First Horizon Corp (FHN) 2017 Q4 法說會逐字稿

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

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Aarti Bowman, Investor Relations.

Please go ahead.

Thank you, Anita.

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 our most recent annual and quarterly reports.

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

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

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

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

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

I'll now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone.

Thank you for joining us.

I'm really proud of the work that our bankers and our team accomplished in the fourth quarter and 2017.

Not only did we announce and complete the merger with Capital Bank, we continued to keep very strong underlying momentum in our business, when it was -- in a year when, particularly, it was easy to take our eye off the ball.

I'm really proud of the work that our bankers have done to build customer relationships, to grow our franchise and to build momentum as we head into 2018.

As I mentioned earlier, we did complete the merger with Capital Bank in November, and we've begun the integration process.

Although we've done limited integration activity at this point, we have completed our first conversions; maybe one of our more important ones, which is a payroll conversion, that went almost flawlessly.

We think the bulk of the work will be completed in the first half of 2018, and we feel very, very good about the progress that we're making in that planning.

In addition to the integration planning, as I mentioned at a conference earlier in December, we feel much better about our pro formas that we laid out in May of last year.

At that time, we indicated that we expected $65 million annually in cost saves.

We've upped that estimate to $85 million annually.

And as I noted earlier in December, that we also expect in the next 2 to 3 years to be realizing somewhere between $25 million and $30 million in annual revenue synergies.

While it's early in the process and we can talk about it more later, we have seen indications of efforts to realize those revenues and feel good about the progress that we're seeing there in terms of referrals across our franchise.

In the results this quarter, there are a number of moving parts, and I'll leave it to BJ to walk you through the moving parts.

But I would encourage you, as BJ walks through it, and as you take time over the next day or so, to peel it back a little bit.

I think if you do, you'll see that the fundamental and underlying trends are very, very good in our business, and we feel good about our ability to make progress in 2018.

Flipping ahead a little bit, you will see in our slides, on the bonefish slide, and BJ will cover it more, that we expect to hit or in some -- in a few cases, exceed our targets for the bonefish by 2019.

That is partially a benefit of the rising rate environment and -- but also the Tax Act that was signed in December is going to have some impact.

We saw the opportunity to take a couple of actions.

We made $1,000 bonus awards to roughly 70% of our employees that was paid in early January, and we've made some contributions to our foundation.

So we expect a significant portion of those benefits to flow through to our results in 2018, 2019 and beyond.

We do expect that rates will rise a little bit over that period.

So very, very confident in our business model, we're more confident in our ability to achieve on the goals that we laid out in our May announcement of our Capital Bank merger.

We feel good about the teams and the integration process and see a lot of optimism for this year and transitioning into a combined organization in the second half of 2018.

So with that, I'll stop.

I'll turn it over to BJ and let him walk you through the numbers.

And then, I'll come back and have a couple of closing comments and then we'll take questions.

So BJ?

Great.

Thanks, Bryan.

Good morning, everybody.

I'll start on Slide 6 by looking at our overall financial results, where you'll find both reported and adjusted results for full year 2017 and the fourth quarter.

Starting with the full year 2017, as Bryan talked about, was a strong year for us with an adjusted EPS for the full year of $1.11 million, up 17% from 2016.

Balance sheet growth and strong operating leverage drove our positive performance there.

And we're very pleased that during a busy year that included the announcement and closing of the Capital Bank merger, our employees were able to keep focused on our customers and maintain strong organic momentum, which clearly showed up in our results.

As expected, our fourth quarter reporting earnings were a net loss of $0.20, largely due to the estimated effect of tax reform, along with a few other notable items, such as acquisition expenses, a legal matter accrual and the special employee bonuses.

On an adjusted basis, our fourth quarter EPS was at about $0.30, reflecting continued positive trends in the regional bank and stable asset quality.

Good loan and deposit growth led to healthy net interest income and net interest margin expansion, while good expense discipline and stable credit quality also contributed to higher earnings.

We closed the Capital Bank merger on November 30, so we also benefited from 1 month of its earnings in the quarter, which totaled about $15 million of pretax income.

Digging into the Capital Bank merger a bit more, you can see on Slide 7 that we are increasingly confident about our ability to successfully integrate the 2 organizations, and we believe the deal economics will be even more favorable than originally announced.

First, we have meaningfully increased our cost savings expectations by almost 1/3 to $85 million from the original $65 million deal assumption.

