
As I mentioned a minute ago, we are 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. And we are 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 conversions, customer conversions later this quarter, late May timeframe. We are looking forward to those system conversions. And 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 are 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 have made over 50,000 contacts with customers so far, and interestingly enough, several of them have turned into cross sales or additional opportunities. So it's always a good sign when you talk to your customers.
So in summary, we are optimistic about the remainder of the year, we are optimistic about the integration planning and our conversion coming up. We think that the business is on track to perform very-very well over the remainder of this year, going into 2019.
So with that, I will stop and turn it over to BJ, and then we will come back to questions later.
All right. Thanks Bryan. Good morning everybody. I will start on slide 5; for the first quarter in 2018, we reported EPS of $0.27 or $0.34 on an adjusted basis. The results, we believe, reflects strong trends due to a full quarters 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.
Now if you turn to slide 6, 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 the 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, had significantly enhanced our return and profitability profile. But we are 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 are also on track to achieve our higher cost save target of $85 million, and we expect about half of that amount to be realized in 2018, with the full benefit in the run rate by first quarter of 2019. And 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 to $30 million over the next few years.
Moving on to slide 7; 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 1Q 2018, the reported NIM was 343 basis points, up 16 basis points from 4Q 2017. We saw a combined 6 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 product line asset based lending and healthcare. While loans and 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 deposit from both the consumer and commercial side, and we are 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 27% and excluding our market index deposits, our beta on consumer and commercial relationships deposit is 15%. So clearly so far, through the cycle, we have 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. And 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 [indiscernible] credit of $1 million in the quarter. The allowance to loan ratio was 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 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. And as Bryan said, with the continued strong performance in 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 are well positioned to do so.
So with that, I will turn it back over to Bryan.
Thank you, BJ. Again, I am pleased with the results in the first quarter. Our bankers, our technology and operation teams are making great progress on the integration. Our customer activity, calling efforts, continue to be very-very good. I think we are very well positioned to grow the balance sheet profitably, and with disciplined 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 are doing. Many of them working very-very long hours, nights and weekends, prepare us for the integration, and doing it in a way that will minimize the impact on our customers. So thank you for the great things that you are doing.
And with that Debbie, we will now take any questions.
[Operator Instructions]. The first question comes from Steven Alexopoulos with JPMorgan.
Hey, good morning everybody.
Hi Steve.
I wanted to first follow-up on BJ's comment, the deposit costs appear to be reaching inflection point. BJ, could you tell us exactly what you are seeing that's leading you to that conclusion?
Yeah so, thanks Steve, good morning. So over the last, I'd say, maybe three or four 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 pick up 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. And so, 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.
And 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 and Tennessee, to really go out and meaningfully acquire new deposit relationships that we can then grow and build over time as well.
And BJ, following up on the deposit comments, how are you thinking about the NIM in 2Q and really in two buckets, the core NIM and then scheduled accretion?
Sure. So 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 to accretion.
I think as you know, accretion, we have to reforecast every quarter based on expected cash flows and repayments, etcetera, like that, and generally speaking, accretion will decline quarter-to-quarter over time. So we will expect that to decline, in terms of quarterly impacts by a couple of million dollars, maybe a quarter, over the next several quarters. But in terms of our organic NIM, I think we are still asset sensitive, we still see benefits on the left side of the balance sheet, from rising rates, because of our floating rate book. But will also be very mindful of what we just discussed on deposit pricing as well, to protect, defend and grow our deposit base.
So we are confident that we can manage both of those well. But so I expect that our NIM will continue to get modestly better, but will manage it very closely.
Okay. That's helpful. I wanted to shift gears, so if you look at C&I loan growth, it was a little bit soft in the quarter. Bryan, what do you see 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 will let Susan to add as well. But the customer activity that we see across the franchises is still very good. There has not been a big shift, because taxes hit so late in the year, with tax related activity, I would say our bankers and my customer contacts, I would characterize as overall positive. We'd still see continued optimism about the economy and the outlook. I mentioned the tariff issue, we have heard that a time or two in people that are sensitive, that the price of steel or aluminum for example. But overall, customers are looking at the economy as being very strong. They are looking to hire qualified people, and I would say, we see a little bit of a trend of pulling some deposit balances down and investing that in businesses and overall balance sheet strengthening. I would characterize the financial results we have seen from calendar 2017 versus 2016 as generally being stronger. Then that's a sign of a strong and improving economy, and that optimism is carrying forward.
