First Horizon Corp (FHN) 2018 Q1 法說會逐字稿

Good morning, and welcome to the First Horizon National Corporation First Quarter 2018 Earnings Conference Call.

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

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

Please go ahead.

Thank you, Debbie.

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

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

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

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

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

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

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

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

I'll now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone.

Thank you for joining us.

2018 is off to a very good start.

I'm pleased with the results we saw in the first quarter and excited about the momentum we see going into the second quarter and the remainder of the year as we come close to completing our integration, which I'll touch on a little bit later.

During the quarter, we saw a good economic activity and good customer activity underlying our balance sheet and income statement.

Our balance sheet trends, including credit quality, were good during the quarter.

BJ will talk more about it, but our net interest margin was improved partially by rising rates and partially by the impact of the Capital Bank merger.

We have begun to capitalize on both merger synergies, revenue and expense.

And I'll touch on that again in a couple of minutes.

I'm pleased that after 9 years for the quarter, we've hit our and exceeded our adjusted return on equity bonefish target of north of 17% on ROTCE.

That's an area that we think we can be in for the next several quarters, given the strong outlook on the economy and continued good credit quality.

We expect, as we look into the remainder of the year, that the FOMC will continue to raise rates, not a whole lot different from market expectations another time or 2 this year in 2018.

The Tax Reform Act, while it's still early, does seem to have an underlying positive effect on confidence in customer sentiment.

And we continue to see what looks like the benefit of reduced regulation in the economy and customer activity.

We don't have any expected impact in our view at this point of tariffs.

We think they're likely to be avoided or minimal.

It could be more significant, but at this point, we don't see it affecting the economy very much over the next several quarters to year.

As I mentioned a minute ago, we're making good progress on our merger integration and synergies.

We still expect to realize 50% of our cost saves this year.

There is some impact in the first quarter, and BJ will touch on that.

And we're already seeing and capturing revenue synergies as well.

Our integration teams have done a really fantastic job and tremendous amount of work to prepare for our conversions -- customer conversions later this quarter, late May time frame.

We're looking forward to those system conversions.

In preparation for those conversions in May, our bankers have done a tremendous amount of work, not only training but reaching out and talking to our customers, helping them understand the process that we're going through, preparing them to look for written communication.

And basically, in an effort to minimize the adverse impact of going through an integration.

On our consumer side, we've made over 50,000 contacts with customers so far.

And interestingly enough, several of them have turned through cross sales or additional opportunities.

So it's always a good sign when you talk to your customers.

So in summary, we're optimistic about the remainder of the year.

We're optimistic about the integration planning and our conversion coming up.

We think that the business is on track to perform very, very well over the remainder of this year, going into 2019.

So with that, I will stop and turn it over to BJ, and then I'll come back for questions later.

All right.

Thanks, Bryan.

Good morning, everybody.

I'll start on Slide 5. For the first quarter in 2018, we reported EPS of $0.27 or $0.34 on an adjusted basis.

The results, we believe, reflect strong trends due to a full quarter's benefit from the Capital Bank deal, positive net interest income trends, ongoing expense discipline and stable and quite good asset quality.

Notable items in the quarter were $31 million of acquisition-related expense and a $3 million gain from a property sale.

And if you turn to Slide 6, we remained very pleased with the Capital Bank deal, like Bryan said.

And relative to our original assumptions, we feel even more confident today about its strategic and financial value.

When we announced the deal last year, we anticipated that it would accelerate the achievement of our bonefish targets by the end of 2019.

Today, we show achievement of all of our bonefish targets on an adjusted basis in first quarter of '18.

And we expect that performance to continue.

Continued strong results in the First Tennessee business and early positive ones from the Capital Bank integration, coupled with the added benefit of lower taxes and higher interest rates, has significantly enhanced our return and profitability profile.

But we're far from declaring victory.

As Bryan alluded to, our systems conversion is going well and remains on track for the latter part of second quarter of 2018.

And we are committed to making that a smooth transition for our customers and our employees.

We're also on track to achieve our higher cost save target of $85 million.

And we expect about half of that amount to be realized in 2018, with the full benefit in the run rate by first quarter of 2019.

And after only 4 months since consummating the deal at the end of November, we have roughly $5 million of annualized revenue synergies closed or in process so far versus our goal of $25 million to $30 million over the next few years.

Moving on to Slide 7. Both our net interest income and net interest margin were up, driven by the impact of a full quarter of Capital Bank, loans and loan accretion and the increase in short-term rates.

