First Horizon Corp (FHN) 2017 Q1 法說會逐字稿

Good day, and welcome to the First Horizon National Corporation First Quarter 2017 Earnings Conference Call.

(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, Franchesca.

Please note that the earnings release, financial supplement and slide presentation we'll use in this call are posted on the Investor Relations section of our website at www.firsthorizon.com.

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

Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings materials and in our most recent annual and quarterly reports.

Our forward-looking statements reflect our views today, and we're not obligated to update them.

The non-GAAP information is identified as such in our earnings materials and in the slide presentation for this call and is reconciled to GAAP information in those materials.

Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch.

Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions.

I'll now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone.

Thank you for joining us.

2017 is off to a good start.

We're pleased with the results in the first quarter.

We saw good loan and deposit trends.

Our pipelines remained strong as we wrapped up the quarter and started into the second.

We did see some expected volatility in our mortgage warehouse lending business.

As you know, and as we've talked about in the past, it is a seasonal business, and it is impacted by higher interest rates and that slowed down in the first quarter.

We have seen some recovery as we move into the second quarter and are optimistic about the remainder of the year in that business as mortgage activity picks up seasonally and interest rates, particularly the 10-year Treasury, have come back down.

You'll see a corresponding benefit of the average $900 million decline.

You'll see an impact on the net interest income of the average $900 million decline in the mortgage warehouse lending business.

In fact, if you look at the decline in net interest income, mortgage warehouse lending explains about 150% or more than the total decline.

You add to that day count decline in the first quarter, you see roughly double the impact on net interest income.

So the net effect of that is, is we had good growth in other businesses.

We saw the benefit of our asset sensitivity, and they significantly offset the impact of declining mortgage warehouse volumes.

Our fixed income business was a little soft in the quarter.

Our average daily revenue dropped to $689,000, a little bit down from the fourth quarter.

As we talked in our fourth quarter call in early January, we saw the business tailing off a little bit as interest rates spiked following the election.

That environment continued through the first quarter and into the early part of the second quarter.

We announced earlier this week we have completed the merger with Coastal Securities.

We're excited about that.

It adds a fifth product desk and a strong product set.

It brings a lot of very talented bankers onto the platform.

So we're optimistic that that business will continue to drive forward and help that business.

You'll see an impact -- and BJ can talk more about it, but you'll see an impact in average daily revenue in the future, just through the acquisition of Coastal Securities.

Credit quality throughout the quarter was strong.

You saw net recoveries again in the first quarter, second quarter, consecutively.

We had a slight provision reduction or reserve reduction, but our reserve coverage ratio actually increased slightly.

Our nonperforming assets and delinquency trends continue to look very good, and we're very optimistic about credit quality throughout the year.

Our expense control in the quarter was good.

We have continued to focus throughout on the appropriate investments in the business by hiring the right people and building businesses, like our restaurant franchise finance business, our health care sponsor finance business and a number of our specialty businesses, as well as our banking markets throughout the footprint.

But we also have the ability to maintain strong expense discipline, and you saw that in evidence in the first quarter.

And as a result, you saw operating leverage on a year-over-year basis in our banking business and across the company.

With the help of BJ and his team, our people continue to deploy tools to focus on returns and focus our business on those activities that drive towards our bonefish targets, principally around our overhead -- excuse me, on our return on tangible common equity.

Our capital position in the first quarter was strong.

We increased our dividend by 29% or $0.02 per share per quarter, and we continue to have strong capital ratios, which we think gives us tremendous flexibility to continue to grow the business or redeploy capital to shareholders or otherwise.

We remain focused on driving towards those bonefish targets and seeing us hit those higher ROE targets that we've laid out, and again, feel good about the progress we've made there.

We're reasonably optimistic for 2017.

The economy, in our view, is still very much like it has been for the last several years.

It's growing at a modest pace, somewhere in the 1.5% to 2% range in all likelihood.

Trends seem to be positive.

In all likelihood, we do expect that the Fed will raise rates much like the market does a couple of times over the remainder of the year.

In our view, to break out of this growth pattern, we're going to have to see some legislative victory, taxes, regulation, things of that nature, which are really dependent upon the White House and the Congress being able to enact some of the President's agenda.

But in the absence of that, we think the economy will continue to chug along and that we're optimistic that we'll stay in this sort of steady growth pace that we've seen for the last several years.

So with that, let me turn it over to BJ and he can take you through the details, and then we'll come back and deal with some questions later.

All right.

Thanks, Bryan.

Good morning, everybody.

I'll start on Slide 5. In the first quarter, we reported net income available to common shareholders of $54 million, $0.23 a share, up 15% from last year and steady from the fourth quarter.

We did not have any notable items in the quarter.

I'd say from my perspective, the highlights of the quarter were: we saw strong balance sheet growth and positive operating leverage in the regional bank; expense discipline was evident; credit quality remains excellent; and fixed income performance was muted in the quarter, but still generated positive returns.