So 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 are optimistic about pipelines and the outlook for 2Q and beyond. Susan, anything you want to add?
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, being in private placement structures, when we feel it's pretty -- 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 end, quarter-over-quarter basis, good growth in franchise finance, asset based lending, core commercial across several markets. BJ and Bryan mentioned this earlier, but Middle and West Tennessee as well as our core Mid-Atlantic.
In addition for the first quarter of this year, in terms of new production, we were actually up over 20% from the same quarter last year. And 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. So 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.
Good morning Brady.
So on slide 11, you have the bonefish targets laid out. They remain unchanged, and specifically like your ROA of 1.1 to 1.3 and then, the ROTCE of 15% plus. I know we have talked about this a little bit last quarter, but it seems like, with tax reform, those could be moved higher? I mean, you are already on the ROTCE, you are already well over 15%, and you are right kind of in the middle of the ROA guidance, and you still have higher rates that are going to push that up, and then some CBF cost saves. So just wondering, how you are thinking about those two metrics on the bonefish, and if you 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. And I am going to make a couple of points about it. You asked a very good question, and I would tell you that, our primary focus has been on merger and integration, and we use the bonefish in many ways. And if you step back from it, BJ and I both pointed out, these goals have been out there for nine years. And 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. And 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 are expected to take, and to give you some sense of how we were going to create returns into profitability.
You may recall, when we originally wrote those bonefish targets out, we had 15% to 20% ROEs and there was a period, where we and probably many others were 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 will be further impacted by higher interest rates, and at some point, through the economic cycle, they will 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. And 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. And I think, that's a real positive thing.
As I look at the question of fine tuning, I have a couple of thoughts, and it hasn't been a priority today for the following reasons. One, we have said consistently, once we adjusted from the 15% to 20%, we said 15% plus. So we don't look at that 15% as a ceiling, we look at that as a floor in terms of profitability. And two, the activity in the organization, and the way we think about the businesses, is to maximize shareholder value, and that is, to drive the greatest return that we can, given the risk profile that we have articulated. And to do that in a way that maximizes value over the long term.
So while I have 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. So we use that as a tool that feeds data. And so, 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 and the foreseeable future, that we can be in the high teens in ROTCE and higher up on the ROA scale that we have laid out. But 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 are going to push to drive as much return as we can, given our articulated risk tolerance.
Okay. And then, on loan growth, I know the seasonality of the mortgage warehouse impacted period end balances. But even if you strip that away, loans were down a little bit. I know you have 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, and part of what we are 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 limit, and we also got a lot of activity dedicated. So I'd say, that has had some marginal impact on loan activity, but as Susan articulated, I thought, pretty well, the activity across the franchise is encouraging. So I think, that will move up, and as you see the seasonality and our mortgage warehouse finance business improve in the second and third quarters, when home buying activity occurs. I think you will see us -- I'd say so, just sort of mid-single digits in terms of loan growth.
All right. And then last one for me, BJ, I know -- I think last conference call, you mentioned $30 million of yield accretion would be a good number for this year. You have taken almost half that, around $14 million in 1Q. Maybe just an update on how you are thinking about accretive yield levels this year?
Yeah. So 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 are doing with purchase accounting accretion, 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 etcetera. So 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 are going to have and when and so on. And so, this quarter, obviously we had a little bit more than what we would have expected at the end of the fourth quarter. We will recast those cash flows again, as we will every quarter, to look ahead. But, generally speaking, I think for 2018, we will have more than that $30 million for sure. But again, it will 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.
Okay. Thanks guys.
