First Horizon National's (FHN) CEO Bryan Jordan on Q3 2016 Results - Earnings Call Transcript

| About: First Horizon (FHN)

First Horizon National Corporation (NYSE:FHN)

Q3 2016 Earnings Conference Call

October 14, 2016, 09:30 AM ET

Executives

Aarti Bowman - Investor Relations

Bryan Jordan - Chief Executive Officer

BJ Losch - Chief Financial Officer

Susan Springfield - Chief Credit Officer

Analysts

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Jared Shaw - Wells Fargo Securities

Ebrahim Poonawala - Bank of America Merrill Lynch

Jennifer Demba - SunTrust

Nick Grant - KBW

Kevin Fitzsimmons - Hovde Group

Christopher Marinac - FIG Partners

Jon Arfstrom - RBC Capital Markets

Operator

Good day and welcome to the First Horizon National Corporation Third Quarter 2016 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.

Aarti Bowman

Thank you, Nicole. 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 announcement materials in our most recent annual and quarterly report. Our forward-looking statements reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement 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.

Bryan Jordan

Thank you, Aarti. Good morning everyone, thank you for joining us. We’re really pleased with the results of the third quarter. We continue to see very good momentum across all of our businesses. We felt very, very good about the progress we saw in terms of revenue growth as well as continuing to control expenses and to create operating leverage. We saw strength in loans across the business, we saw good deposit trends, and credit quality continues to remain very, very strong.

We’re pleased that in the September timeframe, we can completed the acquisition of the restaurant franchise finance business, and we were able to hire a team of talented bankers along with that from GE Capital and feel very good about the prospects for that business as we look into the fourth quarter and 2017 and beyond.

Our fixed income business continued to be better; it was up year-over-year, down a little bit from the second quarter. The third quarter, we saw very good revenue trends in the first two months of the quarter. They moderated some in September, probably more related to speculation about what the Fed may or may not do in September and then later in the year.

As we look out across 2017, we expect fixed income revenue to continue to be steady, and we are optimistic that that business would continue to show the positive trends we’ve seen over the last several quarters. Overall, we’re very, very pleased with the results of the quarter, and we see very good momentum and pipelines as we look into the fourth quarter of this year.

BJ will talk more about interest rates, net interest margin, and outlook, but we expect that our plans at least call for the Fed to raise rates in December and then really not much after that, you can call that a low-for-long view of the world if you like, but essentially we don't think there is very much in terms of the rate increases in the future, but we do expect one in the fourth quarter.

We do continue to see good growth opportunities across our franchise both in our core banking markets and specialized businesses. We see good opportunities as I mentioned in portfolios that we've acquired like the franchise finance business as well as our specialized healthcare finance business. We've hired a lot of talented bankers across all of our businesses and see great opportunities.

You’ll hear more from BJ as we talk about expenses, but expense control and creating operating leverage is still going to be a primary focus of what we’re doing. The rest of this year and into 2017, and we think we've got a good momentum there and we think we've got good opportunities to increase or create additional leverage as we move forward.

Finally, we've continued to make progress on improving our returns. We feel good about the ROEs and we continue to generate and continue to make progress towards hitting our bonefish targets. Hitting our bonefish targets, driving return on equity is still one of our primary objectives that we focus on day-in, day-out at our management strategies.

So, with those opening comments, let me turn it over to BJ to walk through the details and then we’ll open up for Q&A.

BJ Losch

Great. Thanks Bryan. Good morning everybody. I’ll start on Slide 5. As Bryan said, we think that this quarter was a really strong quarter for us across the board. If you look at year-over-year in particular, if you start with that, we had double-digit growth in loans, deposits, net interest income, fee income, total revenue, and pre-provision net revenues.

So, we were very, very pleased with the strength of the performance and how it dropped to the bottom line. We reported net income available to common of $63 million or $0.27 a share, which translates to 12% increase in net income linked quarter and 7% year-over-year.

Looking at pre-tax income growth, you can see 33% growth year-over-year and 6% linked quarter driven by strong positive operating leverage both linked and over prior year. Total revenues were up 4% linked quarter driven by strong loan growth driving higher net interest income and in expansion. And year-over-year growth was again driven by meaningful balance sheet growth and solid fixed income performance.

