First Horizon Corp (FHN) 2019 Q4 法說會逐字稿

Good day, and welcome to the First Horizon National Corp Fourth Quarter 2019 Earnings Conference Call and Webcast.

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

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

Please go ahead.

Thank you, Sarah.

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 report.

Our forward-looking statements reflect our views today, and are not -- 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, and thank you for joining our call.

I'm pleased with the strong performance we've demonstrated throughout 2019, including the fourth quarter.

We ended the year with very good momentum, positioning us well for 2020.

Over the past year, we showed profitable balance sheet growth, including growth in key markets.

We have delivered significant earnings contribution from our countercyclical businesses, improved efficiency and deployed capital effectively.

We spent much of 2018 integrating Capital Bank into our legacy business.

In 2019, we successfully leveraged the combined platform with an expanded market presence and increased balance sheet capacity.

We were able to deliver good earnings power and delivered merger synergies.

Our announced transactions with the IBERIABANK MOE and the Truist branch acquisition should further enhance our growth prospects.

We should also deliver nice earnings accretion in 2020.

Our strategic focus paid off with broad-based loan and deposit growth in key markets.

Our higher return specialty areas were especially strong.

Our diversified loan portfolio was up 7% from 2018 to 2019, and credit quality trends remain stable.

We were able to favorably shift our funding mix with customer deposits, replacing wholesale funding with a regional bank average deposit growth of 9%.

Our countercyclical business mix helps us to produce solid returns even in a challenging interest rate environment, such as 2019.

Our fixed income business benefited from falling interest rates and market volatility.

Fixed income revenue was up 52% from 2018 to 2019, and average daily revenue was over $1 million in the fourth quarter of 2019.

Our mortgage warehouse lending business was also helped by lower rates and customer expansion and showing a 35 -- showing 133% growth year-over-year.

The momentum we accomplished through balance sheet growth, expanded market presence in countercyclical businesses result in the achievement of the financial targets we laid out for 2019 in our 2018 Investor Day.

We now have a strong foundation to build on this momentum.

And we'll use our experience with the Capital Bank merger to successfully execute on our MOE with IBERIABANK.

We will also have meaningful opportunities with the acquisition of the 30 branches in very attractive markets that will provide additional earnings accretion.

Throughout the next year, we will remain focused on growing our balance sheet and not getting distracted while we close and integrate these transactions.

I am pleased with our integration planning to date, and I'm more confident today about our ability to deliver the announced synergies and build a leading regional franchise.

The current economic environment is relatively steady in our view.

Our markets are still showing solid growth.

Our customers broadly remain relatively optimistic with the economic outlook.

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

BJ?

Great.

Thanks, Bryan, and good morning, everybody.

I'll start on Slide 7. By reviewing our EPS trends, we saw quarter-by-quarter through the course of 2019, which gives a good perspective of how the momentum of the business has accelerated over the last year.

Our key financial objectives this year were primarily twofold: first, to accelerate the strong loan and deposit growth momentum that we were seeing towards the end of 2018, post the Capital Bank integration; and number two, leverage the full year impact of merger cost savings and continue expense efficiency efforts.

Coming into 2019, we, like others, expected a rising rate environment, yet that outlook quickly shifted at the beginning of the year and put significant pressure on our net interest income growth.

However, our business model and our teams adapted as we expected.

First, we did an excellent job of growing loan and deposits, with total average loans up 7% and total average deposits up 5% year-over-year.

Second, we maintained strong loan and deposit pricing discipline, in particular, our ability to continue growing core deposits while lowering our deposit rates paid from 103 in 1Q '19 to 82 basis points in 4Q '19 helped mitigate the impact of 3 Fed cuts.

Third, our countercyclical businesses, like fixed income and loans to mortgage companies, generated strong earnings growth that more than offset the rate headwinds.

And lastly, we took out almost 7% of our gross expense base through actions designed to both improve our efficiency and allow for needed reinvestment.

Through all this, we posted quarterly earnings growth over the year on an adjusted basis that continued to strengthen throughout the year, culminating in full year adjusted EPS growth of 18% versus 2018.

As you can see on Slide 8, our consolidated financial results for the fourth quarter showed the line item drivers of growth, both linked quarter and year-over-year.

A few highlights I would point out, average loans from fourth quarter '19 versus fourth quarter '18 were up 13% year-over-year.

Despite the challenging rate environment with the multiple Fed rate cuts, we still grew NII 3% year-over-year due to strong commercial loan growth and managing deposit costs lower.

Fees were up materially, both linked quarter and year-over-year from both continued increases in bank fees from strong customer growth and excellent performance from the fixed income business.