Turning to Slide 6. Let's take a look at the net interest income and net interest margin trends.

Linked quarter, net interest income and NIM were in line with our expectations.

From an NII perspective, we did see benefit from continued loan growth, the December rate increase as well as our proactive actions to optimize our interest rate and portfolio positioning going forward.

These positives, as Bryan talked about, were offset by lower balances on loans to mortgage companies as well as fewer days in the quarter.

From a NIM perspective, our excess cash position in the first quarter, as a result of deposit growth and in anticipation of funding the Coastal Securities acquisition as well as the lower loans to mortgage company balances, which are higher-yielding relative to our overall portfolio, offset positive impacts from our asset sensitivity positioning.

Moving on to Slide 7. We are very pleased with the continued strong performance of our regional bank, as Bryan talked about.

Loan and deposit growth continue to be very healthy.

Positive operating leverage continues to be a key focus, and credit quality in the bank remains excellent.

Let's go into more detail on the bank balance sheet trends on Slide 8. You can see year-over-year, loans were up 13% and down 3% linked quarter.

Linked quarter decrease in loan balances was largely driven by that expected decline in loans to mortgage companies.

Those balances were down about $900 million quarter-to-quarter from about $2.2 billion average outstandings in the fourth quarter to $1.3 billion in the first quarter.

The balances were down as higher mortgage rates slowed down refi activity, along with usual seasonality with lower home purchasing activity in the first quarter.

But if you step back and look year-over-year, our average balances of loans to mortgage companies increased 3%, demonstrating our continued growth in market share for the business.

We're seeing continued momentum in several areas that are driving higher yields and improving economic profitability.

Excluding loans to mortgage companies, average loans were up 14% year-over-year and 3% linked quarter.

You can see that growth was driven by areas such as commercial real estate, private client wealth and asset-based lending as well as our core C&I lending.

Importantly, in the bank, the net interest spread, loan yields less deposit rates paid, was up 5 basis points linked quarter.

Looking ahead, even with good fundings this quarter, our loan pipelines remained strong, particularly in our specialty banking areas.

Moving onto FTN Financial, our fixed income segment, on Slide 9. Pretax income in the quarter was $3 million compared to $6 million in the fourth.

Our average daily product revenues were $689,000 in the first compared to $718,000 in the fourth.

There were many moving parts in the capital markets that made market conditions soft for our business: the sharp increase in interest rates, starting in about mid-November; the continued drift-up in rates thereafter; and the expectation of further rate increases have all combined to dampen fixed income secondary market activity levels among our customer base.

The relatively low level of market volatility during the quarter also dampened the ADR results as fixed income tends to perform better in periods with moderate market volatility.

FTN's net interest income, though small, was down approximately $1.4 million from the fourth quarter due to lower net inventory positions.

Expenses were $49 million, unchanged from the fourth, as declines in variable compensation were offset by the normal first quarter impact of FICA tax resets, along with higher legal costs.

As we announced earlier this month and as Bryan mentioned, FTN completed the acquisition of Coastal Securities, a Houston, Texas-based broker-dealer that specializes in government-guaranteed loan products, principally SBA and USDA loans and securities.

Coastal's operations have been fully integrated into FTN Financial, and approximately 80 Coastal employees, including all key leaders and producers, have joined FTN.

We're very excited about this transaction, which we believe is a great fit strategically and culturally, and we look forward to building on the great business our new colleagues from Coastal have built.

Moving onto expenses on Slide 7 (sic) [ Slide 10 ]. Linked quarter, expenses were down 7% due to declines across various line items: litigation costs, commissions, personnel, advertising, software, legal as well as several other items.

Linked quarter, our efficiency ratio improved 193 basis points, and particularly, the regional bank's efficiency ratio improved 225 basis points to about 58%.

Year-over-year trends were positive in both counts as well.

As we discussed before, our focus on positive operating leverage includes a continued commitment to expense discipline while also investing in our franchise.

We're hiring talented bankers in our expansion markets and in our specialty banking areas.

And in the fourth quarter, we upgraded our digital banking platform and should benefit from this technology upgrade as customer preferences shift and we're able to continue optimizing our branch network.

We also remain focused on generating revenue growth that well outpaces expense growth.

Turning to asset quality on Slide 12.

You could see that the first quarter included a loan loss provision credit of $1 million.

Net recoveries were just under $1 million in the first quarter compared to net recoveries of about $500,000 in the fourth.

Credit trends remained strong as we've seen the lower gross charge-off amounts, a steady amount of recoveries, stability in commercial loan grades and continued runoff of our nonstrategic balances.

The consolidated reserve-to-loan ratio increased to 106 basis points in the first compared to 103 basis points in the fourth.

Wrapping up on Slides 12 and 13.

