First Horizon Corp (FHN) 2019 Q3 法說會逐字稿

Good morning, and welcome to the First Horizon National Corp Third Quarter 2019 Earnings Conference Call.

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

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

Please go ahead.

Thank you, Eiley.

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 note 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 our call.

I'm pleased with our third quarter strong financial results.

We showed good balance sheet trends, improved efficiency and remained disciplined with expenses.

The third quarter demonstrated that our counter cyclical business mix helps us produce good returns even in a challenging interest rate environment.

Fixed income revenue was up 66% from last year, helped by lower rates and greater market volatility.

Average daily revenue increased to nearly $1 million in the third quarter 2019.

Our mortgage warehouse business was also helped by lower rates, with loans to mortgage companies up 84% year-over-year.

Our results showed that we're delivering on the key strategic priorities outlined at our Investor Day last year.

We're strengthening our dominant position, while profitably growing our new markets in specialty businesses in Tennessee.

In the third quarter, we saw good balance sheet momentum across our markets, with average loans up 10% year-over-year.

We're also improving our funding mix, growing customer deposits to replace wholesale funding.

I'm particularly pleased with the customer deposit growth in our key markets.

In the third quarter, we showed solid revenue growth and controlled our costs, resulting in an improved efficiency ratio on an adjusted basis.

Our cost saves are enabling us to reinvest into the company, with better products and better technology for our customers.

The current operating environment has slowed somewhat, but our markets across the Southeast remain good, economically.

Overall, our customers are in good financial position, and they remain reasonably positive about the economy and growth prospects.

Over the past 12 to 18 months, since completing the integration of the Capital Bank merger, we focused on growing our businesses.

We've executed on the opportunities that are attractive markets offer, at the same time, we've been implementing plans and making investments to better position us to provide products and services in an increasingly cost effective and convenient way.

Our actions have enabled us to deliver solid improvement in our earnings power this year and position us for the long term.

I'll now turn the call over to BJ to go through the quarter, then I'll be back for some closing comments.

BJ?

Thanks, Bryan.

Good morning, everybody.

I'll start on Slide 6 with our financial results, which demonstrate continued execution on our key priorities laid out at our Investor Day last November and strong growth momentum from our newer markets we entered with our Capital Bank merger.

We had another very good earnings quarter in 3Q '19, $0.35 on a reported basis and $0.43 adjusted for notable items.

We saw strong revenue growth up 2% linked quarter driven by fee income in both our fixed income and banking businesses.

FTN, in particular, continued its strong 2019 performance was just under $1 million of average daily revenues in the quarter.

We saw very strong broad-based loan growth in both our markets and our specialty businesses, with overall loans up 5% linked quarter.

We saw healthy core deposit growth with strength in key markets, such as Middle Tennessee, South Florida and the Carolinas.

These strong customer flows enabled a continued positive mix shift in the deposit base.

And this customer growth, coupled with good pricing discipline, allowed us to both grow customer deposits and lower our deposit rate paid by 3 basis points quarter-over-quarter.

Strong loan growth and deposit pricing discipline helped to mitigate continued macro interest rate pressures as well as lower accretion, resulting in only a modest $3 million decline in net interest income for the quarter.

Expense control remains a key focus, and we delivered another good quarter on core expenses, with efficiencies offsetting reinvestment in the business and higher variable compensation, supporting the strong revenue growth in our fixed income business.

Total expenses were up 2% due to some notable items that we've listed out on the bottom right of the slide.

The primary drivers were restructuring expenses related to our efficiency actions, resolutions of legal matters and some acquisition-related charges, primarily related to legacy legal and employment agreement matters, along with fixed asset impairments.

Other than rebranding, which we'll efficiency roll out in late October, we would expect much lower impacts for notable items in the fourth quarter.

Turning to loan growth on Slide 7. You can see that after the Capital Bank systems conversion mid last year, we have seen materially improved balance sheet momentum.

Total loan growth sales at 10% year-over-year, much higher than the 3% to 6% growth we discussed at Investor Day last November.

And the growth has been in the key markets and specialty businesses that are most profitable segments and the ones that we are very focused on growing.

Looking at the loan growth in more detail on Slide 8. You can see that our strategic focus on growing those areas have clearly paid off.

Linked quarter specialty loans grew 11% and were up 23% year-over-year.

As expected, loans to mortgage companies delivered more strong growth with linked quarter increases of 32% and year-over-year increase of 84%.

Bryan mentioned earlier, the business offers countercyclical benefits since lower rates help drive volume.

And while refinancings were higher in the third quarter, the purchase market remained very strong as well.

In fact, purchase volume outpaced refi volume, with the purchase refi mix at 56%, 44%, respectively.

We continue to grow market share and maintain competitive pricing through our ability to buy -- provide balance sheet capacity, expert knowledge and flexibility to our customers.

As you can see in the bottom left of this slide, not only did loans to mortgage companies grow in the specialty businesses area but all other lines of businesses also grew linked quarter as well.

Specialty loan growth in aggregate, excluding loans to mortgage companies, was up 4% linked quarter and 7% year-over-year, and our key markets Middle Tennessee, South Florida, the Carolinas and Texas, delivered solid growth as well, just under 2% linked quarter with a 7% increase year-over-year.

Shifting to deposits on Slide 9. You can see our continued emphasis on growing customer deposits, resulted in solid deposit growth across key markets and specialty areas.

If you look at the bottom of the slide, we've seen excellent deposit growth across all areas: 21% deposit growth year-over-year in specialty businesses; 10% growth in key markets; and a very healthy 6% year-over-year in Tennessee.

In the key markets, in particular, our focus on South Florida is paying off with 16% growth.