You'll see on the bottom right, notable items are related to the merger cost from the pending IBERIA deal; a charitable contribution that we made to our foundation in our previously announced rebranding launch that occurred in the fourth quarter.

Let's take a deeper look at the broad-based loan growth we're seeing on Slide 9. And as you can see here, the 13% growth in loans, which is well ahead of industry growth, comes from all parts of our franchise in both our specialty businesses, which grew 31% and 8%, excluding loans to mortgage companies, which had an outstanding year.

And across our markets, we saw healthy growth with particular strength in our highest opportunity markets like Middle Tennessee, South Florida and Texas.

Encouragingly, pipelines into 1Q also remained strong, and we expect the favorable momentum to continue.

Taking a look at deposit trends on Slide 10, you see that our core deposit gathering in the regional bank is strong.

And as with our loan growth, our growth in deposits is also broad-based across both our specialty businesses and our markets.

And again, we've done this while being very disciplined on pricing.

Deposit rates paid declined 13 basis points linked quarter and are down 21 basis points since the first quarter of 2019.

Turning to Slide 11, this brings us to the fixed income business, which, again as Bryan said, had an outstanding year.

We've known that this business had the nimbleness and capability to quickly capture revenue opportunities when the market turned.

And with the decline in interest rates and the market volatility, it was favorably impacted in terms of market activity in our sales and trading across all of our desks.

And in addition, our other product revenue increased with customers continuing to execute rate swaps resulting in higher fees in our derivatives business.

And during the last few years, the management team has repositioned the expense base for improved profit leverage as volume returned, which is clearly evident in the results we've seen this year.

Given the general level and direction of rates along with some expectation of continued market volatility, we expect the fixed income business to continuing delivering solid results into 2020.

Let's turn to net interest income and margin on Slide 12.

Linked quarter, we saw increases in both NII and NIM as strong loan and deposit growth, coupled with deposit cost discipline and a rebound in accretion, led to a 3% linked quarter increase in NII and a 5 basis point expansion in the net interest margin.

In the bottom left, we wanted to dimension for you how much of a headwind the change in the interest rate environment was yet how well our teams were able to manage through it through strong customer growth and solid pricing discipline.

Now let's turn to expenses on Slide 13.

Underlying the great growth and revenue performance we saw across our markets and businesses, we also continue to actively reposition our expense base for improved efficiency.

The disciplined approach to expense management we've had over the last several years was a major contributor to our earnings power over the last year as well.

And on an adjusted basis, we were able to reduce expenses slightly versus 2018 despite a $40 million increase in fixed income expenses that supported its higher revenue.

We did it by both lowering our core expenses through the achievement of cost saves from the Capital Bank deal and continuing with further efficiency actions such as branch closures, decreases in vendor and discretionary spending.

The $80 million of expense reductions we referenced here equates to about 7% of the gross expense base.

By continuing our efficiency efforts, we were able to make some reinvestment in our customer experience and technology initiatives that will be critical to our future success.

And by driving significant positive operating leverage, we're able to bring down our efficiency ratio substantially about 600 basis points from 2018 to 2019 on an adjusted basis to finish fourth quarter at 59.9%.

We believe expense management is the strength of our company.

And this track record gives us confidence in our ability to gain the expected further scale and efficiency benefits from the IBERIAN merger.

Turning to asset quality on Slide 14.

Our credit trends remained excellent throughout the year as we maintained our underwriting discipline.

Net charge-offs in the quarter were at only $3 million with delinquencies and nonperforming loans declining both linked quarter and year-over-year as well, with provision growth largely due to the strong loan growth.

Again, credit quality remains strong, and we expect our credit trends to remain stable.

Slide 15 gives you a preview of our expected CECL impact, which, as you are aware, we will adopt in first quarter of 2020.

We currently estimate that the adoption of CECL will result in allowance to loans ratio of 100 basis points to 110 basis points.

We'll experience an increase in the reserve largely due to longer-term consumer loans and establishing a reserve for previously marked and acquired loans.

Other commercial portfolio reserves are expected to remain relatively stable.

As a reminder, we'll also see an impact on the reserves when we close our IBERIA transaction, and we have repeated these and laid them out at the bottom half of the slide.

On Slide 16, you see a brief update of our IBERIA merger and branch acquisition.

Activities for both the closing and integration planning remains on track.

In addition to holding town halls and engaging employees, we have already completed several steps in the regulatory application process and commenced integration planning.

Our current expectation is to close and integrate the branch transaction in the second quarter of 2020 and to close the IBERIA merger sometime mid-2020.