We’ll talk some more specifics on the balance sheet dynamics in a minute, but overall average consolidated loans were up 5% linked quarter and 12% year-over-year with average core deposits increasing 4% linked quarter and 11% year-over-year. Loan loss provision was again modest at $4 million in the third quarter, flat compared to the second as credit trends remained healthy with net charge-offs at only $3 million in aggregate for the quarter.

Turning to Slide 6, you can see the significant positive momentum being demonstrated in our regional banking franchise both on a linked quarter basis and year-over-year with double-digit revenue, net interest income, and balance sheet growth year-over-year. Net interest income was up 7% linked quarter and 15% year-over-year largely driven by commercial loan growth.

Linked quarter fee income was up 6%, primarily due to higher swap fees and a gain from property sales. Expense in the bank was up as we continued our investment in strategic hires in expansion markets and specialty businesses, and we saw higher incentive compensation due to the strong loan and deposit growth and made technological upgrades in areas such as digital banking.

Loan loss provision in the bank was $9 million in the third quarter, reflecting continued stable asset quality trends with net charge-offs at only $2 million and additions to the bank coverage due to the strong loan growth.

Looking at the regional banks balance sheet on Slide 7, you can see the strong growth in multiple areas of our commercial portfolios. Average loans were up 6% linked and 18% from the third quarter of last year. In September, we completed the franchise finance loan portfolio acquisition of approximately $535 million in outstandings at period end. Since we closed this deal in late September, the impact on average loans was only about $90 billion.

The acquired loans with our existing franchise finance loans will establish a new specialty lending area with about $750 million in outstandings currently. As Bryan talked about, we liked the franchise finance business with its relatively strong margins, solid credit trends, and fee opportunities that make it a great contributor to our focus on economic profitability.

Linked quarter loan growth came from specialty lending areas, primarily loans to mortgage companies, commercial real estate, asset based lending, and private client wealth management. Commercial real estate growth was largely driven by the funding up of prior commitments, yet we remain active in the broader CRE market. Loans to mortgage companies benefited from a backup in rates earlier in the quarter, as well as a seasonally strong summer home purchase season.

We continue to see growth in our core Tennessee markets as well year-over-year, Middle Tennessee, the Nashville area was up 8%, and West Tennessee and Memphis area was up 5%. Despite the competitive landscape pricing trends held up you can see loan yields were up about 2 basis points linked quarter and 16 basis points year-over-year as we benefited from growth in our higher returns specialty and lending areas, and took advantage of the asset sensitivity from the Feds rate move last year.

We continue to remain disciplined on underwriting and credit quality was strong. On the liability side, average core deposits in the bank were again strong, up 1% linked quarter and 7% year-over-year. We’re encouraged by the strong pipelines we continue to have despite the strong fundings we have experienced. And while loans to mortgage companies will fluctuate, we are positive on the forward outlook for our loan growth prospects.

Moving on to fixed income on Slide 8, fixed income average daily revenue was solid at $922,000 in the third quarter, reflecting a large increase of about 37% from the prior year, although down from 2Q 2016’s $1.1 million. Linked quarter declined can be attributed in part to typical third quarter seasonality, as well as less favorable market conditions with lower volatility experienced in the third quarter.

It was kind of “A Tale of Two Cities” within the quarter though activity was stronger in July and August, but we saw a pretty significant decline in activity in September as volatility abated. The year-over-year increase in average daily revenues reflected increased performance across all product sectors, but particularly our agency and mortgage debts. We continue to focus on investing and distribution platform in the fixed income space through strategic hires and expanding our product capabilities.

Getting into net interest income and net interest margin, a little bit further on Slide 9, we see net interest income was up 5% linked quarter and 13% year-over-year. The margin was up 4 basis points linked quarter. And as you can see in the bottom left, the linked quarter improvement was mostly driven by higher commercial loan growth volume, particularly in loans to mortgage companies.

We are particularly pleased, if you look at the chart in the upper right, you can see the significant net interest income growth over the last two years with a relatively steady NIM over the same period. This demonstrates our banker’s ability to remain disciplined on pricing while generating plenty of opportunities, or growth on the balance sheet.