Second, we're in the process of executing on several revenue opportunities and have already seen some early wins.

Third, though not obviously modeled in the original deal assumptions, we will see outsized benefits from both a lower tax rate and higher interest rates.

All of these factors should result in higher earnings accretion and achievement of our key bonefish targets by 2019.

Moving on to net interest income and net interest margin trends on Slide 8. You'd see that both NII and NIM were up nicely linked quarter and year-over-year.

The captured asset sensitivity on the legacy First Horizon portfolios as shorts rates -- short rates moved higher was enhanced by the addition of Capital Bank's portfolios.

As you can see, we are showing you 3 components of Capital Bank's contribution: Their scheduled accretion, which is the accretable income, largely from scheduled repayments; prepayment accretion, which is the accretable income from prepayments on the portfolios; and CBF core, which is the rest of the net interest income off the legacy Capital Bank assets and liabilities.

You may recall that at the time of the deal announcement in May, we did not anticipate a meaningful level of accretion through the NII line.

But as both real and expected levels of rates have moved higher along the curve, our rate mark at the closing of the transaction went up as well.

Therefore, while the initial rate market is now larger, the corresponding accretion through NII will now be higher as well going forward.

As you can see on the walk forward in the bottom left, we saw a roughly 4 basis point impact from the scheduled accretion related to the acquired loans, and we expect about $30 million or so of scheduled accretion to flow through the net interest income over the course of 2018.

Each quarter, we will update investors on the NII and NIM impacts of this accretion.

Slide 9 highlights the bank's diversified loan portfolio.

This quarter, we saw growth across our commercial portfolios and specialty lending areas such as commercial real estate, health care and asset-based lending.

Loans to mortgage companies, while flat to 3Q '17, were seasonally strong in the fourth quarter at about $1.9 billion, on an average basis.

As we've discussed before, the merger should further enhance our loan opportunities, our larger balance sheet capacity and ability to deliver specialty lending expertise to Capital Bank prospects and clients will be a positive.

Moving on to asset quality on Slide 10.

Our allowance-to-loans ratio is at 69 basis points in the fourth quarter as we had $7 billion of marked loans from the Capital Bank acquisition.

As you know, the credit impacts were through purchased accounting loan marks, which did not affect loan loss provision in the quarter.

Our dollar and percentage coverage on the legacy First Horizon portfolio remains relatively steady.

Net charge-offs were $8 million in the fourth quarter compared to $2 million in the third.

And as we noted, the increase was primarily driven by a single large credit.

But overall, our current environment remains stable.

Wrapping up on Slide 11.

We're pleased with the accomplishments that we saw in 2017, and we made significant organic progress towards our bonefish targets with all of our key metrics moving in the right direction during the year.

And while we were confident in our ability to achieve those targets before, the addition of Capital Bank has both increased our confidence and accelerated our time line for achieving those goals we set back in 2009.

We still have plenty of work to do in 2018, but we are very well positioned to deliver bonefish-level performance by 2019.

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

Thank you, BJ.

Over the next year, we're going to be focused on the successful integration of the Capital Bank merger while profitably growing loans and deposits.

We believe the economy remains steady to improving.

Our balance sheet will benefit from rate rises and tax reform, as we mentioned earlier, and we should see all of those accumulate in a bit of a tailwind for earnings.

We're on track to achieve our cost savings and increased revenue opportunities with the merger.

With the favorable economic backdrop and the strong fundamentals in our business as a platform for growth, we have great momentum going into 2018.

I want to issue a word of thanks to all of our First Horizon, First Tennessee, Capital Bank, FTN Financial employees for all that they do to make our business stronger, to grow our customer relationships and to build our franchise and, most importantly, to serve our communities.

With that operator, we'll be happy to take questions.

(Operator Instructions) The first question today comes from Steven Alexopoulos with JPMorgan.

Bryan, looking at Slide 9 in the organic C&I loan growth, why was it so weak this quarter?

I'm sure paydowns were a factor there.

Well, yes.

Back of the envelope, my calculation was -- on the First Tennessee side only, core growth was about 6% on an annualized basis.

And you have to keep in mind that there's a bit of seasonality in our mortgage warehouse business.

And if you go back and look historically, a lot of quarters, that business tends to recede a bit.

It was actually flattish.