In 1Q '18, the reported NIM was 343 basis points, up 16 basis points from 4Q '17.

We saw a combined 6 basis point increase from the impact of a full quarter of the Capital Bank balance sheet as well as the rate hike.

And accretion further enhanced the NIM by 16 basis points.

Turning to the next few slides, let's look at loan and deposit trends.

Starting with loan growth on Slide 8, we saw a broad-based loan growth in markets such as Middle Tennessee, West Tennessee and Texas, with growth in specialty lending areas such as private client, asset-based lending and health care.

And while loans to mortgage companies had a seasonal decline, our year-over-year growth in that business was 19%, reflecting significant market share gains we have made in the business.

Competition remains high, but we continue to grow in a disciplined and profitable manner on the left side of the balance sheet.

Moving on to Slide 9. Our franchise provides us a solid base of customer deposits on both the consumer and commercial side, and we're focused on growing our deposit base and improving our mix over time.

From the first rate hike of this cycle in third quarter of '15, our overall deposit beta is 27%.

And excluding our market index deposits, our beta on consumer and commercial relationships deposit is 15%.

So clearly, so far through the cycle, we've seen historically low-rate competition.

Like others in the industry, we believe that we may be reaching an inflection point in the cycle, and deposit competition will likely increase.

And as that competition continues to heat up, we plan to remain focused on protecting our existing deposit base with relationship pricing.

And our expanded presence in newer markets, such as the Carolinas and Florida, afford us significant opportunities to both aggressively acquire new consumer deposit relationships and grow commercial deposits with our strong treasury services offerings.

Moving on to asset quality on Slide 10.

Our credit trends remain excellent.

Net charge-offs were at just $1 million in the quarter, with an overall provision credit of $1 million in the quarter.

The allowance-to-loans ratio was at 69 basis points, roughly flat to the fourth quarter.

Our Capital Bank portfolio is performing as expected.

And in the near term, we expect the credit environment to remain benign.

Wrapping up on Slide 11.

We announced our original bonefish targets in early of 2009 at a time that was very uncertain for us in the banking industry as a whole.

Our leaders and employees over the last several years have done an excellent job to put us in a position today to have delivered on those aspirational targets.

And as Bryan said, with the continued strong performance and growth opportunities across our franchise, coupled with positive tailwinds such as tax reform, rising rates, a balanced regulatory agenda, a healthy economic outlook and a benign credit environment, we expect our performance to continue strengthening as a result over the next few years at or above our various bonefish metrics.

We are confident in our ability to control what we can control.

And in whatever operating environment we face, our goal going forward will be to consistently deliver top-quartile performance, and we're well positioned to do so.

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

Thank you, BJ.

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

Our bankers, our technology and operations teams are making great progress on the integration.

Our customer activity call-in efforts continue to be very, very good.

I think we're very well positioned to grow the balance sheet profitably and with discipline and deliver strong industry-leading returns over the long term.

I want to take this opportunity, and will take this opportunity, to thank our employees across the organization for the great work that they're doing.

Many of them working very, very long hours, nights and weekends preparing for the integration.

And doing it in a way that will minimize the impact on our customers.

So thank you for the great things that you're doing.

And with that, Debbie, we'll now take any questions.

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

I wanted to first follow up on BJ's comment that deposit costs appear to be reaching an inflection point.

BJ, could you tell us exactly what you're seeing that's leading you to that conclusion?

Yes.

So thanks, Steve.

So over the last, I'd say, maybe 3 or 4 months, maybe a combination of the expectation of either -- of more rate moves than what the market may have anticipated as well as the benefits of tax reform, we have seen a significant pickup in deposit competition.

It hasn't necessarily been in posted base rates, but a lot of it has been in relationship pricing and exception pricing and people walking into our branches with various offers as well as on the commercial side.

And so we plan to take a very active approach in protecting and growing our customer base.

We consider ourselves a relationship business, particularly in the bank.

And we will continue to serve our customers appropriately and fairly with deposit pricing.

And with that, we will also take the opportunity in these new markets, like the Carolinas or Florida, where we don't have quite the shares that we do in Tennessee, to really go out and meaningfully acquire new deposit relationships that we can then grow and build over time as well.

And BJ, following up on the deposit comments, how are you thinking about the NIM in 2Q and really in 2 buckets, the core NIM and then scheduled accretion?

Sure.

So we made it a point to break out the core NIM and the scheduled accretion so that people could clearly have a view of what our organic performance is going to be relative accretion.

I think, as you know, accretion, we have to reforecast every quarter based on expected cash flows and repayments, et cetera, like that.