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 are saying, that you want to offset that with sort of customer relationships. But is that just -- I guess, how meaningful can those, I guess, impact your deposit pricing? Like, it seems to me it's more of a -- it mitigates some of the higher end deposit pricing, or it takes some of the edge off, if you will, that increases boost? It sounds like you are 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 making acceptable profit for shareholders. So we balance all of those things. I think we have done a good job to-date. I think we will do a great job going forward. But what I was getting at, was clearly, deposit competition has picked up, and if you look at it 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, and we have seen that, and has actually been lower than previous cycles.
We think there is an inflection point now, since we are at 125 basis points of moves, that it could get more price competitive. And we will be prepared for that. And so, whatever actions we need to take to protect and grow our relationship to deposits, we will do so. 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 or people have extraordinary say in that, and do an excellent job serving customers. But we will be prepared to defend the balance sheet, as much as we need to.
Ken, this is Bryan. Just to say what BJ said, but 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, and 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 are still sensitive to what deposit pricing competition is. As BJ said, we want to make sure, that we are competitively priced, and that we are offering a fair relationship based price to our customers, and we want to be in a position, where we are competing on a level playing field.
So all we are really articulating is, 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. And then just, last question, can you just remind us, did Capital Bank materially change your asset sensitivity, or if not, do you expect it to, over time? Thanks.
Hey Ken, it's BJ. Yes, it reduced our asset sensitivity. There were round figures, roughly half as asset sensitive, as the legacy book was. So that did dampen asset sensitivity. But as you can see on slide 7, in the bottom, that we still give you that net sensitivity impact that we would expect on a [indiscernible] balance sheet, and this balance sheet does include Capital Bank as well. So if you were to compare it to some of our past graphs, without Capital Bank, you would have seen a modestly higher impact. But I would also remind you, that these shocks are based on kind of through the cycle assumptions, and as Bryan said, we have seen some -- certainly seen some lags so far at this point, and so, 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.
So I guess, 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 re-fi slowdown in the first quarter. So just want to make sure, we don't go too ahead of us, in terms of expectation on that business for the year?
Yeah. So 20% increase year-over-year would be fantastic, but I am not sure I am ready to declare that yet. I think, as Bryan alluded to earlier, we expect that we will see the same seasonality, as we have seen in the past, which would be buying season in the spring and into the summer, build those balances in that business for the second and third quarter. They drop back off in the fourth to the first and come back. So we expect to see that, but if you take a step back and you look across full year 2017 to 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. So we are 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 or the overall --?
On the warehouse specifically.
Yeah, I would say so.
And, could you remind us what the pricing on this is? I mean, I know that creates some volatility in the core name. When we look at for -- I think loan yields were at about 4.53 this quarter. Is that going to be accretive or dilutive to the NIM increased balance from the warehouse?
It will be accretive.
Yeah, definitely accretive. It's one of our highest yielding portfolios. But keep in mind, in that business, if you got -- we from time to time, will take advantage of opportunities we have with customers and customer relationships to grow. So part of that business, we are trying to gain market share. We will try to be more aggressive on price, and at other times, we won't. So it just depends on where the opportunity lies. But in aggregate, it is at almost 5% in terms of yields on our portfolio. So from a commercial perspective, one of the most highest yielding portfolios, and we expect that to continue.
Ebrahim, this is Bryan. Bob Garrett and the team that manage that warehouse business are extraordinarily disciplined and thoughtful and they have very-very great, good strong relationships with their customers. And we have 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. And while pricing is one tool, it has to do with availability of credit and utilization of those credit lines and such. It is a profitable high return business for us, and that team does a really good job of balancing all that out. So in short, it will be accretive to our margin, if we do see outsized growth there.
And 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.
Good morning.
Looking at the CBF acquisition and the cost saves, it seems a little surprising, I guess, after the integration, 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. So I think, maybe there is a little misunderstanding in how I said it. I apologize if so. But, what we were saying is, we still expect $85 million of cost saves, which is up from $65 million at deal announcement. We expect half of it to be in the run rate and in our numbers in 2018, and by first quarter of 2019, all $85 million of that annualized would be in the first quarter run rate, if that makes sense. So said a different way, we expect that all of the cost efficiencies that we expect out of the deal to be out by December 31, 2018, such that we have a claim efficiency run rate into 2019.