So while it was a little bit less than we have seen in previous quarters, we felt pretty good in the mid- to high-single digits.

The other thing that has happened in the fourth quarter is the restaurant franchise finance business was not a boost to the comparison on a year-over-year [business].

That was completed in the third quarter of 2016.

So as we looked at the underlying growth and the underlying customer activity, we felt very, very good.

Our pipelines coming into the quarter were strong.

We had very good closings in the fourth quarter.

And we think that momentum, particularly with enthusiasm created with the Tax Act that we could see continued momentum into the early part of 2018.

I would say though, with some of the comparisons [and things], the numbers are going to be a little bit hard to compare with the merger and acquisition, Capital Bank and the restaurant franchise finance business.

But overall, we felt good about underlying loan growth.

And we did have some pockets in the third quarter -- fourth quarter over third quarter that had some good growth.

So Private Client/Wealth, we saw about a 3% increase in average loans quarter-over-quarter.

Bryan mentioned franchise finance quarter-over-quarter had some growth.

Our Middle Tennessee region was up 5% quarter-over-quarter, and that's obviously been an area of emphasis for us as we've continued to add very seasoned bankers.

And even in our home West regions, we had a 3% quarter-over-quarter average loan growth.

So we did have some areas that quarter-over-quarter, we experience some good solid growth.

Okay, that's helpful.

BJ, maybe I can ask about the margin.

Given the purchase accounting impacts for 2018 and now having Capital Bank in the mix, how are you thinking about the trajectory for NIM for 2018?

Yes.

I think, Steve, it'll continue to move higher, we believe.

So clearly, rate expectations seen -- on the short rate side continue to float higher.

That will certainly help us.

Our asset sensitivity is still there as a combined firm, though it's moderated from what it was as a standalone firm.

But still, we will benefit from the rise in short rates, so I think that, that will continue to move us higher.

I think the accretion that we'll now see from the Capital Bank deal will certainly help to continue driving our margin higher.

So I think there's pretty good tailwinds to what we should see from a margin perspective.

Okay.

Bj, if you don't mind, if I squeeze one more in.

Look, it was a really messy quarter obviously with the deal closing and the tax-related actions.

If we look at the $0.30 adjusted earnings you're pulling out, do you see that as a level where you should be able to build from in 2018 and then see the cost saves come through and lower taxes, et cetera?

Yes.

The short answer is yes, yes.

So that to us feels like a good level as we ended the year.

And so as you know, quarter-to-quarter, you'll see seasonality as things occur.

But generally speaking, we think that this is a good baseline that we'll continue to grow off of and capture both cost and revenue synergies from the deal in 2018.

The next question comes from Brady Gailey with KBW.

Just a question for BJ about the $30 million of NII accretion from CBF this year in 2018.

Is that -- when you look at that $30 million, is that just the scheduled accretion?

Or are you also including some expected prepayment accretion in that figure as well?

Yes, good question.

That $30 million is just the scheduled part of the accretion.

So as you can see, in the fourth quarter, we did have $1.7 million or so of accelerated prepayment accretion as well.

So you can reasonably expect that there will be some of that there as well.

But we don't really necessarily forecast faster prepayments other than what we've normally assumed through our models.

So there could be some upside to that $30 million as well.

All right.

And then, just so we can help frame out not just '18, but kind of '19 and beyond, when you look at the total bucket of accretion that could run through NII from CBF, what is that total amount?

It's probably going to be somewhere in the $80 million range.

Okay.

And then finally, just on the bonefish, the ROA and ROE targets are unchanged.

So why not put -- I mean, obviously, we have kind of a different backdrop with the tax reform in there.

Do you think that, over time, you'll look to kind of tweak the ROA and ROE guidance higher just with the benefit you guys are going to enjoy from a lower tax rate?

We certainly could.

We do believe that we can tune the bar on all the bonefish metrics by 2019.

The head of the bonefish, ROTCE, is at 15-plus, right?

So over that, we can go as high as we possibly can.

I think ROE is 1.10% to 1.30%.

That's probably a good range for us over the next couple years.

But as we optimize the loan portfolios, we'll continue to strive to make that higher.

I would love to be able to -- for us to move our targets higher.

But we think these are pretty good, at least for the next 2 years.

The next question comes from Michael Rose with Raymond James.

Maybe we can just start with the tax rate a little bit.

On an effective basis, 23% is the estimate.