And generally speaking, accretion will decline quarter-to-quarter over time.

So we will expect that to decline in terms of quarterly impacts by a couple million dollars, maybe a quarter, over the next several quarters.

But in terms of our organic NIM, I think we're still asset-sensitive.

We still see benefits on the left side of the balance sheet from rising rates because of our floating rate book.

But we'll also be very mindful of what we just discussed on deposit pricing as well to protect, defend and grow our deposit base.

So we're confident that we can manage both of those well.

But -- so I expect that our NIM will continue to get modestly better, but we'll manage it very closely.

Okay.

That's helpful.

I want to shift gears.

So if you look at C&I loan growth, it was a little bit soft in the quarter.

Bryan, what are you seeing your commercial customers doing with the benefit of lower taxes now?

Are they paying down loans?

Are they expanding?

Any color would be appreciated.

Yes, Steve.

And I'll let Susan add as well.

But the customer activity that we see across the franchise is still very good.

There's not been a big shift because taxes hit so late in the year.

With tax-related activity, I would say, our bankers and my customer contacts I would characterize as overall positive.

We still see continued optimism about the economy and the outlook.

I mentioned the tariff issue.

We've heard that a time or 2 in people that are sensitive to the price of steel or aluminum, for example.

But overall, customers are looking at the economy as being very strong.

They're looking to hire qualified people.

And I would say, we see a little bit of trend of pulling some deposit balances down and investing that in businesses.

And overall, balance sheet's strengthening.

I would characterize the financial results we've seen from calendar 2017 versus 2016 as generally being stronger.

And that's a sign of a strong and improving economy, and that optimism is carrying forward.

So we think while the balance sheet growth was largely offset by decline in mortgage warehouse finance activity, which tends to be seasonal in the first quarter.

We're optimistic about pipelines and the outlook for 2Q and beyond.

Susan, anything you want to add?

Yes.

I would add a few things.

The few payoffs that we saw in the quarter were largely M&A, but we're also seeing opportunities on the M&A side.

There was also some non-bank competition out there, putting out term loans being in private placement structures.

When we feel it's prudent, we'll compete with them.

And if not, we'll let those roll off.

We did have some very good period ends, quarter-over-quarter growth.

With the merger last quarter, the average to average can be a little bit noisy.

But on a period and quarter-over-quarter basis, good growth in franchise finance, asset-based lending, core commercial across several markets, BJ and Bryan mentioned these earlier, but Middle and West Tennessee as well as our core mid-Atlantic.

In addition, for the first quarter this year in terms of new production, we were actually up over 20% from the same quarter last year.

And for new production, we also saw good activity in franchise finance, asset-based, mid-Atlantic, both legacy First Tennessee and legacy Capital, Middle Tennessee, West Tennessee and health care.

So we feel very good about where we're positioned as it relates to the outlook for loan growth.

The next question comes from Brady Gailey with KBW.

So on Slide 11, you have the bonefish targets laid out.

They remain unchanged.

And specifically, like your ROA of 1.1% to 1.3% and then the ROTCE of 15% plus.

I know we talked about this a little bit last quarter, but it seems like with tax reform, those could be moved higher.

I mean, you're already -- on the ROTCE, you're already well over 15%.

And you're right kind of in the middle of the ROA guidance.

I mean you still have higher rates that are going to push that up and then some CBF cost saves.

So just wondering, how you're thinking about those 2 metrics on the bonefish and if you all are thinking about maybe updating and increasing those targets longer term?

Thanks, Brady.

This is Bryan.

As I pointed out, after 9 years, we just hit them this quarter.

And I want to make a couple of points about it because you asked a very good question.

And I would tell you that our primary focus has been on merger and integration.

And we use the bonefish in many ways.

And if you step back from it, BJ and I both pointed out that these goals have been out there for 9 years.

And what we tried to do with the bonefish was to do a couple of things or several things really.

It was to give you some sense about what we thought the earnings power of the franchise was over the long term.

And we wanted to give you a sense of our risk profile.

How much we would lever capital?

What kind of margins and credit risk we expected to take?

And give you some sense of how we were going to create returns in the profitability.

You may recall, when we originally wrote those bonefish targets out, we had 15% to 20% ROEs.

And there was a period where we and probably many others were a lot less optimistic about the industry getting back to those profitability levels.

And as you pointed out, the bonefish targets have been impacted by a tax reform, and they'll be further impacted by higher interest rates.

And at some point, through the economic cycle, they'll be impacted by higher credit cost.