Middle Tennessee growing double digits, and our Mid-Atlantic market primarily in the Carolinas, growing 8%.

Noninterest-bearing deposits were also up 4% linked quarter due to a consistent dedicated focus on building primary relationships across our consumer and commercial customer bases.

By continuing to shift our deposit mix and manage our deposit rates appropriately, we saw another decline in our deposit cost, which were down another 3 basis points this quarter.

Turning to Slide 10.

Look at NII and the margin, we continue to proactively manage the balance sheet to optimize both NII and NIM drivers in various rate environments.

As you can see, our core net interest income was up due to strong commercial loan growth as well as lower deposit costs.

The overall NII and NIM decreases were largely due to a large step-down in accretion as well as the impact of decline in LIBOR rates.

While the lower rate environment is affecting our NII and NIM, like others across the industry, our unique business mix is providing the expected countercyclical offsets that others in the industry do not possess, that helps support our overall earnings.

Within the net interest income line, our loans to mortgage companies business benefits from falling rate through higher volumes and our fee income businesses that benefit from lower rates, specifically our fixed income and derivatives businesses we saw strong performance.

Moving to Slide 11.

We see some of the key drivers of another great quarter for fixed income.

Linked quarter, again, average daily revenues about $1 million a day, up 15% from last quarter and up 83% year-over-year.

The decline in interest rates, the sentiment towards continued lower rates and market volatility all favorably impacted activity in the quarter.

Other product revenue increased as well, with customers continuing to execute rate swaps, resulting in higher fees in our derivatives business.

And in addition, we're very pleased with the hard work that Mike Kisber and his team at FTN have done to reduce fixed costs over the last few years have improved our profit margins on incremental revenue growth from prior levels.

Based on the key drivers of revenues in fixed income, we expect earnings in the business to continue its strength in the current market conditions.

Turning to expenses on Slide 12.

You see that our strategic focus on optimizing our expense base to both improve efficiency and enable incremental investment is paying off.

We've demonstrated disciplined expense management on a core basis year-to-date.

And in addition to benefiting from capturing the full year benefit of merger cost saves in 2019, we've taken additional actions across the franchise this year to achieve approximately $80 million of incremental efficiencies, with about $15 million of reinvestment.

We've reduced structural cost meaningfully by rightsizing our spend across all areas of our business, rethinking how we deliver services to our customers based on what they want and improving processes to take out unnecessary cost.

With the $80 million of cost reduction and avoidance we'll achieve this year, we will have saved about 7% of our gross expense base, while starting to invest a meaningful amount in growth markets, such as South Florida as well as needed areas such as technology, digital banking, customer experience and treasury management.

Turning to asset quality on the next slide.

Loan loss provision remained relatively stable linked quarter.

Regional bank provision was up due to strong commercial loan growth and modest grade migration, offset by continued net reserve releases in the nonstrategic portfolio.

The linked quarter uptick in net charge-offs was related to 2 commercial credits, and we're still seeing overall credit stability in our portfolios, with charge-offs still at historical lows and credit quality remaining strong.

To sum up, we're controlling what we can control and delivering on the key priorities we laid out last November at our Investor Day.

We have strong balance sheet momentum, with good loan and deposit growth in key markets and specialty areas.

We're implementing cost savings to reinvest into the company to further enhance our earnings power.

Credit quality is stable.

We're deploying capital smartly, and our countercyclical businesses, such as fixed income and loans to mortgage companies, are providing the unique offsets that we expected in a declining rate environment.

Wrapping up with the outlook slide on Slide 15.

You'll see that our outlook for the year for return on tangible common equity efficiency ratio and credit quality remain unchanged.

However, we've increased our ROA outlook to reflect strong revenues on higher fee income, coupled with the ongoing expense discipline.

As have others in the industry, we have lowered our NIM outlook for the full year due to earlier Fed rate cuts than previously expected as well as our updated expectation of 2 additional Fed rate cuts this year and subsequent further declines in LIBOR.

Again, the impact to NIM will be somewhat offset with loan growth that is likely to exceed our prior outlook of 3% to 6% for the year as well as the countercyclical offsets in our fixed income business.

Due to our strong organic loan growth opportunities, we've been able to put more capital to work in an accretive fashion, and we expect CET1 levels to be in the 9% to 9.5% range for the year.

So with that, I'll turn it back over to Bryan, and he can make some closing comments.

Thank you, BJ.

We feel very good about our outlook for the remainder of the year, and we're very encouraged by the momentum we see in the fourth quarter and going into the turn of 2020.

The economies across our footprint continue to be good.

Our customers are generally optimistic, and we're well positioned to continue growing our balance sheet, improving profitability and controlling expenses.

Thank you to all of our colleagues, for all their hard work in the quarter, building our business and serving our customers.

With that, Eiley we'll take no some questions.

(Operator Instructions) Our first question comes from Steven Alexopoulos with JP Morgan.

I'd like to start on the NIM guidance.

So if I look at the 3.25%, the new estimate for the full year '19, it implies a fairly sharp drop coming here in 4Q, maybe 7 basis point range or so.

BJ, is there another large step-down in accretion coming at 4Q?

Or is this margin pressure from the assumption that we get 2 rate cuts in the quarter?

Steve, good question.

So you can see from second quarter to third quarter, we had a fairly large step-down in the loan accretion from about $12 million in the second quarter, down to about $6 million in the third.

I wouldn't expect that big of a step-down in the fourth.

It'll probably continue to come down modestly but this was quite a big step-down.

I think it's more related to our now current assumption for 2 additional Fed rate cuts in the fourth quarter.

As you know, Fed funds futures have been moving all over the place.