Do you have an estimate for what the FTE tax rate would be?

And then have you guys contemplated any balance sheet restructuring?

We've seen that at some other companies to help, post tax reform, to optimize the balance sheet.

Yes.

On the FTE said, I'm not sure I have that.

So we can circle back to you on that.

On the balance sheet restructuring, I'm not sure that we have anything that's specifically planned.

Obviously, in the quarter, we did restructure the securities portfolio coming over from Capital Bank.

We did keep probably 25% of it, mostly CMBS and some corporate bonds that we had, but we've restructured everything else.

But in terms of loan portfolios, I don't, at least sitting here today, foresee anything major.

Okay, that's helpful.

Maybe as a follow-up, can you guys talk about the step down in ADR in the capital markets business?

I guess, effectively, you guys have reduced the reliance on that with the Capital Bank deal.

But do you think we've hit a bottom here?

And maybe what should we think about for ADRs into '18?

Brady, this is Bryan.

That's one of the reasons we're not going to adjust the bonefish targets in the short run.

We got out there with an estimate on ADR just 5 years ago and we're still paying for that.

Look, this is a business that has gone through a tremendous amount of change.

And the short answer to your question is, I think this is sort of around the bottom.

I think for the year, we were just under $700,000 in average daily revenue.

We're about $655,000 or something for the quarter.

And that business is, we think, sort of bottomed out.

We're excited about our expansion into the government guaranteed loan business with Coastal, which was consummated in the early part of 2017.

But it's a business in transition as the GSEs are not doing as much issuance, particularly callable agencies.

And we're optimistic that we will build off of this base, but we don't see that being a rapid change.

To the point that you made, it clearly is a smaller piece of our earnings stream going forward, particularly with the expansion of the banking business with the Capital Bank merger.

It's an important piece though and we like the business.

We think that it has the ability to continue to provide very attractive returns on capital.

We're going to look for opportunities to grow and to strengthen the business to build out municipal finance and things of that nature on an organic and hiring basis and build on the gap -- the Coastal acquisition with government guaranteed loans.

So I think this is sort of around the bottom, and we're optimistic that we will be able to build.

But it's going to take a little bit more certainty about the direction of rates and a little bit of momentum from customers getting back into the fixed income activity as opposed to growing through fixed investments in loans, for example.

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

Just had one follow-up question, BJ, on the margin.

So I'm assuming the margin in December was higher than the first 2 months post CBF.

So when we think about where we ended the year at, is like 3.27% the right way to think about what the starting point should be?

Or I mean, I get the accretion impact, but like any color around where the NIM probably ended the year and from we should bake in the rate hike expectations and everything else.

That would be helpful.

Yes, I think this is a good place to start.

We saw some good organic expansion, or at least modest expansion from the legacy First Horizon portfolio.

And so again, it was from asset sensitivity, good discipline on deposit rates paid, and we certainly expect that to continue as a combined organization.

So like I said earlier, I do expect the net interest margin to continue to grind higher in 2018.

Understood.

And in terms of, when we look at kind of the core expenses, ex CBF, I get the CBF expense saving for this year and next.

What's your sense, BJ, in terms of -- should we expect some inflationary growth of 2%, 3%?

Or do you still expect this core expenses to remain a little bit flat?

Yes.

So we are obviously still very focused on expense discipline.

Clearly, what you're going to see coming through the expense line, in aggregate, is the cost savings, and we did put in the presentation that we're currently expecting about 50% of the $85 million to occur in 2018.

But we have been very, very intentional across our organization about not losing focus on our core expense base as we go through the merger integration because clearly, that's very important to the trajectory.

So we think we have a good handle on that.

Things like merit increases and cost of living type of adjustments are always going to happen.

But in terms of expenses across the other lines, we think we're going to hold it relatively flat.

Got it.

And if I can sneak in one last question for Bryan.

Assets post CBF are about $41 billion.

Would love to get your thoughts.

Well, I realize integration of CBF is probably the biggest priority over the next 6 months.

As we think about additional M&A, either with SIFI or without SIFI, Bryan, would appreciate your thoughts in terms of how you're thinking about that.

Yes.

Yes, Ebrahim, the -- clearly, you hit the #1 priority, and that's to make sure we do a great job on the integration for Capital Bank customers and employees.

It is a tremendous undertaking in the first half of the year, and we'll get that done.

So that's what we're really focused on in 2018.