Wrapping up on Slide 17.

Again, 2019 was a transformative year for us.

Our successful execution of the Capital Bank deal strengthened our franchise, improved our efficiency and favorably shifted our funding mix through market and customer expansion.

We delivered on our financial targets in 2019 that we laid out at our Investor Day.

We showed meaningful earnings growth despite a challenging rate environment.

We showed strong business momentum by generating earnings and balance sheet growth and demonstrating the benefits of our complementary business model.

Our merger of equals with IBERIABANK and the Truist branch acquisition will expand our opportunities in attractive high-growth markets, enhance our scale and lead us towards top-tier profitability.

We're not done.

Momentum continues across our business into 2020.

That's all I have.

Bryan?

Thank you, BJ.

I'll repeat BJ a little bit.

We've accomplished a great deal over the past year.

We delivered on our financial targets that we set out in our Investor Day.

We grew earnings despite the challenging rate environment and successfully executed on the opportunities from the Capital Bank merger.

We ended the year with strong momentum, and we see that momentum continuing into 2020 as we work on the integration of our MOE with IBERIABANK and our branch acquisition from Truist.

Thank you to all of our employees for all of their hard work over the past year on behalf of our customers, our communities and our shareholders.

With that, Sarah, we'll now take questions.

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

I want to just start on the margin, maybe for BJ.

How are you thinking about the core NIM here, like near term as well as, as we work through 2020?

Yes.

So I think what I would say into 2020, Steve, is we would expect net interest margin trends to remain relatively stable through the next couple of quarters.

There usually is a seasonal decline in the first quarter related to the seasonality of loans to mortgage companies, which is one of our higher-yielding businesses, day counts and that type of thing.

So there could be a dip because of those factors in the first quarter.

But generally speaking, given the pricing discipline that we've got on the deposit side and the loan side, we would try to hold that relatively stable over the next couple of quarters.

Okay.

That's helpful.

And then I appreciate the CECL disclosure.

As we think through the day 2 impact and we look at the 1% to 1.1% range, should we assume that you stay in the middle of that range?

Or is the bias a decline over time as items such as nonstrategic runoff, for example?

Yes.

I think as you know, the CECL impacts really are largely unknown.

There's a significant effect of future views of the economy as we get into the use of CECL.

And so if we're assuming that the future economic environment is relatively the same as how we view it today, then I would expect that the 100 to 110 basis points largely stays.

Our nonstrategic portfolio now is well under $1 billion, and so not nearly as big of an impact as it used to be.

So if we continue to have a commercially-oriented balance sheet, which we expect, then I think largely that range will likely hold.

Okay.

And does the potential capital hit from CECL change your thoughts around buybacks at all?

Not necessarily.

Now of course, we can't do any share repurchases with the pending IBERIA merger, right?

So nothing would be occurring till that closes.

But not really.

I think you're moving from one pocket to another in terms of capital in my opinion.

So all of it will be put into our stress tests, which again is the foundation for how we think about deploying excess capital, and with that, we feel very strong.

And then finally, I'm curious, if you guys look at the synergies post the IBERIA deal closing, the benefit from the SunTrust branches, do you guys feel consensus properly captures the earnings power of this new company?

Probably short answer is no.

I just -- I think the momentum that we've got in our business is going to carry on into 2020.

Bryan talked about it at the beginning as being a major focus of not losing sight of continuing to run the business as we integrate.

So that's one of our top priorities.

Then if you look at how we're performing today, how we've taken cost out of our own organization, how we've done it in the Capital Bank deal, how much expertise IBERIA has integrating and doing the same types of things, we feel very confident in our ability to put these 2 companies together well and deliver that profitability profile over time that we expect from the deal.

Steve, this is Bryan.

To add to what BJ said, we don't think about how we influence consensus in the short run.

Our role is to deliver on the commitments that we make.

And we're very optimistic about what we see in both of these transactions.

And as I said in my opening comments, the more planning that we do, the more optimistic I am that we will not only deliver but potentially over-deliver on those commitments.

So we see both of these transactions accreting to earnings, and we see both of them delivering significant shareholder value over time.

We recognize that it is our responsibility to manage the business day-to-day and to execute on what we said we're going to do, and that's what we're set out to do.

Our next question comes from Brady Gailey with KBW.

So in your opening comments, I mean, you guys said that expense management continues to be a strength of the company.

You took out another $80 million, 7% last year in 2019, that's above and beyond any sort of deal-related cost savings.

How do you think about that going forward?

Do you think there's still opportunity to reduce the legacy expense base from here?