As Bryan talked about, we're pleased with our results and overall momentum.

We continue moving towards higher profitability levels with steady higher returns.

Our focus on economic profit's paying off as we grow our specialty banking areas.

Our balance sheet trends are strong.

We're well positioned with our asset sensitivity as we benefit from short rate hikes.

Our expense discipline's evident, and we'll continue to prudently deploy capital.

With that, I'll turn it back over to Bryan.

Thank you, BJ.

Again, I'm very pleased with the results in the first quarter.

I think our business is right where it needs to be.

We see good trends in loans and deposits.

People are focused on controlling costs and making sure that we deliver high levels of quality service to our customers.

We're investing in our product set and building the business for the long term to create higher returns for our shareholders.

We're very, very pleased with the progress that we're making, and we think that the economic environment will continue to facilitate a modest and steady growth across our business and are optimistic about the rest of the year.

Thanks to all of our First Horizon, First Tennessee, FTN Financial employees for all you do to meet our customers' needs and make their experiences unique and beneficial.

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

(Operator Instructions) The first question is from Steven Alexopoulos of JPMorgan.

I want to start on the loans.

If we look at core C&I, so back out the mortgage warehouse, it looks like you had modest growth.

Can you talk about the pipeline?

And specifically, what do you hear from your commercial customers during the quarter?

We are seeing very good pipelines really across our markets.

And if you let me go through some of our core markets [ from an] on core commercial.

Actually we?re in middle Tennessee, where we've had a concerted effort to grow market share, add talented bankers.

Core commercial is up 4% quarter-over-quarter.

And then in West and East Tennessee, which are slower-growth markets where we have a higher market share, we also saw growth there.

Commercial, up 2% quarter-over-quarter.

And then good growth also in Mid-Atlantic and Houston as well, where we have higher growth rates on a smaller base.

The pipelines do look strong.

The customer sentiment is -- as Bryan talked about, I think is largely -- feels like another year, much like the last few years.

Potentially, some -- less regulation for some of the business owners.

I think that's still -- we're still waiting to see how that pans out in terms of what Washington does.

But we're encouraged by pipelines in both core commercial as well as our specialty market.

Steve, this is Bryan.

I'll add to Susan.

It's a good environment for our customers, and we're seeing, as Susan said, universally, leaning into economic recovery and people are generally optimistic across the footprint.

We continue to pay attention to some of the disconnects in the data.

Loan growth has been a little softer in the H8 data, and there's some disconnect in terms of consumer confidence and what's happening in consumer spending numbers.

But in our customer base, people are still very optimistic.

And as we look at the loan pipeline, the 50% or greater probability loan pipeline at the end of the first quarter, it exceeds where we have been over the trailing 12-month period.

So customers are still optimistic, and our outlook is still positive for 2017.

So Bryan, if we think about the increased optimism, which we're hearing across the industry, about lack of loan growth, is it just the uncertainty over how regulatory taxes, health care, all these items, play out?

Is that what you're hearing from your customers?

Well, a little bit.

It'd be hard to put a pin in it and say it's exactly this because it's different in every situation.

I think there's clearly some expectation that built after the election that regulation, health care, maybe taxes, more optimistically, would have some impact.

And whether that's softened or not, I don't know, but I think people are looking at that and paying attention to it.

But I wouldn't say that that's the single determinant.

Ultimately, people make decisions about the customers that are walking into their business, their opportunities to buy or build plant and equipment and what they can do with it.

And in certain businesses, we're seeing demand -- if it's infrastructure, road and bridge building, we're seeing that demand already picking up.

And so there are some aspects of it that are not really related to legislative effect.

But as I said in my opening comments, we truly believe that the breakout of this band that we've been in, seeing some relief, particularly on taxes and regulation, will be very helpful, and we could accelerate growth in the economy beyond where it has been.

Steve, I'd also mention, there are 2 particular areas, I think, that have maybe moderated.

Mortgage and mortgage lending, if you look at the data industry-wise, is certainly down quarter-to-quarter.

But also, there's a lot of discussion, as you well know, about commercial real estate and what's going on in the commercial real estate market, particularly, let's say, multifamily across the industry.

If you look at the data, that's a line item that's starting to moderate as well.

As you know with our portfolio, we are underweight commercial real estate by a pretty meaningful amount relative to other banks, and so we still have a lot of capacity to lend there.

And we're seeing interest in well-priced deals that we can take advantage of there.

But I think those 2 areas, in particular, are ones that are dampening some of the overall industry growth.

One thing I would just add to what BJ said about commercial real estate is that we are seeing the ability to get higher levels of equity, upfront equity on new commercial real estate opportunities as well as, as you said, other good structural elements.

Okay, that's really terrific color.

BJ, if I can ask you one other question.

In the release, you guys talked about running deposit promotions, which seemed to push up deposit costs.