BJ and our finance team and our bankers, our business leaders have really done a great job using the bonefish to manage profitability.

How we think about the business.

How we think about risk and reward.

How we price relationships and customer transactions.

And through all of that, I would say that bonefish is -- has become a verb in the organization.

It is a tool that people use day in, day out.

And they talk about whether something bonefishes or whether it doesn't bonefish.

And I think that, that's real a positive thing.

As I look at the question of fine tuning, and I have a couple of thoughts.

And it hasn't been a priority to date for the following reasons: one, we have said consistently once we adjusted from the 15% to 20%, we said 15% plus.

So we don't look at 15% as a ceiling, we look at that as a floor in terms of profitability; and two, the activity in the organization and the way we think about the business is to maximize shareholder value.

And that is to drive the greatest return that we can, given the risk profile that we've articulated.

And to do that in a way that maximizes value over the long term.

So while I've talked about the bonefishes, the tool for management decision-making, it's a tool that's used in addition to others.

Our business leaders think about consistently how do they double the value of their franchise over the next 5, 6 years.

So we use that as a tool, it feeds data.

And so at this point, we have not put a lot of energy into whether we change that or not.

We think that, as you pointed out, there is a very good likelihood given our outlook, and what sounds like your outlook on the economy in the foreseeable future, that we can be in the mid -- the high teens in ROTCE and higher up on the ROA scale that we've laid out.

But don't feel a strong need right now to go out and adjust those goals.

Because again, it's not a floor -- excuse me, it's not a ceiling, it is a floor.

And we're going to push to drive as much return as we can given our articulated risk dollars.

Okay.

And then on loan growth.

Yes, I know the seasonality of the mortgage warehouse impacted period-in balances.

But even if you stripped that away, loans were down a little bit.

I know you've talked about loan growth kind of longer term in the mid- to high single-digit range.

Does that still feel appropriate for the rest of '18 and into '19?

I'd say, in general, yes is the answer.

And part of what we're doing as we go through the integration activity and planning, we are making shifts in terms of the way we can form our policies and the way we look at our portfolio management and portfolio limits.

And we also got a lot of activity dedicated.

So I'd say that has had some marginal impact on loan activity.

But as Susan articulated, I thought pretty well, that the activity across the franchise is encouraging.

So I think that will move up.

And as you see, the seasonality in our mortgage warehouse finance business improve in the second and third quarters when more home-buying activity occurs.

I think you'll see us in sort of that mid to -- I'd say so just sort of mid-single digits in terms of loan growth.

All right.

And then last one for me.

BJ, I know -- I think last conference call you mentioned $30 million of yield accretion would be a good number for this year.

You've taken almost half that, around $14 million in 1Q.

So maybe just an update on how you're thinking about accretive yield levels this year?

Yes.

So I think we did have a little bit more accretion in the first quarter than what we would have thought.

I would tell you that, again, as I said at the beginning, what you're doing with purchase accounting accretion is looking at the aggregate loan book that's purchased and trying to estimate cash flows over the next several years.

And estimate them by quarter based on prepayment rates and et cetera.

So I think it takes a couple quarters, post a deal and post those marks, to really get a good cadence on how much accretion you're going to have and when and so on.

And so this quarter, obviously, we had a little bit more than what we would've expected at the end of the fourth quarter.

We'll recast those cash flows again, as we will every quarter, to look ahead.

But generally speaking, I think for 2018, we will have more than that $30 million for sure.

But again, it'll start to again go down a handful of millions every quarter over the next several quarters as it starts to run off, would be our expectation today.

The next question comes from Ken Zerbe with Morgan Stanley.

Just going back to the deposit competition comments that you made.

I know you're saying that you want to offset that with sort of customer relationships.

But is that just -- I guess how meaningful can those, I guess, impacts your deposit pricing?

Like it seems to me it is more of a -- it mitigates some of the higher-end deposit pricing or it takes some of the edge off, if you will, the increases but you're -- it sounds like you're still going to have sort of meaningful increases in deposit cost if the industry still has deposit cost increases.

Is that a fair assumption?

I think, Ken, the way we -- where we start is that we are proud of the relationships that we have with our customers.

And we want to treat them fairly and as competitively as possible, while also optimizing our ability to pay for all of the infrastructure costs and making acceptable profit for shareholders.

So we balance all of those things.

I think we've done a good job to date.

I think we'll do a great job going forward.

But what I was getting at was, clearly deposit competition has picked up.

And if you look at historically, after the Fed starts raising rates, the first 50, 75, 100 basis points of moves are a little more muted in terms of price increases.