Or are you to the point where reductions are not going to be as notable?

Brady, this is Bryan.

I'll start.

I think it's going to be really, really difficult in the next year or 2 to separate out what's associated with our integration of the merger or of merger of equals with IBERIA.

But we continue to believe that through this period and beyond that we will continually have to rethink our expense base and think about how we manage expenses to, as BJ said, control costs but also invest in the technology and infrastructure to deliver the products and services that our customers are looking for.

The short answer to your question is, yes, I think there are other additional opportunities in the legacy expense base as well as on the IBERIABANK side that will allow us to deliver our merger synergies and will allow us to fund the investments that we need to make long term.

So I am optimistic that we will be able to do exactly what you described.

And as BJ said, if you go back 10, 12 years, we have consistently worked on our expense base.

We have consistently delivered greater efficiency.

And it showed up on our overhead efficiency ratio improvement in 2019, and I expect that you'll continue to see that improve throughout the merger and the integration of the 2 transactions that we've talked about.

All right.

That's helpful.

And then the mortgage warehouse was also very strong in 2019.

It was up -- average balances were up 75% year-over-year.

And you finished on a high note at $4.4 billion in a seasonally soft quarter.

How do you think the mortgage warehouse will trend as we continue through 2020?

And I know you all talked about the yield being one of your highest or one of your higher loan yields, does that yield still run about 5.5%?

So Brady, this is Bryan again.

I'll start.

Mortgage warehouse is a seasonal business.

The first quarter is historically the lowest.

And I would expect that, that could be down $400 million to $500 million on average versus the fourth quarter.

But as you look at it vis-à-vis a year ago, I expect it to be up.

We've gained market share, and we continue to grow our customer base and we continue to broaden the breadth and scope of the business.

So while it will have seasonal fluctuations or seasonality, as we've said in the past, we believe it's an extraordinarily valuable business.

It creates a tremendous amount of shareholder value by delivering very strong return, so we live with the seasonal volatility.

Our outlook overall for the business is good.

We expect long-term rates to be low.

We expect purchase activity to continue to be very good.

In 2020, refi is a little less than half of the business we're seeing today.

So overall, we're optimistic about the outlook for mortgage warehouse in 2020.

A few specifics I would add to what Bryan said.

If you look at where we are just the first 10 days of January compared to the January average last year for mortgage warehouse, we're more than double where we were last year for January.

So the pickup in the number of clients, we've added 17 net new clients year-over-year.

And we're looking -- continuing to do business with good-sized companies, medium- and large-sized mortgage companies, and we've been able to increase our average mortgage warehouse relationship from about $22 million to $30 million over the course of the last 12 months.

So in addition to the economy leading that, great work by the team on bringing in new customers and continuing to deepen relationships with customers that will really help sustain that business even through some seasonal and cyclical fluctuations.

Our next question comes from Ebrahim Poonawala with Bank of America Securities.

Just one, wanted to follow up on the margin.

BJ, how should we think about the accretion, at least through the first half before you close either of the deals relative to the 15 basis points in the fourth quarter?

Yes.

So we put on here on Slide 12 just to dimension for you, the total loan accretion in the year was $42 million.

That continues to step down every quarter, right?

So accretion, by nature, would be lower in 2020 than it was for 2019.

The other factor that's going to drive it even lower is the impact of CECL, which takes away some, not all of the accretion that you have from purchased or acquired loans.

So loan accretion will continue to come down over the next few quarters.

Got it.

Okay.

So a step down from the 15 bps in the fourth quarter, I guess?

Oh yes.

Yes.

Yes, because we were -- if you think about it, we should have been averaging something like 10-ish a quarter.

Third quarter was abnormally low.

Fourth quarter was abnormally high.

Put the 2 together and it was right around the $10 million, but it'll continue to come down a couple of million dollars a quarter.

That's helpful.

And just going back to the IBERIA deal.

And is it safe to assume that -- I know you said mid-2020, but the deal could close by the second quarter or by the end of the 2Q '20, given just the time lines we've seen with other deals like TCF last year.

And Bryan, would love to get a little more color around just your confidence around the expense savings.

As you said, IBERIA has done a fantastic job in terms of getting expense savings from its deals historically, and you guys have done a great job on expense management.

If you could just talk to in terms of the possibility that expense savings from the deal could run ahead of schedule and how you think just -- how the integration plan, like do we see a good amount of savings come through by the end of the year or by the first half of next year?

Would love to hear any color that you can provide on this.

Yes, sure.

So the first part of your question was time line.

And we have no reason to believe at this point that we won't get the requisite shareholder and regulatory approvals by second quarter of this year.

