First Horizon Corp (FHN) 2016 Q3 法說會逐字稿

Good day, and welcome to the First Horizon National Corporation third-quarter 2016 earnings conference call and webcast.

(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, Nicole.

Please note that the earnings release, financial supplement, and slide presentation we will use on this call are posted on the investor relations section of our website, at www.FirstHorizon.com.

In this call, we will mention forward-looking and non-GAAP information.

Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings announcement materials, and in our most annual 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 announcement 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, 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 will now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone, thank you for joining us.

We're really pleased with the results of the third quarter.

We continued to see very good momentum across all of our businesses.

We felt very, very good about the progress we saw in terms of revenue growth, as well as continuing to control expenses, and to create operating leverage.

We saw strength in loans across the business.

We saw good deposit trends, and credit quality continued to remain very, very strong.

We're pleased that in the September timeframe we completed the acquisition of the restaurant franchise finance business, and we were able to hire a team of talented bankers, along with that, from GE Capital, we feel very good about the prospects for that business as we look into fourth quarter and 2017 and beyond.

Our fixed income business continued to be better.

It was up year over year, down a little bit from the second quarter.

In the third quarter, we saw very good revenue trends in the first two months of the quarter, they moderated some in September.

Probably more related to speculation about what the Fed may or may not do in September, and then later in the year.

As we look out across 2017, we expect fixed income revenue to continue to be steady, and we're optimistic that business will continue to show the positive trends we have seen over the last several quarters.

Overall, we are very, very pleased with the results of the quarter, and we see very good momentum and pipelines as we look into the fourth quarter of this year.

BJ will talk more about interest rates, net interest margin, and outlook, but we expect that our plans at least call for the Fed to raise rates in December, and then really not much after that.

You can call that a low for long view of the world if you like.

But essentially, we don't think there's very much in terms of rate increases in the future, but we do expect one in the fourth quarter.

We do continue to see good growth opportunities across our franchise, both in our core banking markets, and the specialized businesses.

We see good opportunities, as I mentioned, in portfolios that we've acquired like the franchise finance business, as well as our specialized healthcare finance business.

We have hired a lot of talented bankers across all of our businesses, and see great opportunities.

You will hear more from BJ, who will talk about expenses, but expense control and creating operating leverage is still going to be a primary focus of what we are doing the rest of this year and into 2017, and we think we've got good momentum there, and we think we've got good opportunities to increase or create additional leverage, as we move forward.

Finally, we continue to make progress on improving our returns.

We feel good about the ROEs that we continue to generate, and continue to make progress towards hitting our bonefish targets, hitting our bonefish targets, driving return on equity is still one of our primary objectives that we focus on day in, day out, in our management strategy.

So with those opening comments, let me turn it over to BJ to walk through the details, and then we will open up for Q&A.

Great, thanks Bryan.

Good morning, everybody.

I will start on slide 5.

As Bryan said, we think that this quarter was a really strong quarter for us across the board.

If you look at year-over-year in particular, if you start with that, we had double-digit growth in loans, deposits, net interest income, fee income, total revenue, and pre-provision net revenue.

So we were very, very pleased with the strength of the performance, and how it dropped to the bottom line.

We reported net income available to common of $63 million or $0.27 a share, which translates to 12% increase in net income linked quarter, and 7% year over year.

Looking at pretax income growth, you can see 33% growth year over year, and 6% linked quarter, driven by strong positive operating leverage, both linked and over prior year.

Total revenues were up 4% linked quarter, driven by strong loan growth driving higher net interest income and [margin] expansion, and year-over-year growth was again driven by meaningful balance sheet growth, and solid fixed income performance.

We will talk some more specifics on the balance sheet dynamics in a minute, but overall average consolidated loans were up 5% linked quarter, and 12% year over year, with average core deposits increasing 4% linked quarter, and 11% year over year.

Loan loss provision was again modest at $4 million in the third quarter, flat compared to the second, as credit trends remain healthy, with net charge offs at only $3 million in aggregate for the quarter.

Turning to slide 6, you can see the significant positive momentum being demonstrated in our regional banking franchise, both on a linked quarter basis and year over year, with double digit revenue, net interest income, and balance sheet growth year over year.

Net interest income was up 7% linked quarter, and 15% year over year, largely driven by commercial loan growth.

Linked quarter fee income was up 6%, primarily due to higher swap fees and a gain from property sales.