We think that there will be additional opportunities in the M&A environment in the future.

We still believe that fundamentally, you will see consolidation in the banking industry, and we think we've built [that effective] platform.

But we don't see that as something that we have to do.

We think it's -- we have the ability to deploy capital in an organic fashion.

And given the expanded footprint we have with Capital Bank, particularly in the Carolinas where we have a much enhanced market presence in Raleigh, Durham, Chapel Hill, Greensboro, Winston, Salem, Charlotte, Upstate South Carolina, Greenville, Charleston, Columbia, for example, and then South Florida, we've got more optimality to invest capital in hiring and growing organically and being front-footed on an organic basis.

We think we've brought in a tremendous amount of talent.

There will also, we think, be opportunities to do smaller M&A activity that can fill in some of those markets as well.

So we think M&A can be a part of our capital deployment strategy, but we don't think that's the only vehicle to deploying capital and doing it efficiently.

The implied question, I guess, may have been, "how do you feel about the SIFI designation?" And I would say, while the Senate has not taken up -- in the full Senate, the bill that came out of the Banking Committee, the Crapo Bill, we think -- directionally, we think that's a very good bill.

It has some bright lines in it, which would -- we'd rather it be activities-based.

But moving that threshold up to the $250 billion benchmark is a good thing and I think gives some breathing room.

In the absence of that, though, I would say that it's clear that -- where it seems clear to me anyway, that you'll see more differentiation in the way regulation is applied even around the existing bright lines in terms of a focus from stress testing to regulatory activity.

Some of it is mandated.

But I think there's a flexibility that the Federal Reserve, the OCC and the primary regulators have in the way they apply the rules under Dodd-Frank.

And so I think that bright line will be less consequential than it has been in the past.

And I know the big question that comes up around that is, "How much does it cost to go over that bright line?" And we think we've got a lot of the fundamental pieces in place or some pieces that we're not dealing with, like liquidity coverage ratios and living wills that will have some cost, but we think it's manageable.

So we don't sit around at $41 billion and think, we've got to do a deal to get a way over it or we got to do nothing to stay below it.

We think we can manage through that and we think that making the right investments in customers and communities and employees is the right way to approach the business.

And if we do that, we'll improve and drive the returns that we've talked about in that Slide 11, the bonefish slide, and things will fall into place.

The next question comes from Emlen Harmon with JMP Securities.

Have you guys kind of taken a cut that -- kind of quantifying how much of the improved profitability from tax reform could be reinvested in development areas?

And do you think you can do that and both kind of keep the core expenses flat as you were talking about a few minutes ago?

Yes, Emlen, this is Bryan.

We have a sense of the impact of the tax reform.

And we took some onetime items that we've talked about earlier, the $1,000 incentive awards and then the contribution to our foundation.

We'll look at some other actions that we'll consider over the next several weeks around compensation levels for our lowest paid associates.

But we don't think that we'll take -- that will fundamentally change our expense trajectory by a significant amount.

We think that our ability to fund needed investments in the franchise, both in hiring and technology, should and has been funded by our operating activities.

And so this gives us a little bit more flexibility, but we don't think that it'll fundamentally change our expense trends.

So another way you'd look at that is I think what happens is a fair amount, if not a substantial portion of the tax benefit, falls to enhanced capital returns over time to improved ROEs and potentially higher dividends and share buyback.

Got it.

And then BJ, just a quick question on deposit pricing.

You guys give us kind of a breakout of the consumer-commercial deposit yields on Slide 16, which is always helpful.

Do those incorporate capital for the quarter?

And kind of what would the trends have been there without the addition of Capital for a part of the quarter?

Yes.

So they would have still been favorable.

Consumer was very, very strong.

I think we were down 3 basis points on deposit rate paid in the quarter on the consumer side.

So the team there has done an excellent job and the front line has done an excellent job of managing our deposit rates closely over the course of the year.

Commercial deposit rate paid are still rising a lot faster than the consumer side.

We're seeing a lot more competition, whether it's actually in deposit rates paid on the commercial side or in earnings credit rates that are earned on treasury management business.

So that has continued to move up and clearly, the market index are what they are.

But I think the discipline is there.

We're very pleased with what we've seen.

So the way I look at it is through net interest spread, so is our loan yields minus our deposit rate paid on our portfolios expanding or not the way we think they should.