But as of this morning, the futures actually imply only 1 rate cut, the rest of this year in October, and then not another one until August of next year.

But to be more on the conservative side, we're assuming 2 rate cuts.

And so we will continue to assume that there would be further pressure on the margin in the fourth quarter.

Okay.

That's helpful.

And then on the fixed income business.

If I look at the $1 million ADR, nice to see it back to the low end of the historical range, market volatility was really high in August.

Is this where you saw the bigger pick-up in volumes?

Or short-term rates just moved lower or you're just seeing a sustained increase overall at traded volumes?

I would actually say, it was pretty consistent.

If you look at month to month to month for the quarter, I think July was just under $1 million, August was right around $1 million, and September was slightly above $1 million.

And so it was fairly consistent.

But the interesting thing that -- to see was the number of days that we had above $1 million was about 42% of trading days in the quarter above $1 million.

75% of trading days were actually above $750,000.

So we had very consistent volume throughout the quarter in terms of what we were seeing.

So that gives us a lot of encouragement that going forward, at least in these current market conditions, this kind of performance can continue for FTN.

Okay.

That's helpful.

And just finally, BJ, on CECL, what's the anticipated impact day 1?

And how do you think about ongoing provision impacts from CECL?

Sure.

So we haven't yet disclosed our impacts for CECL.

We'll probably do that with our fourth quarter earnings announcements, but we have done a significant amount of work, of course, as you can imagine.

And so we expect much like the industry to see more of an impact on the longer-dated assets, more on the consumer portfolios, less of an impact on the commercial portfolios.

So we will generally, I believe, be in line with what we're seeing across the industry, but we'll disclose that upcoming in the fourth quarter.

Next we have Ebrahim Poonawala with Bank of America.

I guess, BJ, if you could help clarify around the efficiency plan.

So you expect $65 million of net savings through the restructuring, rebranding, all of that that's going on.

When we look at the $276 million expense on rate for the third quarter, how much of that has baked in?

How much of that comes through in the fourth quarter?

I'm just trying to think through as you look into next year where -- how we should think about just core expenses ex any capital markets volatility?

Yes.

So if you look across -- if you look at Slide 12, it kind of gives you a pretty good view of the relative stability quarter-to-quarter of our expenses, and that's with materially growing fixed income.

So we've been taking cost out of the organization, particularly during the first half of the year.

Some of it being offset by variable comp with FTN but also, towards the second half of the year, as I mentioned.

So we are reinvesting in the business.

It's not just all dropping to the bottom line.

And so more of our reinvestment is hitting in the latter part of the year.

So I expect expenses to be in this range, give or take, $5 million in the fourth quarter based on what we're seeing.

We have very, very good expense discipline, which we're proud of, but we will be reinvesting in the business as well.

Understood.

So the net $65 million of savings, one way or the other, are reflected in these numbers.

Just making sure we got that right.

Understood.

It has come in across the year.

That's a all-in number relative to what our run-rate was at the beginning of the year.

And then just tied to that, when you think about the cap markets, I guess, the efficiency ratio ex the legal was about 71%, 72%.

Can you give us a sense of like how we should think about operating leverage if ADRs continue to get better into next year, like does it fall into the 60%s?

Or is there a natural trough in that business when you think about it?

Yes, it's a good question.

If you do take out some of the legal matters and really look at both last quarter and this quarter, the business roughly has a 50% margin on the incremental revenue that we're generating right now.

I alluded to in my opening comments that Mike Kisber and the team out there have been doing great work last few years on taking out fixed cost and other costs that weren't supportive of revenue.

That 50% used to be a 60% margin, a couple of years ago.

And so now we're getting much more leverage.

So incremental 50% margin will, of course, help overall the 70% efficiency ratio that we see today.

So as fixed income move higher, we would expect the efficiency ratio to continue to get better.

That's helpful.

And If I can, just 1 follow-up to Steve's question on the margin.

I guess to be clear, you assume October and December rate cut in the guidance and it implied about 3.15% plus or minus margin for fourth quarter.

Can you talk about the outlook going forward, given the dynamic of what you're seeing in terms of deposit mix shift?

Like is there a point where you can defend the margin despite additional rate cuts?

Or do we need the rate cuts to stop before the margin drops?

Yes.

So I -- the 3.15% plus or minus, I'd probably be a little more on the plus side than the minus side for that in the fourth quarter because I think we are doing a good job defending the margin with our deposit pricing discipline.

We are seeing good volume, particularly in loans to mortgage companies based on the rate environment.

So we do have pretty good offsets, but LIBOR declining and the Fed outlook certainly is a headwind.

Deposit pricing dynamics are still very competitive, no doubt, but you have seen with the Fed cutting rates, more and more banks whether it's online or the traditional banks being a lot more thoughtful and a lot more disciplined around deposit pricing in general.

And so I think that's incrementally helpful to -- and supportive of the margins but overall, declining LIBOR is going to be more of a headwind that we have to deal with.

Although, again, remind everybody of the unique countercyclical offsets that we have in our business some of which are in net interest income and net interest margin like loans to mortgage companies, but others like our fixed income business and our derivatives business are going to show up more in the fee income line such that our EPS can be potentially more supportive than maybe some others that are just levered to the margin.

Ebrahim, this is Bryan, I'll add to BJ's comment.

I think fundamentally, when you step back from what's going on with interest rates, there seems to be a fundamental disconnect between the expectation of lower rates and what's going on in the underlying economy.

And as I indicated lower, it's clearly has slowed a little bit.

And I think some of the impact is driven by tariffs, or the expectation of tariffs.

And I think there is an awful lot of talk about lower rates and the impact.

If you look at even the dialogue at the Fed, the have a bit of a mixed discussion about whether they need to cut, whether they don't.