So we expect to close late first half of this year.

So as far as we know, everything there is on track.

And as BJ mentioned, we have made the required filings and so the ball is rolling in that regard.

To your point, clearly, the experience base with the IBERIA team has been very, very strong.

They've done a number of mergers and integrations over the years.

And so when I step back and think about their experience base and coupled with ours, I think fundamentally, we have the right focus on how we execute on these transactions.

The thing that has really encouraged me has been the way the 8 executives that we announced in the merger announcement as well as our ability to roll that out further in the organization, the way these teams are coming together and planning for this integration, is very, very good in my view.

And I've seen a lot of these over the years.

And there's a strong focus on not only how we deliver on these commitments, but how we build the franchise to be in a very strong and stable place for the future, delivering strong shareholder value and products and services that our customers won't need for the long term.

So without trying to fine-tune where expenses will fall throughout the back half of this year, I would say that I am optimistic that we're going to hit our synergy numbers.

And I think over time, we may prove that there's some upside to that.

So I'm optimistic in the way the planning has gone to date.

I love the way that the team is working together to plan the combined organization.

And as we get through this approval process and shareholder vote, I'm excited by bringing the team together to manage the combined business.

Our next question comes from Tyler Stafford with Stephens.

Just following up on one of the earlier questions about street estimates, perhaps not reflected in the earnings power of the combined company.

Obviously, there's a lot of moving pieces this year with the branch purchase and IBERIA acquisition.

Just curious why you guys chose to not provide 2020 guidance, even on a stand-alone basis given the momentum coming out of 2019.

Yes.

I think generally speaking, as you know, we don't provide guidance.

We did -- I guess, you can call our Investor Day targets a form of guidance that, I think, was a little bit unique.

I think if you listen to what Bryan and I said in some of our opening comments, you can take some trends away.

Strong business momentum, loan pipelines remain strong.

We maintained pretty good discipline on deposit pricing.

We talked earlier in the Q&A on what we thought around margin, fixed income, given continued market volatility and the level and direction of rates.

We feel good about the level of what we're seeing there.

And our expense discipline will remain a key focus for us through the first half of the year.

Now again, as Bryan said and as everybody knows, it's going to get a little noisier as we get to close with the IBERIA deal and things are going to start to come together, but the fundamental business momentum that we're seeing continues into the first quarter.

Okay.

And just thinking about loan growth for 2020.

I think Bryan mentioned, perhaps roughly a $500 million step down in mortgage warehouse balances.

But just trying to triangulate what that could mean for 2020 growth, last year for '19, you had the 3% to 6% growth expectations.

Obviously, you came in ahead of that.

But is that a good range that we should think about for -- on a stand-alone basis for 2020?

Yes.

I think so.

Yes.

I think -- yes, clearly, we had really, really strong loans-to-mortgage company growth.

It'd be great if that continued.

But we'll assume that, that's going to come back in a little bit.

But the fundamentals of the rest of the growth feel really good, such good that, that low to mid-single-digit range feels appropriate.

Okay.

And then just one more for me on expenses.

Backing up the onetime expenses, it looks like the employee compensation expense was up, call it, $10 million or so quarter-over-quarter on a core basis, even with the FTN expenses up only $2 million or so.

Can you just give us any color on what drove that step-up in employee comp?

Did you guys hire?

Or was that incentive kind of catch-up for the year?

Or just any color you can share on that increase.

Yes.

It was a variety of things.

It was fixed income, variable comp driving much of it, but then year-end bonus accruals, given the strong year that we had as well, both on the frontline side related to volume-based incentives as well as overall corporate results.

BJ, you may correct me if I'm wrong, but Tyler referenced the step-up in FTN expenses.

Last quarter was high because of the legal settlement that was reflected in those numbers.

And that didn't recur and compensation expense was higher as a result this quarter.

Yes.

That's a good point.

Yes.

I think I was taking that into account, but regardless, yes, that was -- the FTN was definitely a driver of that step-up.

So I can appreciate that.

Our next question comes from Jennifer Demba with SunTrust Robinson.

Question on asset quality.

You indicated you think things will be relatively stable this year.

Your net charge-offs were so low in 2019.

Just wondering how you kind of think about it going forward.

And also your franchise lending, I know it's a small business for you, but just wondering how that's performing these days given restaurant pressure.

Yes, Jennifer.

Our outlook for asset quality has remained stable and strong at this point based on what we're seeing in our portfolio, and I know Bryan touched on the client sentiment as well.

We continue to be selective and disciplined in terms of both increases to existing clients and bringing on new clients and disciplined around servicing.