Expense in the bank was up, as we continued our investment in strategic hires in expansion markets and specialty businesses, and we saw higher incentive compensation, due to the strong loan and deposit growth, and made technological upgrades in areas such as digital banking.

Loan loss provision in the bank was $9 million in the third quarter, reflecting continued stable asset quality trends with net charge-offs at only $2 million, and additions to the bank coverage due to the strong growth.

Looking at the regional bank's balance sheet on slide 7, you can see the strong growth in multiple areas of our commercial portfolios.

Average loans were up 6% linked, and 18% from the third quarter of last year.

In September, we completed the franchise finance loan portfolio acquisition of approximately $535 million in outstandings at period-end.

Since we closed this deal in late September, the impact on average loans was only about $90 million.

The acquired loans with our existing franchise finance loans will establish a specialty lending area, with about $750 million in outstandings currently.

As Bryan talked about, we like the franchise finance business, with its relatively strong margins, solid credit trends, and fee opportunities that make it a great contributor to our focus on economic profitability.

Linked quarter loan growth came from specialty lending areas, primarily loans to mortgage companies, commercial real estate, asset based lending, and private client wealth management.

Commercial real estate growth was largely driven by the funding up of prior commitments, yet we remain active in the broader CRE market.

Loans to mortgage companies benefited from a backup and rates earlier in the quarter, as well as the seasonally strong summer home purchase season.

We continue to see growth in our core Tennessee markets, as well.

Year over year, middle Tennessee, the Nashville area, was up 8%, and west Tennessee, the Memphis area, was up 5%.

Despite the competitive landscape, pricing trends held up.

You can see in loan yields were up about 2 basis points linked quarter and 16 basis points year over year, as we benefited from growth in our higher-return specialty lending areas, and took advantage of the asset sensitivity from the Fed's rate move last year.

We continue to remain disciplined on underwriting, and credit quality was strong.

On the liability side, average core deposits in the bank were again strong, up 1% linked quarter, and 7% year over year.

We are encouraged by the strong pipelines we continue to have, despite the strong fundings we have experienced, and while loans to mortgage companies will fluctuate, we are positive on the forward outlook for our loan growth prospects.

Moving on to fixed income on slide 8, fixed income average daily revenue was solid at $922,000 in the third quarter, reflecting a large increase of about 37% from the prior year, although down from Q2 2016's $1.1 million.

Linked quarter decline can be attributed in part to typical third-quarter seasonality, as well as less favorable market conditions with lower volatility experienced in the third quarter.

It was a tale of two cities within the quarter, though.

Activity was stronger in July and August, but we saw a pretty significant decline in activity in September, as volatility abated.

The year-over-year increase in average daily revenues reflected increased performance across all product sectors, but particularly our agency and mortgage [desks].

We continue to focus on investing in distribution platform in the fixed income space through strategic hires, and expanding our product capabilities.

Getting into net interest income and net interest margin a little bit further on slide 9, we see net interest income was up 5% linked quarter, and 13% year over year.

The margin was up 4 basis points linked quarter, and as you can see in the bottom left, the linked quarter improvement was mostly driven by higher commercial loan growth volume, particularly in loans to mortgage companies.

We're particularly pleased, if you look at the chart in the upper right, you can see the significant net interest income growth over the last two years, with a relatively steady NIM over the same period.

This demonstrates our bankers' ability to remain disciplined on pricing, while generating plenty of opportunities for growth on the balance sheet.

Turning to slide 10, you can see asset quality trends remain favorable.

Net charge-offs and non-performing assets were down year over year in linked quarter.

Our reserve to loans in aggregate was 103 basis points in the third quarter.

Asset quality in our commercial loan portfolios in the bank remained strong.

And in the non-strategic portfolio, credit metrics are stable to improving.

And balances continue to run off, with period-end loans for non-strategic dropping to $1.7 billion, or about 8% of total loans.

Even with the strong loan growth, the commercial loan originations we are putting on the books are on balance of slightly better quality than the overall portfolio, which is encouraging to our forward view of credit performance.

Wrapping up on slides 12 and 13.

I think we are pleased with both the strong quarter we had and the positive momentum we still see in our businesses.

From a bonefish perspective, we ticked off a lot of improvement boxes, as we saw improved ROTCE at about 12%, improved ROA, NIM expansion, a reduction in net charge offs, strong fee income generation from our fixed income business, an improved efficiency ratio, and accretive capital deployment organically, and via the franchise finance acquisition.