We don't fundamentally see that rates need to go a whole lot more -- go a whole lot lower based on economic activities, BJ said, we've built in an expectation for a couple of cuts.

But fundamentally, the business underlying our markets is still very good.

Consumers are good.

Borrowers are good.

Borrowers are confident.

And generally speaking, we see a lot of momentum in our footprint.

And so while we think that, like everybody else, we're going to see a negative impact if the Fed cut rates on our margin, we do think there's a lot of underlying momentum in the business, lending and customer activity.

And then as BJ said, we have a bit of a countercyclical balance that helps us overcome some of that.

So we look at these rate cuts and see them as a headwind, but we're still very optimistic about our outlook.

Our next question comes from Ken Zerbe with Morgan Stanley.

Obviously, your loan growth just is awesome this quarter.

And I was hoping to get a little clarity.

When you think about 2020, obviously, loan to -- loans to mortgage companies is very strong.

I mean is that something that can continue into 2020?

I mean I guess sort of 2 questions.

So one on the loans to mortgage side, and then other one just kind of given that economic uncertainty.

And I think you just spoke very positively about some of the healthy borrowers and what they're seeing, sort of, I guess implies that you do see some of that strength continuing, but it just seems like it's a tough pace to continue.

Yes.

I'll start and then, let Susan pick up.

The -- Ken, I think the loans to mortgage company is going to depend on for the next couple of quarters what refi activity looks like, and there is still a huge number of potential refi opportunities out there with way the 10-year has dropped and to the extent that mortgage originators lower rates as volumes start to subside a little bit, I think you can make it steady.

We would acknowledge very readily that, that is a bit of a cyclical business and that at some point, those balances will trend down.

But I do think fundamentally, in our warehouse business, our team has done a really an outstanding job of building market share and building a very strong business.

So I think we've improved share, I think we'll run at higher balances.

I'm still optimistic about the opportunity to grow loans in our existing footprint on a broader basis.

You see, in the data, we had good growth in our specialty businesses, South Florida, our Florida region, what's going on in Middle Tennessee, Mid-Atlantic are still very, very good economies, we see good opportunities there.

There is -- one point in there that sort of underscores my next point, which is if you look at our commercial real estate business, it was down little bit on a year-over-year basis.

So we look at the opportunity to grow the balance sheet in a very disciplined thing.

We think it's important that we not stretch our credit standards.

We do not take undue credit risk to grow the balance sheet.

So we're going to continue to try to capitalize on opportunities in the marketplace but the same time, we're going to continue to be very disciplined in the way we use our balance sheet and make sure that we're keeping good credit structure, and we're keeping a strong pricing discipline as we look at opportunities, Susan?

For the mortgage warehouse business, we've added 49 clients over the last 2 years to the client account mortgage warehouse.

And so being able to continue to expand that market share has been important for us as we think about growing that business.

We've also had great opportunities over the last couple of quarters, with rates, with what they're doing to expand existing relationships too.

In addition to that, the mortgage warehouse team has added some very talented relationship managers from other entities who have relationships.

Most recently on a call, and we were able to bring in a client that we've actually been calling on for several years, and because of the RM that we hired they finally decided to come on over.

So we feel like that business will continue to be good.

As Bryan mentioned, rates do impact but I feel good about the fact that we've expanded market share with new clients as well as with existing clients.

And then to add on to what Bryan said more broadly, outside of mortgage warehouse, we do believe there are opportunities to continue to grow, and I am pleased with the discipline that I see.

We have monthly calls with clients and with credit leaders, and we talk about business they're winning and business they're choosing not to compete on.

And I think that's very important as we continue to build the balance sheet for the long term.

Okay.

That's very helpful.

And then just my second question.

In terms of deposit cost, it looks like your cost for core deposits was down about 3 basis points this quarter.

When you think about your NIM guidance for fourth quarter, how much of that is dependent on a sort of set assumption about what your deposit costs are?

And I guess what I'm asking is that how much visibility do you have in those deposit costs currently in terms of what you know is rolling off, in terms of pricing, given the October rate cut, versus how much more variability could there be if the industry is less aggressive on deposit pricing?

Yes.

So I think, Ken, we have very good visibility into deposit costs.

We know obviously exactly what we are offering from a base rate, from a promo perspective, what vintages are, what's rolling off, what our rate guarantees are, et cetera.

So we've seen 2 quarters now of step-downs on deposit pricing.

We expect to be similarly disciplined in the fourth quarter if they continue to cut rates.

We've seen it -- we've done a very good job on the commercial side moving those rates down.

I would expect that to continue, and I think we can to a good job, maybe a little better job on the consumer deposit side managing rates.

So I feel very, very good about our deposit discipline in the face of continuing to grow deposits in a reasonable fashion, particularly in those key markets.

Our next question comes from John Pancari with Evercore.

Just -- so back to loan growth question, and I appreciate the color around both the warehouse as well as the other businesses and how it's holding up.

I know more broadly, you're looking at the loan growth coming in above your 3% to 6% level for '19.

For 2020, factoring in the mortgage warehouses, is this still fair to assume a mid- single digit range?

And then or is it something that could be closer to low single digits, just given the later cycle and some of the macro backdrop indicators that we're seeing?

Yes.

So John, I think like we talked about, we continue to see strength in the fourth quarter continuing into next year.

Right now we're in the midst of our strategy planning, which we do with the management team and the Board at this time every year.

And so we actually have pretty good visibility into what the execution plans are for next year across the businesses.

And like Bryan and Susan said earlier, sentiment is pretty good.

We know where we want to focus, which is key markets and specialty businesses.