Turning to Slide 10, you can see asset quality trends remained favorable. Net charge-offs to nonperforming assets were down year-over-year and linked quarter. Our reserve to loans in aggregate was 103 basis points in the third quarter. Asset quality in our commercial loan portfolios in the bank remained strong.

And in the nonstrategic portfolio, credit metrics are stable to improving and balances continue to run off, with period-end loans for nonstrategic dropping to $1.7 billion or about 8% of total loans. Even with the strong loan growth, the commercial loan originations we are putting on the books are, on balance, of slightly better quality than the overall portfolio, which is encouraging to our forward view of credit performance.

Wrapping up on Slides 12 and 13, I think we're pleased with both the strong quarter we had and the positive momentum we still see in our businesses. From a bonefish perspective, we ticked off a lot of improvement boxes as we saw improved ROTCE at about 12%, improved ROA, NIM expansion, a reduction in net charge-offs, strong fee income generation from our fixed income business, an improved efficiency ratio and accretive capital deployment organically and via the franchise finance acquisition.

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

Bryan Jordan

Thank you, BJ. We're really pleased with the results we see in the bank and the fixed income business. Our emphasis on improving economic profitability as an organization is improving our returns and our profitability. Our capital ratios remained strong, and we think we have opportunities to opportunistically - in a disciplined fashion, to continue to deploy capital in growth opportunities, stock buyback, et cetera.

A special thanks to all of our First Tennessee, First Horizon employees. Thank you for all that you do. You are our most important assets, and we appreciate what you do to build our relationships with our customers and to build our business.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Steven Alexopoulos of JPMorgan. Please go ahead.

Steven Alexopoulos

Hi good morning everybody.

Bryan Jordan

Good morning Steve.

Susan Springfield

Good morning Steve.

Steven Alexopoulos

I'll just start on the mortgage warehouse, which is obviously very strong in the quarter. First, what was the split between purchase and refi? And could you talk about expectations for the business in 4Q as the refi cycle likely slows a bit?

BJ Losch

Yes, so I can answer that, Steve. It's BJ. So it was largely balanced. Maybe modestly more purchase than it was refi in the quarter, but it was pretty close to 50-50. So, we usually have and usually see a strong home purchase market in the summer. But with the backup in rates at the beginning of the quarter that also helped spur a lot of refi activity as well. So it was kind of a positive on both of those ends. So, we feel pretty good about that business, very good, in fact.

We've been gaining market share from existing customers and picking up new relationships. And so again, while we know that, that business has kind of fluctuated in terms of outstanding, and we think the fourth quarter is going to probably be seasonally less strong than what we usually see in the third quarter, we still think that the business has a pretty good trajectory of growth going forward.

Steven Alexopoulos

Okay. That's helpful. Thanks BJ. And then on the capital markets business, when we look at the historic ranges, $1 million to $1.5 million for the ADR, if I look back over the past 3 years, there's actually only one quarter that you were in the range, which was last quarter. Bryan, have you considered lowering the range? And related to that, you would lower the investment you're making in the business capital allocation, et cetera?

Bryan Jordan

Yes, Steve. I think it's probably been a year and a half, two years ago, we effectively did lower it. I think at that time, we talked about the fact that we didn't think we'd get to the $1 million to $1.5 million range. At that time, we were in the $700,000 to $800,000 a day range. We think as the effects of Dodd Frank, in particular, the Volcker rule, continue to work through the business model in the fixed income business, that we'll continue to build share that we'll continue to have greater opportunities with customers, one; and two, opportunity to bring people on to the platform.

Much like the mortgage warehouse finance business, where balances will fluctuate, average daily revenue is going to fluctuate in this business. And so, while I'd stick with - we think that the business is better today than it was two years ago. Whether we're going to be at $1.1 million or $900,000 a day, we don't have a clear enough crystal ball in any way, shape, or form to say this is the number. So, I wouldn't argue with you, if you said the range was going to be $800,000 to $1 million to $1.2 million for the next year or so, we think the business is getting better.