And we've seen that and it's actually been lower than previous cycles.

We think there's an inflection point now since we're at 125 basis points of moves that it could get more price competitive, and we'll be prepared for that.

And so whatever actions we need to take to protect and grow our relationship deposits, we'll do so.

So it remains to be seen exactly how big that impact will be because we have good solid customer relationships that aren't simply based on price.

Our people have an extraordinary say in that and do an excellent job serving customers.

But we'll be prepared to defend the balance sheet as much as we need to.

Ken, this is Bryan.

Just to say what BJ said a slightly different way.

But I think consistently is that the industry I thought created a fair amount of lag last year in deposit pricing relative to what people would've modeled as betas.

And what we expect is that, as BJ articulated very well, that some of that lag, not all of it, but some of that lag may migrate out over the course of 2018.

We're still sensitive to what deposit pricing competition is.

As BJ said, we want to make sure that we're competitively priced and that we're offering a fair relationship-based price to our customers.

And we want to be in a position where we're competing on a level playing field.

So all we're really articulating is that some of that lag that was captured in 2017 is likely to drift out as rates and deposit competition starts to percolate a little bit more in 2018 and beyond.

Great.

Okay.

That's helpful.

And then just a last question.

Could you just remind us, did Capital Bank materially change your asset sensitivity?

Or if not, do you expect it to over time?

Ken, it's BJ.

Yes.

It reduced our asset sensitivity.

They were round figures, roughly half as asset-sensitive as the legacy book was.

So that did dampen asset sensitivity.

But as you can see, on Slide 7, in the bottom, that we still give you the net sensitivity impact that we would expect on a shocked balance sheet, and this balance sheet does include Capital Bank as well.

So if you were to compare it to some of our past graphs without Capital Bank, you would have seen a modestly higher impact.

But I would also remind you that these shocks are based on kind of through the cycle assumptions.

And as Bryan said, we've seen some -- certainly seen some lag so far at this point.

And so depending on how much of that lag comes out, these could be higher or lower.

The next question comes from Ebrahim Poonawala.

So I guess the first question.

I wanted to clarify on the mortgage warehouse.

BJ, it was up 20% year-over-year.

Is that how we should think about that business for the year?

I mean, obviously, volumes are going to be a little bit challenged because of refi slowdown in the first quarter.

So just want to make sure we don't go too ahead of our skis in terms of expectation on that business for the year.

Yes.

So 20% increase year-over-year would be fantastic.

But I'm not sure I'm ready to declare that yet.

I think, as Bryan alluded to earlier, we expect that we'll see the same seasonality as we've seen in the past, which would be buying season in the spring and into the summer, builds those balances in that business for the second and third quarter, they drop back off in the fourth to the first and come back.

So we expect to see that.

But if you take a step back and you look across full year 2017 for full year 2018, we absolutely believe that we could see good outstanding growth because of the great work that our folks in that business have done to earn more market share at a time when competition has significantly heated up and originations in the industry have come down.

So we're optimistic that we can see year-over-year growth, but it's going to follow that seasonal pattern quarter-to-quarter.

Fair to conclude -- and I know it changes real time.

But fair to conclude where you expect mid-single digit overall loan growth, this should at least be towards in the higher single digits, if not double digits?

On mortgage warehouse specifically or the overall loan growth?

On the warehouse specifically.

Yes.

I would say so.

And could you remind us what the pricing on this is?

I know that create some volatility in the core NIM.

When we look at sort of -- I think loan yields were about 4.53% this quarter.

Is that going to be accretive or dilutive to the NIM-increased balance on the warehouse?

It'll be accretive.

Yes.

Definitely accretive.

It's one of our highest yielding portfolios.

But keep in mind, in that business, if you got -- we from time to time will take advantage of opportunities we have with customers and customer relationships to grow.

So part of that business, if we're trying to gain market share, we will try to be more aggressive on price and at other times, we won't.

So it just depends on where the opportunity lies.

But in aggregate, it is almost 5% in terms of yield on our portfolio.

So from a commercial perspective, one of our highest-yielding portfolios.

And we expect that to continue.

Ebrahim, this is Bryan.

Bob Garrett and the team that manage that warehouse business are extraordinarily disciplined and thoughtful.

And they have very, very great -- good strong relationships with their customers.

And we've seen very good work on their part to expand and deepen relationships with customers, including efforts to grow deposits, the deposit funding in the business.

And while pricing is one tool, it has to do with availability of credit and utilization of those credit lines.

And so it is a profitable, high-return business for us.