Okay, okay. Great. That's good clarity. Thank you. And then, just sort of looking at the capital markets business and the face of continued pressure on ADRs. Are there any thoughts to changing your approach to the capital markets space?
This is Bryan, Jared. We have 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 are on the right track in making adjustments. Part of it is, a tremendous focus on controlling costs and controlling the cost. But there is some fairly significant shifts in the way that business is being done, and so, we are making some shifts and making some investments that we think will make us more relevant and profitable in that business over time. And we have also seen good activity, and we have spent most of our time talking about the merger with Capital Bank. But our integration and merger with Coastal Securities, about a year ago this time, has gone very-very well, and 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, their customer suite.
So we are optimistic that the changes that we can make in that business will improve the profitability and these cycles, the fixed income markets running cycles, we expect that it will be difficult for the remainder of 2018, and we do think though, that as rates begin to stabilize and the Feds look at a more neutral policy on rates, that it's relative to raising or lowering, that that activity will pickup some, and that we are well positioned for that.
So 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.
Hey Jennifer.
Two questions; first of all, Bryan, could you elaborate on the investments you are making in fixed income to make you guys more relevant and profitable? And second, could you just update us on your future M&A interests at this point?
Yeah. Just to make sure I clarify your question, I will answer the first investment question first. The investments are in run rate investments that are embedded in the run rates you see and the fixed income business. So they are not outsized investments. They are 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 the customers and things of that nature, which we think will create greater transparency and greater liquidity.
We also continue 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 agencies.
So tools like that, but that's all embedded in our run-rate. So 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 both ways.
Broadly. Across the company.
Yeah. I would say in a phrase, we are 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. But under existing law, we still deal with the $50 billion threshold. So that has some impact on our short term thinking about it.
Long term, we think M&A is a tool to use, but is 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 and/or the funding mix of the business, and can be done in a disciplined fashion. Certainly, we will consider it. But right now, we are 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. And Capital Bank has given us -- taken our toehold and expanded that. So we feel better about that, and if we had opportunity to do fill in, in those markets, that would be attractive. And potentially, in the South Florida market, we still have a lot to learn about South Florida banking, and while Capital Bank has given us a small presence there, we do think the deposit and the funding demographics of South Florida are very-very attractive. And 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 big specialized businesses that generate attractive assets, but don't always self-fund. And so, we think anything that could fill in, from a funding perspective, is an attractive opportunity as well. And that doesn't tend to be as geographically centric as it is, the type of institution that you might have an opportunity.
But again, back to the larger point; right now, we are focused on integration, and we will 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, that $13.7 million, how much of that was scheduled versus accelerated?
$10 million or so maybe was scheduled, Michael.
Okay, that's helpful. And then, one thing I didn't hear talk about, in terms of loan growth outlook, or at least for this quarter, with the impact in Texas and then 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 of quarters or years? Thanks.
We are 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 for C&I, commercial real estate and energy. That team has done a great job of bringing in great relationships, full relationships in many cases. So we continue to be optimistic about the future growth in that Texas market.
As it relates to Florida, as Bryan said, we are still learning about the South Florida market. But we do believe there will 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, Capital Bank in the South Florida market, both on the C&I side and the commercial real estate side. So we are very pleased with the relationships that they will continue to be able to attract.
Do you have a sense for what the balances are in each of those states, and then both those states were impacted by the hurricanes, so 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 had about $600 million sort of -- as I mentioned, it's pretty evenly divided among those three. We had very little direct customer impact in Texas related to the hurricane, and actually probably view that more as an opportunity, frankly Texas and South Florida, as there will be some rebuilding and reinvestment opportunities related to some of the damage. There was obviously, in terms, more damage overall in Florida. South Florida had some -- had very few customers directly impacted. But there will be opportunities for us to grow there as well.