With that, I will turn it back over to Bryan.

Thank you, BJ.

We're really pleased with the results we see in the bank and the fixed income business.

Our emphasis on improving economic profitability as an organization is improving our returns and our profitability.

Our capital ratios remain strong, and we think we have opportunities to opportunistically, in a disciplined fashion, to continue to deploy capital in growth opportunities, stock buyback, et cetera.

Our special thanks to all of our First Tennessee, First Horizon employees.

Thank you for all that you do.

You are our most important assets, and we appreciate what you do to build our relationships with our customers, and to build our business.

And with that, operator, we'll open it up for questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

I would like to start, on the mortgage warehouse, which was obviously very strong in the quarter, first, what was the split between purchase and refi?

And could you talk about expectations for the business in 4Q, as the refi cycle likely slows at a bit?

I can answer that Steve, good morning, it's BJ.

It was largely balanced, maybe modestly more purchase than it was refi in the quarter, but it was pretty close to 50/50.

So we usually have, and usually see a strong home purchase market in the summer, but with the backup in rates at the beginning of the quarter, that also helped spur a lot of refi activity, as well.

So it was a positive on both of those ends.

So we feel pretty good about that business, very good, in fact.

We have been gaining market share from existing customers, and picking up new relationships.

And so, again, while we know that business is going to fluctuate in terms of outstandings, and we think the fourth quarter is going to probably be seasonally less strong than what we usually see in the third quarter, we still think that the business has a pretty good trajectory of growth, going forward.

Okay.

That's helpful.

Thanks, BJ.

And then, on the capital markets business, when we look at the historic ranges, $1 million to $1.5 million for the ADR, if I look back over the past three years, there was actually only one quarter that you were in the range, which was last quarter.

Bryan, have you considered lowering the range, and related to that, you would lower the investment you're making in the business, capital allocation et cetera?

Yes, indeed.

I think it's probably been a year and a half, two years ago, that we effectively did lower it.

I think at that time, we talked about the fact that we didn't think we'd get to the $1 million to $1.5 million range.

At that time, we were in the $700,000 to $800,000 a day range.

We think, as the effects of Dodd-Frank in particular, the Volcker rule, will continue to work through the business model and the fixed income business.

It will continue to build share, we will continue to have greater opportunities with customers, one.

And two, opportunity to bring people onto the platform.

Much like the mortgage warehouse finance business, where balances will fluctuate, average daily revenue is going to fluctuate in this business.

And so, while I would stick with, we think that the business is better today than it was two years ago, whether we're going to be at $1.1 million or $900,000 a day, we are not -- we don't have a clear enough crystal ball in any way, shape or form, to say this is the number.

So I wouldn't argue with you if you said the range was going to be $800,000 to $1 million to $1.2 million for the next year or so.

We think the business is getting better.

We think we're picking up market share, the business model that we operate matching up buyers and sellers is effectively what becomes a preferred business model under Dodd-Frank and the Volcker rule.

So we see increased opportunities, but I wouldn't argue with you, I wouldn't pin that $1 million to $1.5 million be in the range.

Fair enough.

Thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Just hoping you touch on expenses a little bit.

It looks like this quarter, they ran a fair bit higher than we were looking for, but it also puts you well above, on a full-year basis above your prior guidance.

Even excluding the $4 million of net one-time items.

Can you just address that?

Should your expense guidance change, going forward?

Thanks.

Ken, it is BJ.

I think the last couple quarters, we have talked about being a little bit more focused on positive operating leverage.

And so, I think you are correct, that our expense base is higher than what I would have said a year ago, I think.

And that's true, but if you look at the revenue assumptions, that certainly we had and maybe the Street had, I would guess that they were higher as well, ex rates.

And so, as we have looked at where we wanted to invest in the business, we've allowed that investment to continue, which has driven most of our expenses.

And we've gotten the revenue that we needed to get, and so that's manifested itself in double-digit loan growth, deposit growth, PP&R is well into the double digits, net interest income is very strong, even without a lot of rate help.

So I think that's why we are a little bit more focused on the operating leverage side, as opposed to an absolute number, on the expense base.

If you actually look at where expenses are growing, it is in the personnel line.

A lot of the year-over-year growth is from much better fixed income than what we would have thought last year.

So that's driving a lot of it.