And that team does a really good job of balancing all that out.

So in short, it will be accretive to our margin if we do see outsized growth there.

And we did actually increase the number of clients in that -- in mortgage warehouse lending by about 15% year-over-year.

Our next question comes from Jared Shaw with Wells Fargo.

Looking at the CBF acquisition, the cost saves, it seems a little surprising, I guess, after the integration -- the systems integration in 2018, there would still be another year before we saw the remaining cost saves.

Can you just give us a little bit of a time line on how we can expect to see those cost saves coming in over the next few quarters?

And then, what's still expected for 2019?

Jared, it's BJ.

So I think maybe there's a little misunderstanding in how I said it, and I apologize if so.

But what we were saying is, we still expect $85 million of cost saves, which is up from $65 million at deal announcement.

We expect half of that to be in the run rate and in our numbers in 2018.

And by first quarter of 2019, all $85 million of that annualized would be in the first quarter run rate, if that makes sense.

So said a different way, we expect that all of the cost efficiencies that we expect out of the deal to be out by December 31, 2018, such that we have a clean efficiency run rate into 2019.

Okay.

Great.

That's good clarity.

And then just sort of looking at the capital markets business in the face of continued pressure on ADRs.

So are there any thoughts to changing your approach to the capital markets space?

Yes.

This is Bryan, Jared.

We've been adjusting in that business for really a couple of years.

And while it's disappointing levels of activity for several quarters now, I think we're on the right track in making adjustments.

Part of it is a tremendous focus on controlling cost and controlling the cost.

But there's some fairly significant shifts in the way that business is being done.

And so we are making some shifts and making some investments that we think will make us more relevant and profitable in that business over time.

And we've also seen good activity.

And we spend most of our time talking about the merger with Capital Bank.

But our integration and merger with Coastal Securities, about a year ago this time, has gone very, very well.

And that has resulted in a tremendous amount of opportunity, we think, for the future in terms of opening up additional product to our existing customer base, but also opening additional services to the Coastal traditional products, so -- customer suites.

So we're optimistic that the changes that we can make in that business will improve the profitability.

And these cycles, the fixed income markets run in cycles, we expect that it will be difficult for the remainder of 2018.

And we do think though that, as rates begin to stabilize and the Feds look at a more neutral policy on rates that -- relative to raising or lowering that, that activity will pick up some and that we're well positioned for that.

So to get to that better profitability though, you do -- you are looking for growth in revenue, not just continued expense control?

Absolutely.

Yes.

The next question comes from Jennifer Demba with SunTrust.

Two questions.

First of all, Bryan, could you elaborate on the investments that you're making in fixed income to make you guys more relevant and profitable?

And second, could you just update us on your future M&A interest at this point?

Yes.

Just to make sure I clarify your question, I'll do it.

I'll answer the first investment question first.

The investments are in run rate investments that are embedded in the run rate you see in the fixed income business.

So they are not outsized investments.

They're investments in how we use technology in the business, how we make information and trading data more available to our sales force as well as to customers and things of that nature, which, we think, will create greater transparency and greater liquidity.

We also continue to invest in our research capabilities and the tools that really differentiate us.

Our ability to provide analytics around ratings on municipal securities, for example, where financial institutions can't rely on the major rating agencies.

So tools like that.

But that's all embedded in our run rate.

So it's not incremental to what you see in our first -- fourth first quarter run rate.

The clarification question, when you asked about future M&A activity, are you referring just to the fixed income business or more broadly?

I may answer both ways.

Broadly.

Across the company.

Yes.

I would say, in a phrase, we're focused on integrating Capital Bank and that is our primary objective.

I don't know what the M&A landscape is likely to look like in the future.

We don't think we have to do anything.

And given current law, and we can go into whether Senate Bill 2155 actually gets enacted and approved by the House and signed by the President.

But under existing law, we still deal with the $50 billion threshold.

So that has some impact on our short-term thinking about it.

Long term, we think M&A is a tool to use but it's not the only tool to used to grow the business.

We think that there -- if there are opportunities that are good, attractive markets that allow us to improve the demographics of our business and/or the funding mix of the business and can be done in a disciplined fashion, certainly, we will consider it.

But right now, we're focused on integrating Capital Bank and not really thinking about what may be next beyond that.

Are there any particular markets that would be more enticing to you over the long term?

Well, the mid-Atlantic franchise continues to be a very attractive marketplace to us.

And Capital Bank has given us a -- taken our toehold and expanded that, and so we feel better about that.

And if we had opportunity to do fill-in in those markets, that would be attractive.