Just as a side bar, I would add that I think client selection throughout -- for a long-term sustainable portfolio is so critical, and our bankers really do a great job with that.

I think that's a tribute to the model of having market presidents and local credit officers in the market who know those markets and the people that we're doing business with.

Because if you do have a situation where you need to come to the table, it's always great to see clients who step up and do the right thing.

And that's something that we talk about day in and day out.

So I feel very good about the asset quality that we're seeing and the way in which we brought business on the book.

The franchise finance team is no different in terms of discipline around underwriting, client selection, the way that they follow various concepts and look for both opportunities and threats.

That portfolio -- excuse me, portfolio is performing well.

But that is an area -- and I would tell you even though customer sentiment across-the-board is very strong, the one thing we're hearing both from franchise finance clients and really others is the pressure on wages and quality of labor.

So we do talk a lot with customers about that.

And you also have many states went to a higher minimum wage that was expected.

And so these clients have put that in their run rate but it is something that we watch closely.

Great.

Another question.

Just, Bryan, wondering how you're thinking about retention of key IBERIA revenue producers.

One of IBERIA's competitors reported yesterday, they seemed very excited about potential merger disruption.

Can you just talk about what your strategy is there?

Yes, absolutely.

Look, when you're in a merger, it's even more of a focus, but the reality of our business is, is that our people are very important to us all the time.

And so we spend a lot of time thinking about how we really create a culture where people want to be here and serve their customers.

And we are working really, really hard with the team at IBERIA to think about how we bring together these 2 organizations.

And it really starts with a fundamental similar culture as the way we do business, as the way we view credit, as the way we fundamentally think about how we serve our customers and communities.

And so I don't expect very much, if any, change on most of our bankers in terms of the way we do business.

We've also been able to say very clearly to our frontline bankers that given the limited branch overlap that we have that we were going to have a role for the folks that are facing our customers and the organization.

So we don't think we're going to create very much disruption, but we're also thinking about how we use all of the tools that are available to us to ensure that people are committed to the organization, they're committed to serving their customers and committed to growing the business.

So I understand people might express optimism or whatever they may express, but we are clearly going to work very, very hard to keep all of our bankers engaged in serving customers and communities, keeping up the great momentum with full knowledge that when we put these businesses together, they're going to be in a better place and better product-set services to serve customers and do a better job for their communities.

Our next question comes from Casey Haire with Jefferies.

I wanted to touch on the liquidity profile post close.

Once you guys do close these deals, they obviously bring a lot of liquidity.

The network deposits were up this quarter around $4.4 billion.

What's a reasonable level for that -- for those network deposits this time next year, given all the liquidity because that could be a potential NIM defense lever for you guys?

Yes, Casey, it's BJ.

That's a good point.

Particularly, the Truist branch acquisition gives us probably a net -- a little over net $2 billion of very low cost incremental funding that we can then build a profitable loan and deposit business on in some attractive markets.

So the thought process on the corporate finance case for those branch acquisitions is bringing on net $2 billion of deposits at 50 basis points and letting go the market-indexed deposits and then over time, reshaping further the funding mix.

And so yes, that is clearly a benefit that we expect to gain in the second half of the year immediately and then leverage it further.

What we'll do is -- I can't really give you an idea necessarily yet of what we think market-indexed deposit levels will be going forward, simply because we want to put the 2 companies together and see where we need net funding with those types of deposits, clearly a gap filler, if you will, much like how we use it today for excess growth in loans to mortgage companies or movements in our fixed income trading inventory.

And so the key point though is that this branch acquisition will certainly improve our funding mix, and we'll continue to optimize it with the IBERIA merger as well.

Okay.

And just switching to the NIM outlook.

It sounds like it's stable -- the core NIM's stable near term, even with mortgage warehouse sort of going against you this quarter, you guys did a decent job on the core deposit side pricing this quarter.

Is there still some room to push that lower and offset some of the mortgage warehouse?

Yes, I think so.

There's a lag effect, as you well know, when rates -- when the Fed cuts rates, LIBOR comes down pretty much immediately, it actually leads into a cut, whereas deposit pricing takes a little bit of time to flow through.

And so the margin compression that we saw in the third quarter reflected that dynamic with pressure on loan yields, which continued into the fourth quarter.

But we started to see the benefit of the pricing changes we made on the deposit side coming through in the fourth quarter.

Those deposits rate changes will continue more into the first quarter, where we believe the pressure on loan yields will moderate a bit.

So all in all, I think your theory is correct that, that will help loans to mortgage company balances and yields coming down will be a headwind.