We think we're picking up market share. The business model that we operate matching up buyers and sellers is effectively what becomes the preferred business model under Dodd-Frank and the Volcker rule, so we see increased opportunity, but I wouldn't argue with you. I wouldn't pin that $1 million to $1.5 million be in the range.

Steven Alexopoulos

Fair enough. Thanks for taking my questions.

Bryan Jordan

Sure thing.

Operator

Our next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Ken Zerbe

Great, thank you. Just hoping you can touch on expenses a little bit. Looks like this quarter, they ran higher than we were looking for, but it also kind of puts you at sort of well above on a full year basis, above your prior guidance, even excluding the $4 million of net onetime items. Can you just address that? Like, should your expense guidance change going forward? Thanks.

BJ Losch

Hi Ken, it's BJ. Yes, I think the last couple of quarters we've talked about being a little bit more focused on positive operating leverage. And so, I think you're correct that our expense base is higher than what I would have said a year ago, I think, and that's true. But if you look at the revenue assumptions that certainly we had and maybe The Street had, I would guess that they were higher as well, ex rates. And so, as we've looked at where we've wanted to invest in the business, we've allowed that investment to continue, which has driven most of our expenses, and we've gotten the revenue that we needed to get, and so that's manifested itself in double-digit loan growth, deposit growth, PPNR is well into the double digits; net interest income, it's very strong even without a lot of rate help.

So, I think that's why we're a little bit more focused on the operating leverage side as opposed to an absolute number on the expense base. If you actually look at where expenses are growing, it is in the personnel line. A lot of the year-over-year growth is from much better fixed income than what we would have thought last year. So that's driving a lot of it. The strategic investments in our expansion markets, in our specialty lending businesses is driving it.

Increased incentives because of the strong balance sheet growth that we've seen is driving a lot of it. FDIC expense from a bigger balance sheet is driving it and some marketing expense as it relates to supporting growth, particularly in expansion markets, is supporting it. So, we think that, as Bryan talked about, we still are very focused on expenses, on expense management. We feel good about how the organization is managing expenses, and we are strategically allowing expense to grow commensurate with outsized revenue opportunity.

Ken Zerbe

Got it, alright

Bryan Jordan

And let me - this is Bryan. If I could, I want to pick up on that. As I think about how we've, one, focused on expenses and how we've executed on expenses, really, for 7, 8, 9 years now, we have worked very, very hard at driving efficiency, while continuing to invest in the franchise. And I've used the term and BJ used the term both this morning on operating leverage. And in some ways, I think if I could back up and do it again, we'd probably be less focused on a range like 6.80, 6.70, 6.60, whatever the numbers were, because we have so many variable components, like our fixed income business, that make it hard to ever reconcile back to that. But that doesn't diminish the key point that BJ just made.

And what has been our trend and pattern over the last several years is we are focused on making investments we need to make to grow the business and driving efficiency and controlling costs in ways that we create positive operating leverage, quarter in, quarter out. And so we're not focused on a number as much as we are focused on making smart investments in the business that drive the future growth opportunities, the future revenue opportunities, and at the same time, driving the efficiencies that allow us to capitalize on process improvement cross-functional, cross-organizational or horizontal processes where we can be more efficient.

So in some ways, we've oversimplified the way we've talked about it. And I would say, on my part, maybe it was a mistake that we got pinned down to a range of numbers. But I feel very, very good about what I see going on in the organization in terms of expense discipline, focused on controlling and managing expenses. And I feel pretty good about our ability to control and to manage expenses in the fourth quarter in 2017 and beyond. Thanks for letting me get that in.

Ken Zerbe

No, that's - I actually agree with you. I think, I just wanted to make sure that we aren't holding you to an outdated standard with the dollars. That totally makes sense. Since I have you, Bryan, can you just address, you mentioned that you're building in or you're expecting one rate hike in December. I really hope so, but if that doesn't happen, does that - what does that actually affect in your business in terms of your outlook, your guidance, your planning? Does that have any impact if rates don't go up in December? I mean right now, it's a negative - yes, go ahead.