And on the legacy First Horizon portfolios, they did -- they were up several basis points quarter-to-quarter.

So that indicates to me that we're doing a good job.

Capital Bank has done a very, very good job as well.

You look over the last 4 quarters of their deposit rates paid, they've actually gone up less than what First Horizon has.

So that's a testament to their work and their business as well.

And so as a combined organization, we'll continue to manage that closely.

The next question comes from Casey Haire with Jefferies.

I wanted to touch on capital.

I know you guys are at the high end of your Tier 1 common range at 8.7%, but you are a little light versus peers on TCE ratio.

Just wondering, would you like to see that -- I mean, does that matter do you guys?

Would you like to see that ratio higher?

Well, we've always thought, as we've had our bonefish targets, that an 8% to 9% CET1 ratio translates to a 6% to 7% TCE to TA.

And now we're at 8.7% CET1, and we're at about 6.6% on TCE to TA, so right in the middle to the upper end of each of those ranges.

A couple things that I would mention is the tax -- the DTA impairment will obviously accrete over time back into earnings and capital levels.

So that's kind of a onetime decline, if you will, in the capital ratios.

The rate mark as well will accrete back into income, and that will add to capital levels as well.

So we still believe that this is the optimal capital levels for our business.

We do think, though, that the capital levels will float higher next year as -- even if we do reinvest, as Bryan said, from a dividend or share buyback perspective, our retained earnings -- our higher retained earnings will more than outweigh that.

And we think that capital levels will probably float more towards the higher end of our bonefish target ranges next year.

I'm sorry, BJ.

I'm sorry.

Casey, this is Bryan.

We are comfortable with our capital levels in this range.

We have been pretty steadfast in our view that there is excess capital in our organization and in the industry.

And we look at capital through the lens of what is the adequate capital level to support fluctuations in the business.

So we really do rely on the stress testing work.

It's not just a regulatory exercise, it is an effort on our part to understand our capital, and we were doing it before it was required for that reason.

And then, we believe that we had excess capacity or capital.

And so we're comfortable in this range.

The final point that I would make is we don't believe that you have to warehouse capital for M&A or other type transactions.

And so we try to run it as efficiently as possible.

We believe driving ROE and getting excess capital in the hands of our shareholders is the right way to look at the business.

And that if we have actions that we want to do in the future that if it's a good transaction, it will support itself.

So we're optimistic that, as BJ said, you'll see improved returns in 2018 and 2019.

That will cause it maybe to drift a little bit higher, but we're not uncomfortable at all.

It's sort of the higher end of the 8% to 9% Common Equity Tier 1 range.

The next question comes from Jennifer Demba with SunTrust.

Bryan, could you just talk about your progress you've made in gaining more market share in Middle Tennessee?

I know you guys have done better there over the last 1 to 2 years.

Can you just give us some more color there?

Yes, sure.

Happy to do that, Jennifer.

I'm really, really proud of the work that our team in Middle Tennessee has done.

Carol Yochem and Renee Drake, big group of folks have really done a tremendous job building that business.

They have built a very talented team of bankers, and we're seeing very good growth there.

And as an aside, I would add that there is a little bit of overlap in the Capital Bank footprint in Middle Tennessee, and we'll pick up a presence in Clarksville, for example.

So we think there will be additional growth opportunities there.

Middle Tennessee is a highly competitive market, not only for people, but it's a highly competitive market for relationships.

We have seen a tremendous amount of competition for every opportunity that is out there.

But this group of bankers has opened a lot of doors and brought in a tremendous number of new-to-bank relationships.

And we've also been doing some things there that we have not tried really in the past, and that is taking our specialized business ABL and overlaying that with our commercial banking business and creating a hybrid go-to-market model where our relationship bankers in Middle Tennessee are working with our ABL folks to deliver the product with a market presence that is a little bit different than what we've historically done.

So we have seen a lot of new-to-bank relationships through efforts like that, that have been important to us.

We don't think that market will be any less competitive in 2018, 2019.

It's a dynamic market, it's growing.

But we think we have the people in place and the momentum to continue to show very positive trends there in customer relationships and balance sheet growth.

Our next question comes from Jared Shaw with Wells Fargo.

Just looking at the Capital franchise, how much more -- or what do you anticipate in terms of additional hiring you need for the markets to be able to really get the organic growth that you're ultimately looking for there?

Yes, this is Bryan.