But all in all, I see our margin being relatively stable, a couple of basis points here and there to either side of where we ended the fourth quarter based on what I can see today.

Okay.

And just last one on capital markets.

It sounds like the momentum is continuing in the first quarter here.

I was wondering if you could just give us a flavor as to where ADRs are trending year-to-date.

Yes.

Go ahead.

Yes.

So I think through the first 16, 17 days of the year, I think we're between $950,000 and $975,000 a day.

We had $1.1 million in the fourth quarter, which was great.

And so we expect something around the range of -- between those levels to be where we're at in the first quarter.

Our next question comes from Brock Vandervliet with UBS.

I just wanted to probe more on Tyler's question on expenses.

BJ, I've been thinking more in the range of $275 million to $280 million or so in terms of core expenses.

I know there's a lot of moving parts here, but is that too optimistic?

Should we really be around closer to $290 million going forward?

I think it's probably not the $290 million range.

It's probably lower than that.

But probably higher than the $275 million range, given how well fixed income has been growing.

So I would say in the $280 million, $285 million range would probably be more appropriate going into the first half of this year.

Yes.

It all depends on how you think about fixed income.

Yes.

Exactly.

Okay.

Excellent.

And also the biggest overhang, I think, right now on expenses is around systems and the integration.

In terms of -- is it Jack Henry?

Is it your internal system?

Is it a third-party?

So when -- can you clear the air at all on that topic?

And if not, when do you think you'll have a decision made that you can share with investors?

Yes, Brock, this is Bryan.

I can clear it a little bit.

It's either going to be Jack Henry or our internal system, Hogan, et cetera.

I think that decision is relatively close.

We're doing some evaluation and some work to evaluate the various angles, and I expect that decision will be made in the next 30 days or thereabouts.

But it's going to be one of those 2 sets of systems.

We're not going to go reinvent the wheel or do something completely different.

So we're going to keep the organization moving, and I think that will be a decision that will be solved fairly quickly here.

Okay.

And you think you're already kind of bracketed with respect to that decision and expense dynamics of that decision?

Or do you think that could result in new guide around expenses?

I don't think that decision will have any adverse impact on what we've laid out in terms of expense guidance.

And potentially, may -- there may be some value down the road as we think about how all of the systems lace together.

But we think we put together something in our forecasting and our estimates when we announced the deal that took into account that we're going to have to make that decision.

And we think we put something in place that was very achievable in terms of an estimate.

So I don't expect any adverse impact to our expense estimates as a result of that.

Our next question comes from Jared Shaw with Wells Fargo.

Just, I guess, looking at the Truist deal.

Is that creating any opportunities yet for you in terms of being able to go on the offensive and maybe hiring employees or seeing any opportunities with customers that otherwise were tied up?

Or is it still too early for you to say?

Jared, this is Bryan.

It's probably a little too early to know the full impact.

But clearly, in the 60 to 90 days that we -- since we've announced that, it has had a very positive impact, particularly in the Mid-Atlantic markets where we already have a presence, and there's a tremendous amount of excitement.

And it does create -- it basically allows us to do in the Mid-Atlantic market, call it, the triangle and the triad area of North Carolina, in particular, we're doing 20, 25 years of work in terms of building branch share and branch franchise.

So that has a positive impact, and we think it will be positive for us in the long term.

We're excited about the other markets that we get an opportunity to acquire in that branch transaction.

And so I think longer term, it will be a very positive thing for us.

And I'm optimistic that you'll start to see that momentum building as we close it sometime in the second quarter in the early -- mid part of 2020 second quarter.

Okay.

Great.

And then just on the average daily revenue in the capital markets business.

Is that $1 million, $1.1 million, sort of a natural ceiling?

Is it going to be hard to see that ever drift higher than that given the current structure?

Or is that sort of the solid wheelhouse right now given the outlook?

Yes.

I think like I said a couple of minutes ago, I think $900,000 to where we're at today is near term, what we think a business should be at over the next quarter or 2, it's harder to look beyond that.

But if you look on whatever slide we had, Slide 11, for fixed income, the bottom right gives you at least a bit of a dimension for how to think about it and how average daily revenues flow in the business, right?

So direction of rates coming down has been helpful, market volatility has been helpful.

But the state of the economy continues to be fairly healthy.

If you think back to when we had really, really big quarters in fixed income, like 2009, 2010, there was a very negative view on the economy, and direction rates and market volatility were favorable to the business as well.

So all of that to say is I don't think that this is a ceiling.

Now we don't necessarily want the state of the economy to be what it would be to drive average daily revenues higher.