The strategic investments in our expansion markets, in our specialty lending businesses is driving it.

Increased incentives, because of the strong balance sheet growth that we have seen is driving a lot of it.

FDIC expense from a bigger balance sheet is driving it, and some marketing expense, as it relates to supporting growth, particularly in expansion markets, is supporting it.

So we think that as Bryan talked about, we still are very focused on expenses, on expense management.

We feel good about how the organization is managing expenses, and we are strategically allowing expense to grow, commensurate with outsized revenue opportunity.

Got it.

All right.

Ken, this is Bryan, if I could, I want to pick up on that.

As I think about how we have, one, focused on expenses, and how we've executed on expenses, really for seven, eight, nine years now.

We have worked very, very hard at driving efficiency, while continuing to invest in the franchise.

And I have used the term, and BJ has used the term, both this morning on operating leverage.

In some ways, I think if I could backup and do it again, we would probably be less focused on a range 680, 670, 660, whatever the numbers were, because we have so many variable components like our fixed income business, that make it hard to ever reconcile back to that.

But that doesn't diminish the key point that BJ just made, and what has been our trends and pattern over the last several years is, we are focused on making the investments we need to make to grow the business and drive inefficiency and controlling costs in ways that we create positive operating leverage, quarter in, quarter out.

And so, we are not focused on a number as much as we are focused on making smart investments in the business, that drive the future growth opportunities, the future revenue opportunities.

And at the same time, driving the efficiencies that allow us to capitalize on process improvement, a cross functional, cross organizational, or horizontal processes, where we can be more efficient.

So in some ways, we have oversimplified the way we have talked about it, and I would say on my part, maybe it was a mistake that we got pinned down to a range of numbers, but I feel very, very good about what I see going on in the organization, in terms of expense discipline, focus on controlling and managing expenses, and I feel pretty good about our ability to control, and to manage expenses in the fourth quarter, and 2017 and beyond.

So thanks for letting me get that in.

No, I actually agree with you.

I just wanted to make sure that we are not holding you to an outdated standard with the dollars.

That totally makes sense.

Since I have you, Bryan, can you just address, you mentioned that you are building in, or you are expecting one rate hike in December.

I really hope so, but if that doesn't happen, does that, what does that actually affect in your business, in terms of your outlook, your guidance, your planning?

Does that have any impact if rates don't go up in December?

Because I know it is a negative.

It is a slight negative on the margin.

We've got some sensitivity data in there, and I think one 25 basis point move parallel is $10 million, and two is roughly $20 million.

For sure, it has impact there.

I guess, you could say we and the rest of the industry have gotten pretty comfortable working in an industry where rates don't do very much.

I think it's probably a bad thing for the industry.

I don't think it changes much in the things that we do day-in, day-out, but I do think it continues to put pressure on the industry, in the sense that there is very little revenue growth opportunities, there's still a tremendous amount of competition for what appears to be a flattening trend line in terms of loan demand, particularly with an environment where there's less emphasis industry-wide on products like commercial real estate, et cetera.

So I think is going to make our business more competitive.

I think that can have some marginal impact on pricing, but I think day-in, day-out we're pretty comfortable we get the 25 basis points, we can deal with that, if we don't get the 25 basis points, we will also continue to deal with that, but I don't think it will have a significant day-to-day operating impact on us.

We're going to stay focused on expenses, and trying to drive the profitability and the returns in the business.

All right, I really appreciate it.

Thank you.

Jared Shaw, Wells Fargo Securities.

Just following up a little bit on the expense side.

As we look through, and I understand we're looking at the operating leverage opportunity, but are there any additional investments you think that you need to make, whether it's any regulatory like BSA/AML or just other systems that may need to be enhanced or grown?

And then also, what do you expect the full impact of the quarter, of the headcount from the GE team, to be on the expenses, as we look into fourth quarter?

Jared, it's BJ.

So the investments that we continue to make probably won't be all too recognizable from a regulatory perspective.

They are part and parcel of what we've been doing over the last couple of years.

There's nothing that's particularly outsized, in terms of that arena.

Where we are making significant investments that are showing up in our incremental expenses are in our digital banking platform, our online banking platform, that's obviously our most recognizable customer-facing system.

And so, we are doing that, at the same time we are rationalizing our branch network, to help offset some of the costs of that as customers are changing their behavior.

So those are the biggest things that I think we see from an investment perspective.