And I was a bit surprised to see that, given how much loans came down in the quarter.

What are the thoughts there?

What exactly are you running?

And how are we thinking about margin here?

Are we going to see deposit pressure eat away some of the benefits from higher rates?

Yes, sure.

So good question.

First of all, we'll start with our aggregate deposit portfolio, which is about 50% commercial, 50% consumer, roughly.

Commercial is going to be more sensitive to increases in short-term rates because you're going to have treasurers that are going to be much more attuned to the market and it's a little bit more competitive, et cetera.

And so they're always going to have a higher beta, and that's probably half of our liability book.

On the consumer side, you're right that we did run a promotion across our markets in the first quarter in one particular line item.

It would be consumer savings, if you're looking at the financial supplement.

So we saw a meaningful increase in balances there.

The average rate paid did go up.

But in aggregate, when we step back, we look at this every month in our ALCO Committee, we're actually ahead of where we thought we would be in terms of moving beta.

So we made a trade-off, if you will, of growing balances in the consumer portfolio, and those balances, and the benefit of those, to our asset liability position offset any incremental interest expense.

And net-net, we're much better off.

And as I talked about in my comments, our net interest spread in the bank is actually up 5 basis points linked quarter, and so we are seeing the expansion that we expect to see.

The next question comes from Ken Zerbe of Morgan Stanley.

First question, just in terms of the lower expenses sequentially how much of that was very specifically variable -- I say variable comp, but expenses related to variable items that came down with, say, capital markets revenues being lower versus just a core focus on expenses?

I'd say that, Ken, it was a very modest amount from variable expenses.

I mean, if you look at FTN and what the revenue was down, it really wasn't all too different than what they were at in the fourth quarter.

So variable comp was down a little bit, but not much.

Much of it was expense discipline.

As we talked about a lot on the fourth quarter call, we have always had a focus on this even as we look at positive operating leverage over time.

And so we wanted to, certainly, as a firm, come out of the gate, in the first quarter, very strong on expense discipline.

We had a ton of conversation about it.

Our people are very good at executing and spending dollars very wisely.

And we saw that in the first quarter, and we're proud of that.

And so we think a lot of that -- ex- of core is what we showed you on the page we have in here on efficiency.

That's more legal accruals and one-times.

All that other stuff, we expect to manage very tightly and see it flow through the rest of the year.

Got it, okay.

And then with capital markets, I guess, just fixed income trading, generally speaking.

Have you guys considered the possibility that maybe this is just -- it's a business in secular decline, right?

Because there's always something, its ADR is certainly under pressure.

And essentially, that -- is it possible that over the next year or 2 or 3, that you do have to just keep making more and more and more investments in the business or acquisitions in the business just to kind of keep revenues, let's call it, roughly flat?

I mean, is that a possibility?

Or is it just -- we're just in a really unique period?

Well again, this is Bryan.

Certainly, we have considered that, and there's no doubt that interest rates, on the whole, have fallen for 30-plus years.

And when you get to the floor, that's going to level out, and around 0, I assume, is the floor.

I'm excluding, for the moment, the possibility of negative interest rates.

But -- so clearly, we've thought about that and we know that will be a headwind.

In many ways, it's going to be -- whether it's a 2- or 3-year issue, it's going to be, longer term, determined by what investors want to do in terms of making loans versus investment securities, particularly in financial institutions, the ability to pick up yield.

We don't sit around today and worry that we can't be profitable at these lower levels.

Clearly, we're more profitable at higher levels, but we drive profitability here.

We still provide adequate returns on the capital we have deployed, and we'd like to see it higher.

We didn't think about the Coastal acquisition as really a way to prop up or level out average daily revenues.

It was a fantastic business.

It provided an enhanced product set that is attractive to buyers of fixed income securities, as BJ described.

It's government-guaranteed loan-backed product securitizations, principally SBA and USDA loans, and they tend to be floating in nature, particularly as rates start to move up.

So we think it's a great product enhancement.

We think a lot about the various possibilities.

But as we look at it today, we think that the business has sort of been bouncing along at low levels, much like it did in the mid-2000s, and that when volatility and movement picks up in interest rates, that we'll see enhanced activity in the business.

And so we don't see it as a place that's going to draw a huge amount of capital or investment to remain profitable.

We think we can do that with the infrastructure we have built.

Okay, got it.

And then just one last question, just going back to the comments on commercial real estate.

I think I heard that you guys are getting greater equity on the deals that you're doing.

But just given the industry concern, right, about slowing CRE growth, about potentially lower prices in commercial real estate or weakening credit quality, like how should we reconcile that?

Because your growth in CRE is awesome this quarter.

I get that you are under-levered to CRE.

But how do you guys view the growth in CRE, plus the better equity positions that you're getting versus more the broader industry -- growing industry concerns about commercial real estate?