Okay. That's helpful. And maybe, just one more for BJ, just back to the accretion. I think, at the outset, you said -- or the 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 in the cash flows, is there an expectation that 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, and I think you know, we said we saw a little bit more in this quarter than we did -- than we expected, when we recast that, etcetera. But accretion comes in over the next several years, in different ways. And so, in terms of the aggregate accretion, it's somewhat finite, it's just a question of when it comes in. So all of that to say, we have probably the best visibility at this point in 2018, and so, again, it's coming in a little bit higher than what we would have thought 90 days ago. We expect that, that might still be the case. But that again, it will come down quarter-to-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.
Good morning.
Just one more clarification question on the loan growth; so the mid-single digit loan growth comment for the year, is that at the regional bank?
Yes.
Okay. So then 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 the right way to think about it.
Yes.
Okay. And then you have, call it $250 million to $300 million of run-off at the consolidated from the non-strategic portfolio?
It may not --
Probably a little lower.
Yeah.
A little bit lower than that?
Yeah. It has gotten down to just over $1 billion, so it's probably smaller than that.
Okay. I think it was down like 70 this quarter, so you annualize that, that was the $280 million, that's how I was getting to that.
Yes.
Okay. All right. So then it would be a little bit lower than that. All right. And then on the -- can you help me on the held for sale loan balances and how to think about those? There 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? And those yields on that were up, call it 145 basis points quarter-over-quarter to $668 million, what kind of drove that up and what's kind of the expectation for that going forward, because I think that helped the core margin quite a bit.
Yeah so, 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 will hold. So 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.
But you said the yields should hold on that?
Well yes. The yields are going to move around and yields on government guaranteed loans do move relatively in lockstep with rates and rising rates. So yeah, those yields should continue to perform where they are, and if rates rise, they should be a little bit better.
Okay. Got it. And then just on the expenses, were there any one time items either negative or positive on the expense side this quarter, and is this kind of a good run rate for the expense base? Obviously, before the CBS cost savings.
Yes. So we broke out the $31 million or so of acquisition related expenses as notable item, and then we had a -- actually, it wasn't an expense, a gain on sale from a office building that we had. But other than that, there is 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.
Thanks for taking my question. I was just wondering, if you -- as you come through this vortex of integrating this acquisition and given all the questions on earnings power and things, if you have 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 [indiscernible] But you are right, it is hard. When you are looking at our numbers today, we understand you had one month of Capital Bank in the fourth quarter, and to have one month of income statement, average balance sheet is a difficult thing to calculate, and then you got a full quarter, and then we are ramping up our cost saves, when we got merger charges. That's an interesting suggestion, and we will take that, and think by that. I think that might make some sense. So we will -- 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, and not just the numbers themselves, especially right now. So great. Thank you.
You're welcome. To your point, it's just not the numbers, there is an awful lot going on in our business, in addition to the integration, and 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 Brian, does the regional bank yields reflect the same accretion that we see at the holding companies? So could we kind of backdoor into a similar kind of core yield and core margins at a regional bank?
Yes.
Okay. So on the loan yield basis of the regional bank, does that kind of core change link quarter be sort of in the mid teens? Will that be a fair way to think about it?
I'd have to go back and look at it Chris. But we can follow-up with you, if you like, with Aarti.
That would be great. Not a problem. And then, just a separate follow-up, just has to do with 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 will be making this year?
Hey Chris, this is Bryan. It really won't change our core capabilities today. Essentially, on the digital side, particularly on the consumer interest and to a large extent on the treasure management side, it's migrating -- well really in total, it's migrating to the First Tennessee system. So 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. And to my response to Brock's question about an Investor Day, you really touch on an important topic, and 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 the technology platforms. And the way we think about the investments that we happen to make is, is how do we save over here, so we can make investments over there, in our technology platform. And so I think, we will enhance continuously the digital capabilities, both around transparency, executing transactions, etcetera for our customers, and 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, and we appreciate your support. Please reach out to any of us or Aarti, if you have any questions. Thank you for being with us, and I hope you all have a great weekend.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.