In terms of the franchise finance business, I think we have hired something like 10 or so people to support that business.

We are very pleased with the caliber and the experience of that team, Todd Jones, who leads it, came from GE Capital, and several other people in that, that we hired, did as well.

So there's a lot of continuity there.

They are on the ground talking to customers, looking for new opportunities, integrating very, very well into our culture and our organization, and are very happy to be here.

And we are happy to have them.

So 10 people, a couple million dollars to support a $20 million, $30 million revenue stream and growing, we are very pleased with what that acquisition will bring us over time.

Great, thanks.

And then on the mortgage warehouse side, was any of that growth due to any new initiatives, and expanding the customer base, or is that really more volume-driven then strategically driven?

It is BJ again.

I think a lot of it is volume driven, but over the last several quarters, we have made a significant investment in trying to expand existing relationships, to get them used and utilize more of their existing lines with us.

And use us more as primary relationships.

So that's one thing that we have done.

We also, probably over the last 12 to 18 months, have added about 50 new relationships there.

We're up to maybe 180 or so mortgage warehouse relationships.

So we believe that we are absolutely gaining share there.

And so it's a combination of all three of those factors, and again, we feel good about the performance going forward, even though it will fluctuate quarter to quarter.

We think the long-term trends, in terms of our ability to grow that business, is sloping upward.

Thanks, and then what was the yield on the mortgage warehouse this quarter?

I think it's in the 440 range.

Great, thank you very much.

Ebrahim Poonawala, Bank of America Merrill Lynch.

I think on, just, on the expenses, I think as we move away from this dollar target, is there a way to think about what quantified the positive operating leverage, all else equal, that we should look for?

I think you had about 70% in the third quarter, where can that go?

I know you have a long-term target of 60% to 65%.

If you can give any framework around that, that would be helpful.

In terms of what we think about in positive operating leverage?

Yes.

At least over the next 12, 15 months.

I think, generally speaking, we talk internally in the organization about targeting a 2 times operating leverage.

And for all of our senior leaders in our business, some of them are going to do well beyond that, some of them, because we are investing in certain businesses, might be challenged to do that, but overall, 2 times positive operating leverage feels good to us.

If we do that, we think that we can continually improve the efficiency ratio by year-to-year, 100, 75, 100 basis points, keep chopping it, and chopping the wood down.

This quarter we were at 70% on the efficiency ratio, I believe, and so, we obviously have that on our bonefish.

That's still part and parcel with how we get there, positive operating leverage, and focusing on driving those revenues is going to be a big part of that as well.

I am sorry if I missed it, what was the reason why we didn't see more expense leverage at FDN of this quarter, given the revenue decline?

More expense leverage this quarter.

Just in terms of when you look, the revenues went down $6 million, if the expenses went down $3 million quarter over quarter.

Should that have been greater?

Or is that normal?

I think that's relatively normal.

You're going to have modestly different payouts, based on which producers are paying, and where their incentive commissions are on the grid, and such, but that to me, is within the range of normalcy in terms of variable comp decline commensurate with the revenue decline.

Understood.

And just a separate question, I guess for Bryan, we've seen some comments from the regulators trying to ease CCAR and stress testing for the smaller SIFI banks.

I'm just wondering if that, you think that may have an impact, on how you and banks around your size approach MOE type acquisitions, that sort of opportunities to cut core expenses starts declining as you look out over the next year or so?

Yes it does appear, both in CCAR as well as DFAST, that there's going to probably be more flexibility in the process, in terms of timing and examination, et cetera.

I don't really expect it will have a tremendous impact on the time or the energy we put into completing the DFAST.

I think in terms of MOE and the bright line that is still at $50 billion, that line may be a little less bright if you lessen the impact of DFAST, but it's still a reasonably bright line, and I would say that it's pretty important.

So I think that MOE opportunities and/or growth through reasonably-priced transactions is still an important part of creating leverage in the industry, and building the capabilities longer-term to invest in product tools and solutions for customers.

But I don't think there's very much, that's changed, in terms of the way I would think about the $50 billion bright line today, as based on any of the conversation around CCAR and/or the DFAST process.

So I do believe that threshold will get moved up over time.

There was, I think, a consensus even articulated in some ways by the Fed, the regulators in late -- or in 2015, not necessarily late 2015, but there was a reasonable place that could be moved up, and focus more effectively on larger institutions.

I think that's the right answer.