Yes, Ken, the commercial real estate segment of our portfolio obviously gets great attention.

And I would say a couple of years ago, we started moderating multifamily in certain markets, taking a look at supply that was coming on; more recently, also really paying close attention to hospitality and retail.

As we've mentioned on this call before, we've remained incredibly disciplined in terms of portfolio limits to make sure that we're diversified across product type in commercial real estate as well as geography.

We also track exceptions to policy and make sure that those are under a certain level.

We remain in tolerance for those.

And then we also have additional things that we do such as, on the retail side, limiting tenant exposure so that we're not overweighted to any certain tenant, looking at the types of retail that we're doing.

So we remain -- our underweight, combined with our disciplined approach to underwriting portfolio limits, has allowed us to remain open for business.

In addition to that, we have excellent customers who've been through certainly the last downturn, some of them more than one recession as it relates to commercial real estate.

And doing business with commercial real estate developers who've been through cycles, I think, is very important.

In addition to that, we also have a number of senior management visits with some of those larger customers to understand what they're seeing, how they're thinking about the business.

So yes, we remain cautious, and we have -- and disciplined associated with upfront equity.

We -- also, when we underwrite, we manage to a debt service coverage that is based on higher interest rates than the current rate, usually 200 basis points' shock or more, to make sure that we've got cushion in our underwriting.

So we remain very, very disciplined.

We also are doing -- are really focused on those professional commercial real estate developers, again, who know when to pull out of the market and come back into the market.

So overall, we feel good about the portfolio that we have.

The last thing I would mention is we've also actually had -- we've slowed commercial real estate commitment growth.

You have seen some fund up in terms of balances, and we've seen loans that we've underwritten over the last few years that were construction loans go on and get stabilized and go into the permanent market.

So we feel like we're doing a great job in terms of underwriting and servicing the portfolio.

But again, it's something we absolutely watch and talk about as it relates to various product types in certain markets.

Ken, this is Bryan.

I'll add one final thought, and Susan hit on this a little bit.

When people pull back in sectors like commercial real estate, good borrowers and good deals that ought to get done sometimes just don't.

And we tend to position ourselves in commercial real estate to be steady through the market, not to run up big outstandings and pull back completely.

And so we look for those good opportunities and good relationships.

And as Susan said, we're doing a lot of business with relationships that we've been doing for decades and decades and decades, and we're also having the opportunity to pick up some nice projects and new relationships in certain markets.

So we're going to be disciplined about it, as we have been through good cycles and bad cycles, but we think we're seeing good opportunities to create some good relationships and profitability and some good outstandings at the same time.

The next question comes from Jennifer Demba of SunTrust.

Just wonder if you could give us an update on your thoughts on M&A interest this year and whether you're still kind of interest biased towards the larger transactions.

Yes.

As I've talked about for years, I think that, fundamentally, consolidation is good for the industry.

There is -- it's going to be need for further cost take-out in the industry, and we think that there are opportunities in that.

From our perspective, it's important to do transactions that would be one, additive to our returns on equity and be good allocations to capital; and two, give you leverage in terms of cost take-out.

Clearly, the larger the size, the greater the efficiency in terms of transaction and creating efficiency for the time invested in it as well as the regulatory approval process and the securities filings and all of that.

So as you look at the operating environment, I don't think there's really anything has changed in the fundamental operating environment that would change our view that if the right kind of opportunity came along with the right kind of structure and price, we clearly would be interested.

Great.

And question -- second follow-up question on the -- you changed some billing procedures on your fee income.

Can you give us some color there?

And is this a good run rate going forward, the first quarter number?

Yes.

It's BJ.

Yes, we essentially made a few tweaks to our deposit fees that are more customer-friendly, and so it had a modest impact on deposit fees in the quarter.

It's also combined with seasonality in the first quarter, so probably looks a little bit worse than it actually is.

So there'll be a modest impact, I think, going forward on the bank fee line from the changes that we made, but I don't think it's all that material.

The next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

Just wanted to follow up on the margin, BJ.

One, if you can sort of -- I know it's tough, but if you can help us understand how you're thinking about the cash, whether how much of that you think goes into the warehouse, given the rebound probably in 2Q, and then where else can you redeploy that cash.

So I'd be grateful if you could first start with that.

Sure, yes.

So we had about average balances of maybe $2 billion of excess cash in the quarter versus $700-ish million in the fourth, so clearly, a huge build-up.

Part of it was, like I said, deposit growth, part of it was getting ready for the Coastal acquisition.

I expect that to come down meaningfully in the second quarter, back towards fourth quarter levels, and so that'll certainly help alleviate some of the pressure that we saw on the margin.

It's just simply a timing of cash.

So it'll be the Coastal close that'll help.

It'll be loans to mortgage companies bouncing back as well as continued loan growth.

So I'm not worried about it.