Bryan Jordan

Yes. It's a slight negative on the margin. We got some sensitivity data in there, and I think one 25 basis point move parallel is $10 million to roughly $20 million. So sure it has an impact there. I guess you could say we and the rest of the industry have gotten pretty comfortable working in an industry where rates don't do very much. I think it's probably a bad thing for the industry. I don't think it changes much in the things that we do day-in, day-out, but I do think it continues to put pressure on the industry in the sense that there's very little revenue growth opportunities. There's still a tremendous amount of competition for what appears to be sort of a flattening trend line in terms of loan demand, particularly with an environment where there's emphasis, industry-wide, on products like commercial real estate, et cetera.

So I think it's going to make our business more competitive. I think that could have some marginal impact on pricing, but I think day-in, day-out we're pretty comfortable that if we get the 25 basis points, we can deal with that. If we don't get to 25 basis points, we'll also continue to deal with that. But I don't think it will have a significant day-to-day operating impact on us. We're going to stay focused on expenses and trying to drive the profitability and the returns in the business.

Ken Zerbe

Alright, I really appreciate it. Thank you.

Bryan Jordan

Thank you.

Operator

Our next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

Jared Shaw

Hi good morning.

Bryan Jordan

Good morning Jared.

Jared Shaw

Just following up a little bit on the expense side. As we look through - and I understand we're looking at the operating leverage opportunity, but are there any additional investments you think you that need to make, whether it's in your regulatory, like BSA/AML, or just other systems that may need to be enhanced or grown? And then also, what do you expect the full impact of the quarter of the headcount from the GE team to be on the expenses as we look into fourth quarter?

BJ Losch

Hi Jared, it's BJ. So, the investments we continue to make probably won't be all too recognizable from a regulatory perspective. They're part and parcel of what we've been doing over the last couple of years. There's nothing that's particularly outsized in terms of that arena. Where we are making significant investments that are showing up in our incremental expenses are in our digital banking platform, our online banking platform. That's obviously our most recognizable customer-facing system. And so, we are doing that at the same time that we're rationalizing our branch network to help offset some of the cost of that as customers are changing their behavior. So those are the biggest things that I think we see from an investment perspective.

In terms of the franchise finance business, I think we've hired something like 10 or so people to support that business. We are very pleased with the caliber and the experience of that team. Tod Jones, who leads it, came from GE Capital and several other people in that that we hired did as well. So there's a lot of continuity there. They're on the ground, talking to customers, looking for new opportunities, integrating, very, very well into our culture and our organization and are very happy to be here. And we're happy to have them. So, 10 people, a couple million dollars to support a $20 million, $30 million revenue stream and growing. We're very pleased with what that acquisition will bring us over time.

Jared Shaw

Okay great. Thanks and then on the mortgage warehouse side, was any of that growth due to any new initiatives in expanding the customer base or is that really more volume driven than strategically driven?

BJ Losch

It's BJ again. I think a lot of it is volume driven. But over the last several quarters, we have made significant investment in trying to expand existing relationships to get them used and utilized more of their existing lines with us and use us more as primary relationships. So that's one thing that we've done. We've also, probably over the last 12 months to 18 months, have added about 50 new relationships there. We're up to maybe 180 or so mortgage warehouse relationships. So, we believe that we're absolutely gaining share there. And so it's a combination of all three of those factors. And again, we feel good about the performance going forward. Even though it will fluctuate quarter-to-quarter, we think the long-term trend in terms of our ability to grow that business is sloping upward.

Jared Shaw

And then what was the yield on the mortgage warehouse this quarter?

BJ Losch

I think it's in the 440 range.

Jared Shaw

Great. Thank you very much.

BJ Losch

Sure.

Operator

Our next question comes from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala

Good morning guys.

Susan Springfield

Good morning.

Bryan Jordan

Good morning Ebrahim.

Ebrahim Poonawala

I think just on expenses, I think as we move away from this dollar target, is there a way to think about what sort of quantified the positive operating leverage almost equal that we should look for like, we had about 70% in the third quarter? Where can that go? I know you have a long-term target of 60% to 65%. If you can give any framework around that, that would be helpful.

BJ Losch

In terms of what we think about the positive operating leverage?

Ebrahim Poonawala

Yeah. At least over the next 12, 15 months.