I think that changes the equation a whole lot more than anything we've heard.

So actual moving that bright line probably has more impact on my thinking then a tweak here or there with stress testing, et cetera.

Jennifer Demba, SunTrust.

He just covered my question, thank you.

Thanks.

Nick Grant, KBW.

You have talked a lot in the past about taking some of that asset sensitivity off the table in the near term, and trying to pull in some enhanced earnings sooner.

So it looks like you guys are maintaining your level of asset sensitivity in the quarter.

How are you guys thinking about managing that moving forward?

And thinking about that with your December rate hike, that you have in your budget.

Can you just talk about that a little bit?

Sure.

It's BJ.

As you know, last year, at the end of the year, we took some actions to reduce asset sensitivity, and if you were to look at the asset sensitivity for our Company year over year, it would be down.

So we have done some things, mostly in the securities portfolio with some bond swaps, some macro hedges, et cetera, to do that.

And they have been successful.

There hasn't been great entry points honestly, to do more of that this year.

Or else we would probably would have.

Our business is still very oriented towards natural asset sensitivity, meaning that most of our businesses are generating loans that are LIBOR-based or floating rate, and so we recognize that.

And one of the reasons that -- among many, that the franchise finance business was so attractive to us was that it was a more fixed rate versus variable rate type lending business, that we thought would also help us with our asset sensitivity.

So, I think as Bryan talked about at the beginning, we don't have high hopes for a lot of rate increases, but we do expect or hope for one in December.

And so, if lower for longer continues to persist, we will look for opportunities to continue to chop away at our asset sensitivity, while also remaining -- also keeping that optionality if rates do rise.

Okay great, thanks.

And you may have mentioned this, I might have missed it, but can you give an update on your Houston operation, can you give us a clue where the loan balances are now, and how much of that is energy?

This is Bryan.

I will get in the ballpark, and then we'll let Susan pin it down.

I think we're just under about $300 million in loans, I think we're just under about $200 million in energy and energy-related credits in Houston.

The business that we see there, and the opportunity is really, really strong.

Gary Olander and the team of bankers that he has assembled there are doing a fantastic job.

Their calling efforts are in relationship building with customers of very strong credit quality and long-term relationship potential.

So we are very, very pleased with the progress that we see in that business, and the opportunity to continue to grow there looks very, very good.

We think as it relates to energy, and to some extent, other parts of the opportunity in the marketplace, we think we are uniquely positioned, in that we have minimal exposure.

We have the opportunity to lean in, or to be a little more front-loaded in terms of how we use our balance sheet to build and create long-term relationships.

So we're very optimistic about the trends we see there.

To provide some additional specifics, as Bryan indicated, in terms of total Houston average balances at the end of the -- for the quarter, about $275 million.

About $140 million of that true energy, but some of the C&I has oil field services which is somewhat related, so around $200 million in terms of total related to energy.

And then we've got about $70 million in the commercial real estate book in Houston.

And as Bryan said, we continue to be optimistic about the opportunities there, while still being appropriately cautious and prudent, in terms of the underwriting.

The leadership team here spends a good bit of time going to Houston, visiting with customers, really in all these lines of business.

So energy, commercial real estate, and C&I.

And it's been, I think, very good time spent in terms of understanding that market, and I believe that Houston is emerging from the hit from oil, as oil prices have stabilized and increased.

Great, thank you.

And then one last question.

With all of these CRE concentration guidelines, we've seen a lot of banks pull back in that market.

I don't know if that's providing an opportunity for you, and are you seeing any better pricing there?

Nick, this is Bryan again.

We do see that as an emerging and improving opportunity.

In some ways it does look like that marketplace is -- particularly the environment around commercial real estate lending has slowed very significantly.

Pricing has shown improvement, structure has showed improvement.

You are seeing better structure, better pricing.

And given our relative underexposure to that space, we do think that is an opportunity, much like we had in 2009, 2010, to look to continue to invest in our lending relationships with our strong long-term customers, but also to build some new relationships.

So we do see that as an opportunity, or an area where we can be front-footed and lean into it a little bit over the foreseeable future.

I think the benefit of the fact that we have been consistent, improving all along the way in terms of product and geographical diversification in that commercial real estate lending portfolio, allows us to continue to be open for business for commercial real estate loans that fit the underwriting profile and risk appetite that we have.

Okay, thank you very much.