We understand where the niche opportunities are, and so we expect to be able to continue to grow.

Now can we do 10% year-over-year, every year?

That's difficult.

But I think that we can continue to sustain some of the momentum that we've seen the last couple of quarters for quite some time.

Clearly, the toggle is going to be loans to mortgage companies, which for the foreseeable future with rates doing what they're doing, with refi volumes, how they're acting, we think that, that can have continued strength at least for the next couple of quarters.

So we feel very good about our loan growth prospects.

Okay.

And then on that same topic, the -- outside of the warehouse, are you seeing any impact to borrower sentiments?

Just -- if we look at the ISM data, we're seeing some softness there and some CapEx pullback, any indication you're seeing that yet?

We really -- we had a couple of customers that were impacted by tariffs.

And so obviously, their sentiments not real good due to the impact on their business.

That's just between a couple of clients that we talked to.

Sentiment -- as I think Bryan said this earlier, sentiment is still good, and people are cautiously optimistic at this point.

So I don't think -- not necessarily exuberant but optimistic and they're talking with our bankers about opportunities to acquire companies, build new facilities, invest in equipment.

So there are still opportunities for our clients to grow.

John, this is Bryan.

I would add to what Susan said.

There are very few customer meetings that don't some way come up -- tariffs don't some way come up.

And whether that's -- impacts their business or not, it does come up.

So it is affecting sentiment to some extent because people are talking about it.

If you look at borrower financial statements balance sheets, they continue to be very good and as Susan said, while they're competing for labor at higher rates or higher costs rate, they still are fairly optimistic.

And so I'd say on the whole, look, it's not without some headwinds, and tariffs do come up and higher cost particularly around labor affect people but generally speaking, people are still pretty positive right now.

Okay.

Great.

If I could just ask one more follow-up.

On the credit front, could you just give us a little bit more color on those 2 commercial credits that drove the higher charge-offs?

And then I know that your non-accruals came down, but can you give us a little more color around what happened and criticize the assets for the quarter and maybe delinquencies, more broadly?

Sure.

So on the 2 credits where we had a charge-off, one was an energy credit.

And they did not -- really the drivers of that were 2 things, they had inadequate production and they were not able to successfully complete an equity raise.

So we did take a charge this quarter on that credit.

The other was a healthcare credit, that owns and operates specialty -- a surgical hospital, the inventory surgery centers.

And their real issue had to do with, they were bringing their accounts receivable collection in-house, and were very delayed in getting billing out and may know that medical receivables become difficult to collect the longer they go out.

And they also had some acquisitions.

So we took a charge on that credit as well.

As it relates to just general outlook, again, we've had a couple of downgrades with 2 companies related -- lumber companies that have some tariff issues.

We've had a restaurant that had some reputational risk franchise issue.

So all of these are specific to those credits.

I'm really not seeing anything broadly.

As it relates to criticized balances, they were up about $70 million quarter-over-quarter.

But they're at the same level at this point that they were at fourth quarter of 2018.

So it's really not elevated, as you know there's going to be some lumpiness from time to time.

And then nonperforming loans did come down.

That was specifically related to the mortgage warehouse clients that we identified last quarter.

We were actually able to successfully move that into held-for-sale.

We also took a charge reversal on that mortgage warehouse client this quarter, last quarter we charged-off $4 million, and we look to recovery this quarter of $2.5 million on that mortgage warehouse client, so feel good about that.

And then lastly, you mentioned delinquencies.

Delinquencies were really stable across the book with exception of -- you probably saw a little elevation in C&I, I think $22 million for the quarter.

$6 million of that has already been resolved, and we're also expecting -- and they're actually expecting roughly $9 million payoff to come in this week.

So those -- that $9 million was really just the driver of the elevation in the delinquencies in C&I.

So overall, I feel very good about where we are as it relates to our asset quality.

Our next question comes from Brady Gailey with KBW.

So another great quarter in the mortgage warehouse.

So I was wondering, the yield of the mortgage warehouse, I think it was around 5.5% last quarter.

With the pickup in volumes, I was wondering if there was any large change in that mortgage warehouse yield quarter-over-quarter?

Yes.

So it is based on 1-month LIBOR.

So with 1-month LIBOR coming down, the yields came down.

So that -- the yields are roughly around 5.30% now versus the 5.50% last quarter.

What I would tell you is -- very interesting is as we've gotten more volume this quarter, we've actually gained a bit more pricing power as well, particularly towards the end of the quarter.

What we saw across the industry and some of the market participants were actually backing away from some volume and having some capacity constraints.

We were able to step in and serve those clients very well.

And so we saw a significant increase, obviously, in our volumes as well as our pricing hold up -- holding up pretty well.

So again, as Bryan and Susan have said, this business is incredibly well managed.

We have very loyal customers.

We're gaining them every day.

And so we're very bullish on the prospects of this over time.

I'll also add, the yield was also slightly impacted by average dwell time went up 2 days quarter-over-quarter.

And because of the way we do -- book fees on those with a slight impact on yield.

Due to just the massive volume in the whole system that really is what led to a slightly increased dwell time.

All right, that's helpful.

And then one more on expenses.

I mean you talk about kind of the net $65 million taken out.

I mean -- I think if I look at that slide last quarter, it was a net $30 million.

So you all -- that number continues to go up.

But longer term, as you look out the next couple of years, is there more opportunity to continue to get efficiencies?

Or are you close to the level where your operating leverage just won't be as great as it has been the last couple of years for you guys?

Yes, Brady, this is Bryan.

As we look out, we think there are 2 compelling things on the expense side that we've got to keep both focused on.

And one is making the right investments in our business, on products and services, and the other is paying for it by driving efficiency in our existing operations.