And potentially, in the South Florida market, we still have a lot to learn about South Florida banking.

And while Capital Bank has given us a small presence there, we do think the deposit and the funding demographics of South Florida are very, very attractive.

And if you look at the mix of our balance sheet, we think about the funding aspects of M&A about as much as anything, simply because we have these big specialized businesses that generate attractive asset but don't always self-fund.

And so we think anything that could fill in from a funding perspective is an attractive opportunity as well.

And that doesn't tend to be as geographically centered as it is the type of institution that you might have an opportunity.

But again, back to the larger point, right now, we're focused on integration.

And we'll see what unfolds with the legislative landscape and what the opportunities in 2019 and beyond may be.

The next question comes from Michael Rose with Raymond James.

Just a clarification on the accretion this quarter, that $13.7 million.

How much of that was scheduled versus accelerated?

That $10 million or so maybe was scheduled, something like that.

Okay.

That's helpful.

And then, one thing I didn't hear talked about, in terms of the loan growth outlook or at least for this quarter, was the impact in Texas and then in Florida.

Can you give us a sense of what you guys expect?

And where the portfolio stand in both those states and maybe the expectations for the next couple of quarters or years?

We are actually seeing great growth out of our Texas bank.

We had a 9% quarter-over-quarter growth in the Texas market, pretty evenly divided among the 3 major businesses that we have there, for C&I, commercial real estate and energy.

That team has done a great job of bringing in great relationships or full relationships in many cases.

So we continue to be optimistic about the future growth in that Texas market.

As it relates to Florida, as Bryan said, we're still learning about the South Florida market that we do believe there'll be good opportunities for us to grow loans over time, as we get up to speed on the different industries that are there.

We have some very good strong bankers at Capital Bank in the South Florida market, both on the C&I side and the commercial real estate side.

So we are very pleased with the relationships that they'll continue to be able to attract.

Do you have a sense for what the balances are in each of those states?

And then, both those states were impacted by the hurricanes.

Are you guys starting to see any recovery efforts, particularly with Capital Bank in South Florida and contributing to loan growth?

Yes.

As it relates to Texas, we're at about $600 million in terms of balances.

And as I mentioned, it's pretty evenly divided among those 3. We saw -- we have very little direct customer impact in Texas related to the hurricanes.

And actually, probably view that more as an opportunity both, frankly, in Texas and South Florida, as there will be some rebuilding and reinvestment opportunities related to some of the damage.

There was, obviously, in terms of more damage overall in Florida.

South Florida had some.

There we had very few customers directly impacted.

But there will be opportunities for us to grow there as well.

Okay.

That's helpful.

And maybe just one more for BJ, just back to the accretion.

I think at the outset, you said -- or last quarter you said, that the total accretion that you expected to realize from Capital Bank was about $80 million.

Is that number still a good number to use?

Or with the recast on the cash flows, is there an expectation that number will be higher?

I don't remember saying that number.

I think we did kind of try to give a guestimate of what you might see for full year '18.

And I think what we said, what we saw, a little bit more in this quarter than we did -- than we expected and we'll recast that, et cetera.

But this accretion comes in over the next several years in different ways.

And so the -- in terms of the aggregate accretion, it's somewhat finite.

It's just a question of when it comes in.

So all of that to say, we have probably the best visibility at this point in 2018.

And so again, it's coming in a little bit higher than what we would've thought 90 days ago.

We expect that, that might still be the case.

But that again, it'll come down quarter-to-quarter-to-quarter over the next several quarters and years.

The next question is from Tyler Stafford with Stephens Inc.

Just one more clarification question on the loan growth.

So the mid-single-digit loan growth comment for the year, is that at the regional bank?

Yes.

Yes.

Okay.

So then since the mortgage warehouse is within the regional bank segment, and you expect a high single-digit to low double-digit growth there -- of the warehouse, that would be included in the mid-single-digit growth expectations at the regional bank.

Is that the right way to think about it?

Yes.

Yes.

Okay.

And then you have, call it, $250 million to $300 million of runoff at the consolidated from the nonstrategic portfolio?

Yes.

It may not be that...

Probably a little lower.

Yes.

It's gotten down.

A little bit lower than that?

Yes.

It's gotten down to just over $1 billion.

So it's probably smaller than that.

Okay.

I think it was down like $70 million this quarter.

So you annualize that, that was the $280 million, that's how I was getting that.

Yes.

Yes.

Okay.

All right.

So then it would be a little bit lower than that, all right.

And then on the -- can you help me on the held-for-sale loan balances and how to think about those?