I had talked about us expecting to build excess cash in the fourth quarter call, and that's what happened.

So you should see it come back down.

Got it.

That's helpful.

And on the other side [ leg ], when we think about the deposit beta, like I was looking at a year ago, 1Q 2016 over 4Q 2015, and when you compare this, it feels like the pace of the increase in deposit costs is picking up.

As we think about the March rate hike and what impact that could have in the second quarter, I mean -- you gave your comments around commercial versus retail.

I'm just wondering the trajectory of the funding costs.

Is it reasonable to assume that what we saw in 1Q 2017 somewhat repeats itself again in 2Q on the deposit side?

Sure, Ebrahim, so I'll refer back that 50% is commercial, and it's going to be a higher beta.

On the consumer side, the only place where we moved was on promo balances.

And so you saw an increase in it because of a promo that we made, but we like running promos to build balances because it doesn't reprice the entire portfolio.

We had, let's say, $4.5 billion of consumer savings deposits, and we built several hundred million of promo balances that will then reprice back down in 6 months.

So it's a little bit of a timing issue.

But if you think and step back and look at the bottom right-hand chart on Slide 6, all of the changes that we're thinking about in beta, the promos that we're running, the growth assumptions that we're running are all going to be in this sensitivity impact.

And if you notice, those numbers really haven't changed.

They've stayed pretty steady.

So our asset sensitivity is intact.

We're managing deposit costs well, and we're trying to optimize balance growth, new relationship growth, new money growth, which we're getting from these promos, with the rates that we pay.

So we're confident we're doing the right thing.

Understood.

And just on -- separately, in terms of capital.

So Bryan, you talked about M&A and the right type of deal you would entertain then.

In addition to that, like any thoughts about -- on the dividend or buyback front?

Or are both those probably lower priority relative to organic growth or M&A?

Well, organic growth is always at the top of the list in terms of a priority for us.

I wouldn't say that we think any differently about dividend or buyback today than we have.

Clearly, we pay attention to prices, and we look at values.

And we think that as prices have come down, that it makes buyback a more effective tool in terms of capital repatriation.

As I mentioned in the opening comments and as mentioned in our documents here, we increased the dividend 29% in the first quarter, I think it was payable or paid on April 1, from $0.07 to $0.09 a quarter.

So we continue to look at capital, and we evaluate, really, the whole range of alternatives.

And we intend to be disciplined in the way we deploy it, and we think we've got a full arsenal of tools available to us.

The next question comes from Michael Rose of Raymond James.

Maybe just to follow up on Ebrahim's questions.

You guys have about $100 million -- $190 million in buyback that I think expires at the end of next January.

Would you expect to start to be a little bit more aggressive in terms of buybacks, given that authorization?

Well, the short answer is it's going to depend on what the stock price, how the stock price performed and how it performs relative to tangible book and to peers in our view of valuation.

But we have the buyback in place because we think that is an appropriate tool to return capital to shareholders, and so we expect that we will continue to be targeted and opportunistic.

And when we see opportunities to buy the stock, we will certainly do that.

We go in and out of blackout periods from time to time, particularly around earnings, and we'll use the tools as appropriate.

Okay, that's helpful.

And then maybe on a follow-up, back to the mortgage warehouse.

The balances in the third and fourth quarter, I think, were around $2.2 billion.

Do you think that with the increased market share and the normal seasonal ramp that you guys are experiencing thus far in second quarter, rates coming down a little bit, do you think you can, on an average balance basis, get close to where you were for full year 2016?

Yes.

This is Bryan again.

Couple of points.

One, I think if you look at average balances first quarter of 2017 to first quarter of 2016 with all the back-up, we still were up year-over-year.

So we have had, in my view, very good success in gaining market share, and we continue to work on that.

I don't want to pin -- try to pin the number down to 2016 averages because it will depend on what happens with interest rates, one, and, two, what happens with the selling season.

But we certainly expect balances to move back up over the course of the year.

They have done that in the early part of -- really, the late part of March and the early part of April in the second quarter.

So we do expect to see higher balances than we saw in the first quarter across the year.

The next question comes from Geoffrey Elliott of Autonomous Research.

On the fixed income side, could you help us understand what is the perfect environment for that business?

It kind of feels like -- sometimes rates go up, rates go down, and it's been tough to get back to where you were historically on average daily revenue.

So what is the kind of dream environment for that business?

Well, the optimal environment is one like we had in 2009, when everything else was falling apart and the business had a $3.2 million average daily revenue.

And so when Bryan was talking about the business, yes, it's at an ebb right now.

Yes, it's been lower than what those "normalized levels" would be.

But when things go south, that's when the business makes a lot of money.

But even with that said, what's going on right now is, since mid-November, the 10-year has gone from 2.35% to 2.75%.

There's anticipation of further rate increases.

The Fed's looking at reducing their balance sheet, which will put further pressure on the long end.