And so as BJ said earlier, we have demonstrated over many years that we have the ability to continue to think about our business and drive efficiency in the way we operate it.

You may or may not have noted, in the last couple of weeks we closed another 20 or so -- 22 branches.

So we're constantly trying to make sure that we're providing high levels of service and customer experience, and doing it with the most efficient infrastructure we can.

And so while I don't know what the demands for investment will be, we think that we've got the opportunity to pay for a substantial, if not all of that -- substantial portion, if not all of that, by continuing to think about how we reposition our infrastructure and use technology to get more efficient for the long term.

Our next question comes from Marty Mosby with Vining Sparks.

As I always do, I have more of a layered question that I want to kind of walk through.

Going into the year, First Horizon are really well positioned.

You're kind of at the seasonal low with mortgage companies.

Fixed income was at its kind of cyclical low.

So those are kind of deltas that can kind of kick in which we've seen over the last 2 quarters, which should have been expected, given what you saw with the interest rates and then the seasonality in mortgage company.

That's generated about $0.08 of growth from the first quarter to where we're at now in the third quarter out of about the $0.09.

Now some of that's been offset by loan loss allowance, it's been ticking up as well.

So if you net that out, I'll say that it's about $0.05 or $0.06 out of the $0.09.

So my thing now is as we kind of go through this inflection point and we look at the seasonality in mortgage, now you still have the refis that could take a couple of quarters to burn out.

But if you kind of go through that next dip, you kind of see that seasonality.

If you look at what's happening in fixed income, as much as you had rates down, we still have on the back end of your little table there, yield curves are going to be flat to inverted, the economy still relatively positive given all the loan growth that you've talked about.

So those things are really negative.

And the positives, I think are more related to cash flows, in other words, rates came down, mortgage prepayments have kicked up.

And so cash flow is creating some of this temporary uptick in the fixed income side.

So if the allowance -- my 3 questions are really: if you look at the mortgage company seasonality, that's kind of a headwind; if you think about sustainability of fixed income, that looks like an incremental headwind as we go forward; and then lastly, when we look at the allowance, have we kind of gotten to a new level?

Or has this just elevated the cause of what we have with the 2 credits that we charged-off this particular quarter?

So just trying to get the level of those 3 things because that really was the dynamic that we went through in the last 2 quarters.

So there's a lot there, Marty.

So I guess I'll start on the mortgage company and FTN, and maybe Susan can give her views on loan loss provision.

But I think on the 2 countercyclical offsets, which we've said before, yes, they are up because sentiment and the rate environment are down.

If the reverse had happened maybe they wouldn't have been that strong.

But our margins would have been better, and we would have gotten more incremental income from some of the great loan growth that we've seen.

So I kind of see them as counter balances to continue to help us over time in any rate environment or any economic environment, continue to improve our earnings.

So I don't necessarily sit here and say, well, gosh, yes, this has been great but it's going to be a headwind.

We kind of look at the totality of our business mix, which is why we like it working together to allow us to figure out ways to continue to grow the business.

And as Bryan just articulated, we are constantly trying to think ahead about how we continue to do that, particularly around, let's say, expenses.

Knowing that we have to take out more costs to be able to reinvest or any of those types of things.

So we are constantly tweaking and managing to continue to grow.

And we'll continue to do that the best we can.

And then as it relates to the allowance, we believe we're adequately reserved.

And we just -- as each quarter comes, we take a look at on what's going on in the book at this point.

I feel very good about our asset quality, Marty.

And so if -- we did have the 2 larger charge-offs this quarter.

I'm not -- I feel very good about the fourth quarter and the outlook for 2020, assuming the economic conditions remain stable.

Marty, this is Bryan.

The other thing that -- when you went through and you're sort of doing your reconciliation.

I didn't hear you pick up was, yields on loans were down about $0.03 in the quarter just due to lower rates.

And then I -- the old adage that every dark cloud has a silver lining, I'm not sure that every silver lining has a dark cloud.

And I wouldn't work too hard to work out all of the cyclical stuff.

I mean at the end of the day, we have a balanced business model.

We understand that the mortgage business will ebb and flow.

We understand that fixed income business will ebb and flow.

Our outlook for those today continues to be positive simply because of what we see in customer activity and what we believe about the rate environment.

And so I don't think there -- as you described, and I don't think there are headwinds for 2020 as we sit here today.

Yes.

My worry was just that some of these positives kind of are more temporary, where some of the negatives are -- could be more permanent.

So that's what I was trying to size up.

But appreciate you all willingness to go through that.

Thanks.

So you -- so are you fairly bearish on long-term rates?

And that they're going to be this low and go down from here?

No.

What we generally think is that rates are going to tick down, but they're going to kind of stabilize in a range.

So there's not going to be as much volatility.

So when you look at your market volatility, where you're calling it moderate.

I think it's going to flip back once we kind of get into a level.

And this is going to kind of be stuck in that level.

So that kind of goes low.

The yield curve is still going to be flat.

If you look at the economy, it's still relatively positive, and the direction of rates kind of stabilizes.

So it's not going down anymore.

It's not going up, it's not going down.

So if you have that, then you really don't have the prepayments that you got on the mortgage backside.

And then the refis eventually kind of burn out.

So that mortgage piece, while it's positive right now it doesn't have any lasting duration to it.

And then Susan, on the credit side, the only thing that -- we were at last year was we still had releases of loan loss reserves.

Already provisioning was in the, let's call it, $3 million to $6 million range.

Now we're kind of stepping up to a $10 million to $15 million range.

So you're just kind of looking at those things happening, the drop down in rates, the net interest margin doesn't get any better, the allowance on provisioning stays higher.