We -- this is not just a Capital Bank franchise statement.

We're looking to continue to grow through the acquisition of talent in all parts of our franchise.

In response to Jennifer's question, I mentioned some of the hiring we've done in Middle Tennessee that has been outstanding.

We think we have an attractive platform and an attractive business model all across the franchise.

We have the ability to make decisions locally and to deliver products and services in a differentiated fashion.

But we deliver large bank products and services, treasury management, Private Client/Wealth Management in a basically community bank look and feel.

So we think that's a competitive advantage.

And we do believe that there are a number of talented bankers that are out there that we can bring onto the platform.

One of the obvious things about the Capital Bank merger and sort of the post-integration or post-merger phase is, is we've got Gene Taylor serving as a Vice Chairman of the organization.

And Gene is probably one of the best relationship bankers in the industry over the last 25, 30 years.

And his relationships and his ability to open doors with talent has been legendary, and we think that is a great opportunity for us to continue to grow.

So while we don't have a number 'we've got to hire this many bankers,' we are opportunistically looking for bankers who can come on to the franchise, who look at relationships and service delivery in a model that is consistent with ours.

And we think there are a lot of people out there that we can attract to the franchise over time and grow organically.

The next question comes from Tyler Stafford with Stephens.

BJ, I wanted to start on expenses.

And looking at Slide 7 on the 1-month impact from CBF, that $20 million of total expenses that you guys call out, does that include or exclude intangible amortization expense?

Does that include or exclude what, I'm sorry?

Intangible amortization.

That would include that.

That does include it, okay.

It does.

Okay.

And then, Bryan, you mentioned in one of the earlier questions, the mid- to high-single-digit growth this quarter with the strength out of the mortgage warehouse.

So is that your expectation for 2018 with the combined franchise, that mid- to high-single-digit range?

Yes.

I would say mid- to high-single digits would be reasonable.

It's going to depend on a number of factors, but that's sort of our plan for the year.

And just to be clear, is that at the regional bank or are all in at the consolidated?

That -- it's about the same, is the short answer.

That will just be a hair lower.

If you look at the nonstrategic, it's down to about $1 billion at this point.

And the run off, while accelerating, is not that much quarter-to-quarter.

So it's about the same.

Okay.

And then, just last one for me, BJ.

You mentioned earlier, chinning the bar on the bonefish for ROA and ROTCE by 2019.

But with the tax benefit beginning in the first quarter, would you not expect across 15% ROTCE in 1Q?

Yes, we have an opportunity to accelerate it in 2018 for sure.

The next question comes from Christopher Marinac with FIG Partners.

You may have mentioned this at the very beginning.

Was there any accretion income in the first month or so of the merger?

Yes, yes.

So if you look on the NII slide, Chris, I think it's 8, we break out the different types of accretion that we saw.

Yes.

Got it, okay.

And then, a bigger picture question for either you or Bryan is just, will we see a net reduction in the sort of number of branches and footprint as you integrate?

Or are there some additions that you plan?

I'm just thinking about the new markets that you've added and if you're selectively kind of building upon to widen that footprint on your own.

Yes.

There clearly are some planned closures and integration.

There's -- a fair amount of it will be in Tennessee in the integration process.

In fact, in our application, we identified, I think, 26 or 27 financial centers.

We think that there will be additional footprint consolidation over time.

We think there will be, in all likelihood, more in 2018.

It's really going to be continuing to follow changes in customer behavior and customer patterns.

It is a known fact that customers are doing less activity in the branches and using more online, more ATM, more mobile capabilities, call centers, things of that nature.

And as that happens, we will look for further opportunities to close, consolidate facilities and drive efficiency.

So I would say that number, that 26 to 27, the application could easily be twice that over the next year or so.

This concludes our question-and-answer session.

I would like to turn the conference back over to Bryan Jordan for any closing remarks.

All right.

Thank you, operator.

Thank you all for taking time to join us this morning.

I think it was described in the very first question as a messy quarter.

I wouldn't use that word, but I'd say there are a lot of moving parts.

And we appreciate you taking time to visit with us this morning.

If you have questions as you try to peel it back and understand the core results, please feel free to reach out to Aarti, to BJ or to me and or Susan.

Thank you again to all of our colleagues at First Horizon, for all that you do to take care of our customers and our communities.

I hope everyone has a great weekend.

Thank you.

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