Kevin Fitzsimmons, Hovde Group.

You mentioned earlier on expenses, that you're looking to offset some of the investments in technology, or digital platform, with branch pruning.

I was just wondering if you can size that up for us at all.

Is that more of a one-off type approach, or do you have a certain number of branches already identified, or you're going through that process now of taking the branch network down a little more meaningfully?

Thanks.

Kevin, it is BJ.

I think we have talked about this before, a couple quarters ago.

We will probably reduce our branch network, again, because of changing customer patterns, about 15 to 17 branches this year.

And we will probably save in the neighborhood, annualized $4 million to $6 million of expense by doing so.

And we can do that because we've got such a strong branch network here in Tennessee, already where we have multiple places in terms of physical branches, that customers can migrate to.

And our retail bankers in the markets do an excellent job of preparing customers that are going to have to move, and preparing them for that.

We support it with call centers, we support it with direct mail, et cetera, so we have been very pleased with how that migration has taken place.

So we save that money, and as I talked about earlier, we are investing a significant amount in online banking and digital banking, which is our probably our most important customer-facing system, particularly in retail, which probably costs close to the same amount.

And so that's one way that we are trying to be smart about how we can take money and reinvest it for the benefit of our customers, and try to be disciplined on the expense side, and have a better product for our customers, in terms of convenience.

Great, thanks BJ.

One quick question about the new markets.

I know we just talked about Houston a minute ago.

Can you talk a little bit about Raleigh?

I know that was a small step, a small deal that you did there, but just efforts that are going on there in terms of hiring, and what you think the next step is to expand in that market area?

This is Bryan.

We're very pleased with the progress that we see.

Jim Beck and the TrustAtlantic team have done a very nice job in the Raleigh market, building on the progress we had there.

Ken Reece, who is running that private banking business, is doing a fantastic job.

You may have seen that in the -- probably a press release in the last 30 to 45 days, we have put our mid-Atlantic headquarters is now in Raleigh, Billy Frank has moved to Raleigh, to assume leadership of that business, based on the retirement plans of John Fox, who has been running mid-Atlantic business.

We see very good calling efforts.

We see great opportunities in the whole mid-Atlantic region, from Richmond to Jacksonville.

Those, the customer calling efforts we see great opportunity in.

So we're pleased with the progress.

We are pleased with the progress that we are making in Raleigh.

We think that there will be additional talent hires that we will see over the next several quarters, as Billy and Jim and the team in Raleigh continue to build out that marketplace.

We will see it in places like Jacksonville and Charleston and Charlotte.

So we're optimistic about the opportunities we see in mid-Atlantic.

Great, thanks Bryan.

Christopher Marinac, FIG Partners.

BJ and Bryan, just wanted to get through on the pickup of the loan yield in commercial.

How much of that is tied to the specialty lines and the ongoing progress there, versus the pricing benefit that Bryan just mentioned on CRE?

I would say it's probably more the former, than it is the latter.

I think we are starting to see what Bryan talked about, in terms of CRE trends emerging right now.

We've had several examples of that occurring.

But I don't think that that's linked fully into what we are seeing in terms of origination.

A lot of the yield increase that we saw this quarter was loans to mortgage companies, which is our -- one of our highest yielding portfolios.

So that certainly helps.

And the specialty businesses in general have a little bit firmer pricing, I would say.

The core C&I business, as we have talked about before in our markets, is very, very, very competitive.

And so our bankers have been very disciplined about keeping as much price and getting paid for risk as we could, but that's a very competitive market, and that specialties have been where we have been able to get a little bit -- get paid a little bit more for the risk.

Great, that's helpful, thanks.

And just a quick follow up for Susan.

Can you give a comparable number like you gave us for Houston, on either Raleigh or even just the mid-Atlantic region, as you think about it for the size of the loan portfolio?

Sure.

For mid-Atlantic, for the average quarter, was just under $1.2 billion, and that does not include, that does not include commercial real estate.

That's just C&I and private client business.

Raleigh is at a little under $385 million.

Great.

So CRE is its own bucket, back to the whole corporate, correct?

Yes.

We run CRE basically as a line of business, CRE is consolidated and reported as one business unit.

So those relationships, and the relationship managers are in the marketplace, so we manage it locally from a relationship manager perspective, but we report and manage the portfolio at a more centralized level.

So if you look at our breakdown pie chart of the loan portfolio, you'll see that in our specialty businesses.