And then some of these things that we've got that have been helping us over the last couple of quarters just kind of burn out over the next, let's call it, 2 to 3 quarters.

So that's the balancing act I'm trying to do as I was looking at it.

Coming into the year, wow, we were positioned perfectly.

I'm not sure now.

It's a teeter totter of those things, how that all works out.

So that's what I was trying to size up.

You must be fairly bearish on the industry as a whole because we've got these countercyclical things.

And as we've acknowledged a couple of times, clearly there's a cyclical nature.

But if the consumer remains strong, rates stay strong, purchase activity in the housing finance ought to be good.

I think there's a -- I wouldn't be as negative as you sound like you are this morning.

Well, not negative.

Trying to just balance out the things that are particular to you.

So that was really the issue just in First Horizon.

So generally positive because I think credit costs stayed low for the duration here.

So the cycle stays positive.

Loan growth still stays.

And what you're doing in the core bank with deposit growth and loan growth, that's generating a couple of pennies every quarter.

So you're getting that kind of progression underneath that.

First Horizon, we've always had this volatility that have to deal with.

I'm just trying to size up what I've experienced over the last 3 decades in this process.

So that's what I was trying to get at.

Got you.

Yes, I think Marty just to add one more thing, if I could.

As I look at our business, we've got excellent customer activity loan growth.

We've got positive deposit growth and positive mix shift into key markets.

We've got really good revenue growth from fixed income and fee income in the business.

We've got excellent expense discipline.

So yes, it's hard for me to see what we're not doing right, and how we're not taking advantages of the opportunities we have with our countercyclical offsets today, while also making sure we're looking to the future and making sure that we can continue to put up solid earnings numbers in returns.

Yes.

The 2 things that I heard that I think are helpful in a sense of what I was trying to be more constructive on is the fact that when Susan said you added more mortgage lenders, so that's part of the core business growth.

If you look at the expense, we are coming through the restructurings, so you should get some more expense savings.

So there's probably some levers that you've got on the backside to help compensate for maybe some of this burnout that I was kind of anticipating.

We're optimistic about it.

Good discussion.

Our next question comes from Casey Haire with Jefferies.

I wanted to touch on capital.

I saw you guys taking down the CET1 ratio.

You're at the floor now.

Can you just give us some updated thoughts on buyback appetite here?

Because it does sound like you have decent loan growth on the comp still.

And then if we layer in sort of an industry average, CECL hit, you could go below that 9% level.

Just trying to get your updated thoughts on what the buyback appetite is.

Yes, Casey.

So as you obviously know, CET1 denominator is period-end assets.

And we saw a significant run-up in the last week of the month in our loans-to-mortgage company business.

So I would have expected, a week before the end of the quarter that our CET1 would have been probably 30 basis points higher and the period-end assets ran up so much and brought it down to 9%.

And that's exactly why we have the capital levels that we do to allow us to take advantage of organic growth opportunities like that.

So we did repurchase about $30 million of shares in the quarter, which we felt really good about.

We'll continue to try to be opportunistic with share purchase -- repurchases if we can.

But always our first priority is to support customer growth and loan growth.

And so based on what we've talked about today, we still feel good about our loan prospects going into the fourth quarter.

So that'll be our primary way we'll put capital to work.

And if there's any excess that we feel is there, we'll put it to work in a different fashion.

But for right now we probably are in the 9% to 9.5% range in the fourth quarter and feel really good about that.

Okay.

Great.

And just one follow-up on the mortgage warehouse yield.

It sounds like it's still accretive to your loan yield.

So if it's dilutive to your NIM, as you guys point out on Slide 12, is -- that has to deal with more I guess the funding side of that growth?

Yes.

I mean just the easiest way to think about it is the loan yield that we talked about the 5.30% funded, let's call it, 1-month LIBOR since it has such short duration.

And so if you do that math, it's just right on or slightly below our margin.

And that's how we calculate it for the [WACC total].

Our next question comes from Jennifer Demba with SunTrust.

It's actually Steve on for Jennifer.

So I just wanted to kind of check up on your Nashville progress.

How are loans and deposits growing there?

Do you guys have any goals for growing it further?

Yes.

This is Bryan.

We have very good growth in Middle Tennessee.

It's one of those handful of markets that we continue to emphasize, I mentioned a couple of others earlier, our Florida region, Mid-Atlantic, and I'll also add into that our Houston market.

We still see good growth opportunities in all of those.

Middle Tennessee has been a tremendous growth engine for the economy and the state of Tennessee as a whole.

And we have been very successful and seeing good, strong customer acquisition and customer growth there.

And the team that we have in place led by Carol Yochem is doing a fantastic job.

It's commercial, it's business banking.

We're doing a really good job in the private client space.

Our music industry business continues to be good.

So we're very optimistic about the ability to continue our Middle Tennessee growth as well as some of these other markets.

And we think that's going to be a bright spot for quite a while.

Perfect.

And just a little bit on kind of merger interest.

I mean are you guys talking at all?

I know you may not have the multiple to do something big, but just kind of wondering what you're thinking there.

Well, look, we can't ever comment on specifics.

And as BJ pointed out earlier, we have a capital base, we have capital generation.

And we look at it in 3 buckets, and those 3 buckets are very simply supporting customer growth and customer activity, which has continued to be very strong.

Putting it to work in an M&A context or repatriating it to shareholders.

And over the last several quarters, we've seen strong balance sheet growth, and we've seen the ability to buy back some stock.

So we'll continue to evaluate all of those opportunities, and try to be smart about how we manage capital.

Our next question comes from Christopher Marinac with Janney Montgomery Scott.

I want to go back to the margin discussion on Slide 10.