But we like the countercyclical benefit of having fixed income stronger as there are pressures on the margin, which is exactly what we saw in 2019.

So business is still performing very strong.

Like I said in my opening comments, the management team out there has done an incredible job over the last couple of years repositioning the expense base such that when revenue and volume and activity did come back, our profit margins got better.

So as an example, 3 or 4 years ago, the leverage, if you will, for every $10 or so that we would generate in incremental revenue, we would have $6 or so of expense.

Today, if you look at the results in the graph, it's roughly $5 of expense for every $10 of revenue.

So they've improved and expanded that profit margin, which will only help us on the upside and mitigate things on the downside.

Our next question comes from Garrett Holland with Baird.

I just had a follow-up on loan growth.

The H8 data for C&I lending for the industry has softened considerably.

I was hoping you could elaborate on what's driving your improving pipeline activity following the good performance in 2019.

Yes.

We are seeing a strong pipeline this quarter.

And we've had -- even our, what I would call, core commercial, so that's our commercial teams that are out in the market, not specialty.

We had good year-over-year growth there.

As you know, we've hired additional bankers in some of our -- what we call, our expansion markets or key markets.

So Florida, mid-Atlantic, Houston continuing to hire bankers as has some of our specialty lines of business.

So in addition to, I'd say, just doing the right thing day in and day out talking with existing customers, bringing in new-to-bank being able to attract new bankers who have a different Rolodex that can bring in over time some of the clients that might have been banking at another institution.

So we feel good about it.

And as I said earlier, not only do I feel good about the type of growth we're seeing, but the continued discipline around which we're looking at these growth opportunities.

And then maybe a bigger picture question.

In the past, you provided good insight about the heavy lifting involved integrating Capital Bank, with outbound calls and training hours and the company's performance notably improved as you move past that.

How do you sustain the core operating momentum as you work through the much larger IBERIA integration?

Yes.

Garrett, this is Bryan.

It is a reality that as you get into the training around the conversion schedule and start communicating with customers, it does impact, to some extent, momentum.

The best anecdote to that is one trying to compartmentalize as much of the integration as you can to a small group of people and allow our bankers, as Susan just referred to them, our core bankers in the market continue to do what they're doing, which is take care of customers and their communities.

So we're going to try to compress any of that outbound calling and communication through a smaller window as we can.

We don't have the full integration schedule laid out yet.

With the Capital Bank merger, we integrated all over 1 weekend, we did all of our system conversion.

And it's not clear yet how we're going to do whole of these integrations.

It could be staged out.

So our focus, as we talked to our bankers and the organization and then the same thing is happening on the IBERIA side is, is, look, let's stay focused on growing the business, let's stay focused on growing customers and community activity, and let's let our integration team worry about the integration.

And so while it will invariably have some small impact, we're doing what we can to minimize that.

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

Bryan and BJ, I want to just reinforce on the systems conversion a few months after the merger.

To what extent does the fact that you're a core provider, that you're such a large part of their business, I think maybe their largest customer, does that give you some positives that you can leverage off of?

And are there any risks that go along with that?

Yes, Chris, this is Bryan.

I reference evaluation.

I think that's part of what we've got to evaluate as we look at these systems decisions.

And clearly, if you go one direction, you're running systems that are being -- ours, for example, you're running systems that are run at Bank of America.

So they're infinitely scalable at least from a perspective of a $45 billion banking organization.

If your reference is to the IBERIABANK systems, and part of the testing we have to do is how scalable is it, and what does that mean in terms of the ability to grow and invest in the systems over the long term, then that's the work that's going on now.

We're trying to make a systems evaluation that when we get to the end of the integration, it leaves us in the best position to serve our customers and communities to grow our business and deliver the lowest-landed cost that we can for that system decision.

So it's a complicated decision, but there's an awful lot of good people spending a fair amount of time looking at it.

And I expect, as I said earlier, in the next 30 days or so, we'll have a decision on it.

Okay.

So there's still room for change and evolution on that, and I presume that your merger charge kind of long covers the cost associated.

Yes, as I referenced to the question earlier, Chris, I don't think that any systems decision will deliver anything that -- as we sit here today, I don't expect any adverse impact on that.

I think that the way we thought through it on the front end, took an approach where -- while you might say conservative, I would say that it's achievable and deliverable.

So I'm not expecting anything adverse from that.

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, Sarah.

Thank you, again, for joining in our call this morning.

We appreciate your interest in our company.

Please let us know if you need any additional information or if you have any further questions.

I hope everyone has a great and wonderful weekend.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

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