They were, call it, $770 million this quarter, up $600 million year-over-year.

Just from a seasonality perspective or the actual balance of that, how do we think about that?

And those yields on that were up, call it, 145 basis points quarter-over-quarter to 668.

What kind of drove that up?

And what's kind of the expectation for that going forward?

Because I think that helped the core margin quite a bit.

Yes.

So Tyler, those are really related to FTN.

And a little bit more specifically to the Coastal acquisition and loans held-for-sale as it relates to government-guaranteed loans that we'll hold.

So if you look at it year-over-year, that's what the increase is.

And we would expect those types of levels to fluctuate of course, but continue to be at those types of levels.

But do you said the yields should hold on that?

Well, yes.

The yields are going to move around and yields on government-guaranteed loans do move relatively in lockstep with rates and rising rates.

So yes, those yields should continue to perform where they are.

And if rates rise, they should be a little bit better.

Okay.

Got it.

And then just on the expenses, were there any onetime items, either negative or positive, on the expense side this quarter?

And is this kind of a good run rate for the expense base?

Obviously, before the CBF cost savings.

Yes.

So we broke out the $31 million or so of acquisition-related expenses as notable item.

And then we had a -- actually, it wasn't an expense.

A gain on sale from a office building that we had.

But other than that, there's not anything that would be in the run rate that would be more onetime in nature that's material.

The next question comes from Brock Vandervliet with UBS.

I was just wondering if you've -- as you come through this vortex of integrating this acquisition and given all of the questions on earnings power and things, if you've thought about potentially having a Special Forum and Investor Day or something like that to engage with investors to really give us more detailed sense of earnings power on the backside of this integration?

Brock, this is Bryan.

I hadn't thought about the integration as a vortex.

That's a neat visual.

But you're right.

It is hard when you're looking at our numbers today, we understand you had 1 month of Capital Bank in the fourth quarter, and so you have 1 month of income statement.

Average balance sheet is a difficult thing to calculate.

And then you got full quarter, and then we're ramping up our cost saves and we got merger charges.

That's an interesting suggestion, and we'll take that and think about that.

I think that might make some sense.

So we'll -- I think as we get through the integration, get to the back half of the year, that's something that we ought to think real hard about.

Yes.

I think that'd be great.

I think given where you are, it's often how you tell the story, not just the numbers themselves, especially right now.

So great.

It's -- to your point, it's just not the numbers.

There's an awful lot going on in our business in addition to the integration.

And I think it's an interesting way for us to sit down and focus and tell the story for a day or so.

The next question comes from Christopher Marinac with FIG Partners.

I had a follow-up question on accretion real quick.

BJ or Bryan, does the regional bank yields reflect the same accretion that we see at the holding companies.

So could we kind of backdoor into a similar kind of core yield and core margin for the regional bank?

Yes.

Okay.

So on the loan yield basis of the regional bank, would that kind of core change linked quarter be sort of in the mid-teens?

Would that be a fair way to think about it?

I'd have to go back and look at it, Chris.

Okay.

But we can follow up with you, if you'd like, with Aarti.

That will be great.

Not a problem.

And then just a separate follow-up, just has to do on the conversion on the system side.

When that is completed, does that give you more capabilities on the digital side for digital banking and products?

Or do you have additional investments on top of the integration that you'll maybe making this year?

Chris, this is Bryan.

It really won't change our core capabilities today there, essentially on the digital side, particularly on the consumer.

And just -- and to a large extent, on the treasury management side, it's migrating, we're really and totally it's migrating to the First Tennessee system.

So our capabilities won't be enhanced, but they won't be diminished in that integration.

There are several things that have been put on the back burner as we focus on integration that will follow along that will enhance our capabilities.

And to my response to the Brock's question about an Investor Day, you really touch on an important topic.

And if you look at the amount of change that's going on in the business, particularly in the digital side, we think there is always a fair amount of change that will be required or enhancement that will be required in our technology platforms.

And the way we think about the investments that we'll have to make is, is how do we save over here, so we can make investments over there in our technology platform.

And so I think we will enhance continuously the digital capabilities, both around transparency, executing transactions, et cetera, et cetera, for our customers.

And that will be a continuous part of our business, we think, for the next 5, 10 years at a minimum.

This concludes our question-and-answer session.

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

Thank you, Debbie.

We appreciate your time and your interest this morning, and we appreciate your support.

Please reach out to any of us or Aarti if you have any questions.

Thank you for being with us, and I hope you all have a great weekend.

The conference has now concluded.

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