If the world gets a little more bearish than the 50 basis points down that you have here.

Would the beta be better necessarily?

And then with the momentum that you have in the other businesses continue do you think into next year?

Chris, so I think if there are multiple rate cuts beyond, let's say, the 50 basis points, I do think, in my opinion, that banks would get a bit more aggressive, even more so than they have been on managing deposit pricing because of what the yield curve looks like in short- and long-term rates.

So yes, I think there would be further opportunity beyond the 50 basis points.

It's very interesting.

I know you look at it as well.

But Fed fund futures have been all over the map.

And I've heard all kinds of sentiment about what's going to be 100 basis points of reductions from here over the next 4 quarters.

Like I said earlier, futures as of today would only imply one cut in October and not another one until August next year.

So it's hard to tell.

We are trying to manage the balance sheet as well as we possibly can to mitigate those things.

And the way we're doing it is strong, healthy loan growth, managing pricing discipline and deposit mix as well as we possibly can.

And using those countercyclical businesses to provide it offsets that we can as well.

So we'll see how it works, but we like how we're positioned.

Great.

That's helpful.

And then just a quick follow-up.

On the fixed income business the -- it would be best to look at operating leverage year-over-year and not look at just what happened last quarter.

Just -- you seem to have had good operating leverage looking at it from a year ago.

Yes.

So Chris, like I mentioned earlier, I think a pretty good rule of thumb, generally speaking, is probably a 50% margin on incremental revenue in the business right now.

The -- again, the team out there has done a great job of eliminating as much cost that wasn't customer enabling as possible.

So 50 basis point margin would probably be a good way to look at.

Our next question comes from Garrett Holland with Baird.

First, maybe on the securities portfolio, it's trended a bit lower in recent quarters, which makes sense given the strong loan growth.

But where do you expect that portfolio to stabilize?

And where are the new money yields for securities as the yield has come in a bit too?

Yes.

So it was down, I don't know, $100 million this quarter.

It's based, as you said, on what we're seeing in terms of loan demand.

So we'd much rather put money to work on the loan side.

We expect loan growth to continue.

In the securities portfolio, we've generally just been reinvesting cash flows for the most part, mostly back into mortgage-backed securities.

Yields are lower, generally speaking, than what we're seeing in the aggregate portfolio right now and modestly.

So you can see, if you look at our financial supplement in the yields and rates section, you can see what the yields are doing, and they've been modestly coming down as you might imagine with the yield curve.

So I don't see a material impact nor a change in our strategy to manage the securities portfolio.

It'll just be based on how much loan demand we have, and what kind of reinvestments we have.

That's helpful.

And I wanted to get your thoughts on deposit mix going forward, specifically, market index deposits and the relative attractiveness of those funds as rates do move lower?

Yes.

So interestingly, they were clearly a headwind, as rates were going up.

They are a tailwind in terms of deposit costs as they come down.

Long term, we want customer deposits versus market index deposits.

So we will continue to manage those down as we continue to build customer deposits.

You saw, in this quarter though, they were actually up, and that's because we saw excess cash coming from the brokerage firms that we do have contracts with, sending more money into our facilities.

So that happens.

And it helped to fund our loan growth at lower cost, so that was helpful to us.

But long term, we'll continue to try to manage it down from these levels.

Our last question today comes from Jared Shaw with Wells Fargo Securities.

This is actually Timur Braziler filling in for Jared.

Just one more from me, Bryan, in your prepared remarks you mentioned that the operating environment has slowed somewhat, can you just frame that comment.

Are you seeing that on the commercial side, kind of ex the mortgage warehouse business, are utilization rates down?

You can provide any additional color on that comment that'd be great.

Yes.

I'll -- it's really just a sense of talking to customers and our bankers talking to customers.

And so it's not a scientific measure.

It's sort of is consistent with job growth, which is, by historical standards, good.

It's not as great as it was.

You see expectations around the economy and GDP growth falling.

And that's consistent with the dialogue that we're having with our customers.

As I said, and I would acknowledge that some of it may be a geographic and where we do business.

The Southeast is still relatively strong in my sense.

And we don't see or hear anything from customers that is as negative as what you would read into ISM, either services or industrial.

And -- but we do think it has slowed a little bit.

That said, against the backdrop, we -- as we pointed out, customer balance sheets continue to be strong and they continue to be forward leaning.

So all in all, we remain optimistic about our ability to continue to grow in a somewhat slower growth economy.

And look, at the end of the day, if we're down from 3 to 2, that's still not a bad place relative to where we've been for the last 10 or 12 years.

So we're still fairly optimistic.

I would just add, just look at our numbers and look at the broad-based growth that we're seeing.

So as Bryan said, there might be a lot of discussion and sentiment out there, but the numbers are there.

And we still think that the growth prospects are very strong across all of our business lines, across the key markets that we're in, we have great people.

And so we're optimistic about our ability to continue to grow the firm.

Look, at the end of the day customers are people too, whether they're consumers or whether they're running big businesses.

And all day long, they're told that the interest rates are down and inverted yield curve means a recession, and the politicians talk about how bad everything is and the impact of tariffs and so.

That's going to weigh on sentiment to some extent.

But at this point, we don't think it's out of balance, and we don't think we've talked ourselves into a recessionary track.

Not to say that we don't do that over the next several quarters.

But at the end of the day, balance sheet trends and momentum continue to be fairly good.

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, Eiley.

Thanks, everybody, for joining our call this morning.

We appreciate your interest in our company and our quarter.

Please let us know if you have any questions or anything that you want further follow up on.

Thank you again to all of our colleagues for the great work that you are doing building our business and building our customers and our communities.

Thank you very much.

The conference has now concluded.

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