And so there's a lot of factors conspiring in our core desks to say that activity is kind of in a wait-and-see mode and a little bit more muted.

But we believe that, number one, adding the Coastal Securities and the fifth desk will add $175 million plus of average daily revenue.

So that'll certainly help us get more into that range, but just kind of a moderation of rate movement, some stability in the 10-year, would certainly help, getting to some kind of level that feels right from a short-rate perspective, such that people don't think it's definitely keep going up or definitely keep going down, just something a little bit more stable.

And then an environment that there's active trading in the fixed income markets and less sector rotation or rotation out of fixed income into equities, which we've seen over the last several quarters.

There's so much that goes into it.

But fundamentally, our business is a lot better positioned, a lot leaner than it used to be to capture any upside that we might get.

Geoffrey, this is Bryan.

Susan and I voted while BJ was talking.

[ We heard ] things about the first part of 2009 we didn't like, and so we don't want to get back into that environment.

Fundamentally, as I said earlier, we can be profitable at lower average daily balances.

And for the last couple of years, we've said that that $1 million to $1.5 million range was not sustainable.

And in some regards, I'm a little regretful we ever put it out there because it sort of pins an expectation that we weren't profitable if we weren't in a $1 million average daily range.

We can do that.

Our business is not going to completely track what happens with the Wall Street firms, principally because we don't run a trading business.

It's basically matching up buyers and sellers.

We're -- basically manage our inventory based on what our customers are buying and what they need.

As BJ pointed out when he was talking about the net interest margin much earlier in the call, the inventories at FTN Financial were down.

So we manage that business for efficiency and for profitability, and we manage our business so that we don't run outsized value at risk or VaR.

And we try to go home pretty close to flat on a nightly basis.

And so if customers are able to -- particularly financial institutions and total return accounts are able to meet their yield needs by making mortgage loans or whatever, sometimes that's the way the market will go and we'll see lower volumes.

That will shift, and we think, over the long term, that business will come back.

But as we've said for the last couple of years, I wouldn't get caught up on the $1 million to $1.5 million in average daily revenue.

We're going to manage it for profitability and for return.

And we think that the Coastal acquisition merger will be additive and will create some additional momentum for us as we work through the rest of 2017.

Thank you.

And then maybe following up on the earlier question on M&A.

CBF is buying, which has got a footprint with a certain degree of complementarity to yours in the Carolinas and Tennessee, and it's being reported in the press as thinking about an exit.

Are you able to give us any thoughts?

Well, I wouldn't -- it's never appropriate to comment on any particular market or press speculation or any acquisition.

We've talked a lot about the markets that we think are attractive, and those markets look an awful a lot like the markets that we serve here in Tennessee.

And we're a border state.

There are 8 surrounding states, and so there's a lot of opportunities in those markets.

We've talked a lot in the past, we have continued to make investments in markets like Charlotte and Winston-Salem, Raleigh.

We completed the TrustAtlantic acquisition in October of 2015, I think.

So we're always thinking about what is the right way to deploy capital, and we continue to hire bankers.

We made a number of significant hires over the last 2 or 3 months in our Mid-Atlantic region.

And we think we'll have opportunities to do that from Richmond to Jacksonville.

So we see the ability to grow in a number of different markets.

The next question comes from Emlen Harmon of JMP Securities.

Expenses -- so I just want to talk about expenses for a minute.

They just -- expenses, excluding the capital markets expense, looked like they're up about 6% year-over-year just on a quarterly basis.

I know you like to keep those as close to flat as possible.

What do you have explicitly planned to kind of narrow that growth rate?

In terms of year-over-year growth?

Yes.

So like if I look at first quarter 2017 expenses, ex capital markets, over first quarter 2016, they're up about 6%.

And I know last quarter, you guys were talking about you were hopeful that you could keep expenses close to flat on a year-over-year basis.

And so just trying to get a sense of what you guys have planned to help control costs through the rest of the year.

Sure, Emlen.

So keep in mind that we added -- and we've talked about this before, we've added several businesses and teams since the first quarter of last year.

So we completed the GE Capital portfolio acquisition and added a dozen or so new team members from that.

We added a specialty health care team in middle Tennessee and Nashville that has a regional national calling effort.

We added a music and entertainment team and also several strategic hires in our expansion markets, Houston, Mid-Atlantic, et cetera.

So those things are certainly driving incremental costs.

But we're taking costs out of the system as well in other ways, whether it's back office improvements, branch network we're down, probably 15 branches year-over-year.

So that'll be flowing through the numbers this year.

We're optimizing corporate real estate footprint, like multi-use facilities, moving into owned facilities versus leased facilities.

If you look through the supplement and kind of as I talked about at the beginning, T&E is down, supplies are down, foreclosed costs are down, professional fees are down.

So we are very closely managing and monitoring expense, and we expect to see a flattening out of the expense line going forward through the rest of the year.