That is a footprint business.

So when we total up what's managed in the market, we don't include CRE.

But CRE for mid-Atlantic, I've got that number too, is about $420 million.

So that's largely business that we are doing in that mid-Atlantic footprint.

So if you add that all together, you are at about $1.6 billion.

Great.

That's super.

Thanks Susan, I appreciate it.

Jon Arfstrom, RBC Capital Markets.

Just a few clarifications here.

BJ, on loan growth, can you help us dissect your expectations a bit there?

I think you said earlier you are positive on the forward loan growth prospects, but expect some warehouse volatility.

Just looking back during the call, looks like you were down a couple hundred million in the year-ago fourth quarter.

I know your averages will be up from the GE loans, but help us understand what you're saying on core growth expectations, and then some of the warehouse expectations for Q4?

For Q4 yes, I think loans to mortgage companies will likely be seasonally down in the fourth quarter.

But as I talked about in the early comments, we still see pipelines that are at some of the highest levels that we have seen in quite some time.

And that's across multiple areas of the organization, not just concentrated in any one or two.

So that gives us pretty good confidence that the loan growth momentum will continue.

Will it be in the high double digits that we are seeing today?

Probably not.

We would expect over the next several quarters, something in the mid to high single digits, which I think would compare very well with the rest of the industry.

And so, we think that we can continue to see that momentum and build upon it.

Okay.

And then on the fixed income average daily revenues, BJ, you may have touched on it a bit, but you talked about being down in September versus July and August.

What was the magnitude of that?

I think July and August was probably in the $1 million-ish range for both quarters.

And so, that's why we felt that it was tracking largely with what we saw in the second quarter.

And then, September was much lower, probably in the $700,000 range or so.

We were tracking about $1 million a day through August, and then we hit in that $700,000 to $800,000 range.

And that's really where October has started off.

It's been less volatile and less activity in the early part of the fourth quarter, as well.

Okay.

And then just last question for Bryan or BJ on the -- your capital levels.

You obviously were able to bring them down a little bit this quarter, with the new loans.

Curious how, what your attitude and appetite is on acquisitions, and also maybe attitude and appetite on buybacks.

You are still -- congratulations for bringing it down, but unfortunately, you are still sitting on a pile of capital.

Just maybe give us your latest thinking on that?

This is Bryan.

I like the way you describe that pile of capital.

And that pile of capital actually grows as the remaining, call it $1.5 billion, $1.7 billion in non-strategic continues to run down.

Our view on how we invest that capital is really unchanged.

We go back to our focus on returns, and we focus on how we put that capital to work, in ways that create shareholder value.

And so, the organic growth and/or the very attractively-priced acquisitions, like the restaurant finance, franchise finance business, has been the greatest opportunity.

So we want to invest in customer relationships, and we want to acquire portfolios, where it makes sense.

And really, we consider an investment or an acquisition when we hire bankers or teams of bankers over time that allow us to grow new and different lines of business.

For example our investment in Nashville and the music industry, and the bankers that have come on board to help us build that business.

M&A, we think, is an important part of how we can use capital.

We intend to be disciplined about M&A.

I would say nothing really has changed very much about the nature of the M&A environment.

We do think that pricing is the key to it, that lower premium transactions, whether you see them as MOEs, or but lower premium transactions, are probably the most effective way to create synergy, and to create value for shareholders, both sets of shareholders.

And so we think that's a priority.

And then, as we have in the past, we continue to look for opportunities to return capital to shareholders through our dividend policies, as well as our repurchase programs.

So we will continue to use all of those levers.

We will be thoughtful and disciplined, as best we can, in terms of picking the timing and the opportunity.

But we see a fair amount of capital or excess capital generation that we have the ability to continue to put capital back in our shareholders hands, and invest it in the business and create continued growth opportunities.

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, operator.

Thank you all again for joining us this morning.

We are very, very pleased with the progress that we see in the organization.

We continue to see a difficult but an opportunity-filled environment, and we continue to look for ways to grow our business, continuing to improve our returns and capitalize on the momentum that our team has continued to create.

Thank you again to all of the First Horizon, First Tennessee team, for all you do, to help us build this business.

If you have any questions or any additional follow-up requests, please reach out to any of us, or reach out to Aarti, any time during the day or over the weekend, or early part of next week.

Thank you all, and have a great weekend.

The conference has now concluded.

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