Got it.

And then just on the asset sensitivity, if we look at the interest income pick-up that you guys got from the rate increase in December and what that meant for this quarter, it was a little less than kind of what you've talked about getting from each 25 basis point move.

And understanding it's not exactly linear quarter-to-quarter in terms of how it comes in, I mean, was there any, I guess, big driver that kind of kept you below that level?

Or is that something you expect to pick up over time?

Well, I'd say it was about in line with what we saw.

There's -- if you look on Slide 6 and you look at the linked quarter change drivers, that first line item, rates and asset sensitivity, $5.7 million change fourth to first, not all of that is simply from the December rate move.

Maybe about $2 million, $2.5 million of that is from the rate move.

So if you annualize that, that's roughly at what the 25 basis point move is on the sensitivity impact on the bottom right.

So yes, we're in line.

We're capturing the exit sensitivity the way that we thought we were and managing deposit betas the way we need to.

So again, as I said earlier, I'm pleased with where we are, and I think we'll continue to perform well.

The next question comes from Casey Haire of Jefferies.

Wanted to touch on credit, obviously, credit provision this quarter.

And I think you had talked about getting a bunch of recoveries this year last quarter, and obviously, this comes in a little bit late versus that provision guide of similar to 2016.

I'm just wondering, I know it's difficult, but how are we looking on the provision front?

Yes, we -- as you know, we've had several quarters of either very low charge-offs or net recovery.

We've also continued to experience actually even low gross charge-offs.

So we're -- asset quality is very, very strong.

In addition, the runoff -- the continued runoff in nonstrategic allows us to release reserves associated with that portfolio.

And as we've stated, we actually -- it did end up with higher coverage overall and a higher coverage in the regional bank.

So we - I still see us -- assuming, and we believe that asset quality will remain stable, that we should not see huge changes in how we think about provision.

We feel like the reserve is adequate for -- that we're well reserved for the portfolio that we have.

And obviously, we take a look at that every single quarter, do the deep dive analysis on each of the portfolios and make a determination of what that provision should be.

Okay.

All right.

And then Bryan, not to beat a dead horse on the M&A, but -- I mean, that last quarter, you guys talked about -- that you thought that M&A activity might pick up, but it would be next year.

There's clearly some activity going on in your footprint.

Just wondering, are you seeing an increased appetite from the seller perspective earlier than you anticipated?

I wouldn't say there's been any significant changes.

I -- as I talked about last quarter, I think there was -- the market valuations ran up, and there was a belief that we were going to get a lot of regulatory release and that we were going to see reduced taxes and things of that nature through legislative changes.

Some of that euphoria has probably dissipated.

Does that add to the likelihood of M&A?

It may be too early to see.

I think that if there is a significant pickup, and it is likely to happen in the latter part of this year or next year, the economy seems to be pretty steady and people are still optimistic that through the course of this year, we'll see some potential for lower taxes and things of that nature.

The final question comes from Christopher Marinac of FIG Partners.

Wanted to ask about the consent order put on the bank level earlier in the first quarter.

Does that have any meaningful difference on the day-to-day operations of the bank or any of your other decisions going forward?

Chris, this is Bryan.

Clearly, we're working to meet the requirements of that.

This is -- for those that haven't read it, this is an order that relates to a product that we stopped selling in 2006.

It was tied to the mortgage business.

It was essentially an add-on product.

We stopped selling the product in 2006.

In, I'll get may years off a little bit, 2012, '13, we did an examination to see if we had any add-on products.

We researched it.

We identified the problem, and we reported it to our primary regulator, the Office of the Comptroller of the Currency.

We have put in place a remediation plan in compliance with the order that you referenced.

And we have reimbursed substantially all of those customers, not only for the revenue we earned but for the entire premium that they paid for that product under the terms with the insurance company.

So from a day-to-day perspective, we're continuing to wrap that up or to meet the requirements of it.

But from a operations standpoint, we stopped selling add-on products a decade ago.

Great.

That's really helpful.

And just a follow-up for BJ.

When you mentioned about the rising deposit cost in general, do you see anything unusual from competition throughout the footprint?

Not really, not yet.

On the consumer side is where you'd obviously see it the most, and we're just not seeing any meaningful change yet in what people are doing.

And so we anticipate that that's going to change.

We've always thought the first couple of moves would be -- there'd be not much movement from the banks.

But we'll have to see what happens going forward.

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, Franchesca.

Thank you all for joining us this morning.

I feel very good about the progress that we're making.

We're optimistic about 2017.

If you have any follow-up questions or you need additional information, please feel free to reach out to any of us or to Aarti, and we'll be happy to try to get that information for you.

And again, thanks to our First Horizon, First Tennessee, FTN Financial employees for all you do.

I hope everyone has a great day.

The conference has now concluded.

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