BJ Losch

Yes, I think generally speaking, we talked internally in the organization about targeting a 2x operating leverage. And for all of our senior leaders in our business, some of them are going to do well beyond that. Some of them, because we're investing in certain businesses, might be challenged to do that. But overall, 2x positive operating leverage feels good to us. If we do that, we think that we can continually improve the efficiency ratio by year-to-year 100 basis points, keep chopping it and chopping the wood down. This quarter, we are at 70% on the efficiency ratio, I believe. And so we obviously have that on our bonefish. That's still part and parcel of how we get there. Positive operating leverage and focusing on driving those revenues is going to be a big part of that as well.

Ebrahim Poonawala

I'm sorry if I missed it. Was there reason why we didn't see more expense leverage at FTN this quarter given the revenue decline?

Bryan Jordan

More expense leverage this quarter.

Ebrahim Poonawala

Just in terms of when you look at sort of the revenues went down $6 million and fee expenses went down $3 million quarter-over-quarter. Should that have been greater like or that's normal?

BJ Losch

I think that's relatively normal. You're going to have modestly different payouts based on which producers are paying and where their incentive commissions are on the grid and such. But that to me is within the range of normal fee in terms of variable comp decline commensurate with the revenue decline.

Ebrahim Poonawala

Understood. And just a separate question, I guess, for Bryan. We've seen some comments from the regulators trying to ease CCAR and stress testing for the smaller 50 banks. I'm just wondering if that you think may have an impact on how you and banks around your size approach MOE-type acquisitions and sort of opportunities to cut core expenses sort of declining as we look out over the next year or so?

Bryan Jordan

Yes. It does appear, both in CCAR, as well as DFAST, that there's going to probably be more flexibility in the process in terms of timing and examination, et cetera. I don't really expect it'll have a tremendous impact on the time or the energy we put in to completing the DFAST. I think in terms of MOE and the bright line that is still at $50 billion. That line maybe a little less bright if you lessen the impact of DFAST, but it's still a reasonably bright line. And I would say that it's pretty important.

So, I think that MOE opportunities and/or growth through reasonably priced transactions is still important part of creating leverage in the industry and building the capabilities longer term to invest in product tools and solutions for customers, but I don't think there's very much change in terms of the way I would think about the $50 billion bright line to date as based on any of the conversation around CCAR and/or the DFAST process.

So, I do believe that, that threshold will get moved up over time. There was, I think, a consensus even articulated in some ways by the Fed regulators in late 2000 - or in 2015, not necessarily late 2015, but there was a reasonable place that, that could be moved up and focus more effectively on larger institutions. I think that's the right answer. I think that changes the equation a whole lot more than anything we've heard. So, actual moving that bright line probably has more impact on my thinking than tweak here or there with stress testing, et cetera.

Operator

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Bryan Jordan

Hi Jennifer.

Jennifer Demba

Hi. He just covered my question. Thank you.

Bryan Jordan

Alright, thanks.

Operator

Thank you. Our next question comes from Nick Grant of KBW. Please go ahead.

Nick Grant

Hi good morning guys.

Bryan Jordan

Good morning.

Susan Springfield

Good morning.

Nick Grant

So you guys have talked a lot in the past about kind of taking some of that asset sensitivity off the table in the near term and trying to pull in some enhanced earnings sooner. So kind of looks like you guys are maintaining your level of asset sensitivity in the quarter. How are you guys thinking about managing that moving forward? And thinking about that, with your December rate hike that you have in your budget, could you just talk about that a little bit?

BJ Losch

Sure. Yeah it's BJ. So as you know, last year, at the end of the year, we took some actions to reduce asset sensitivity. And if you were to look at the asset sensitivity for our company year-over-year, it would be down. So, we have done some things, mostly in the securities portfolio with some bond swaps, some macro hedges, et cetera, to do that. And they've been successful. There hasn't been great entry points, honestly, to do more of that this year or else we probably would have.

Our business is still very oriented towards natural asset sensitivity, meaning that most of our businesses are generating loans that are LIBOR based or floating rate. And so we recognize that. And one of the reasons that, among many, that the franchise finance business was so attractive to us was that it was a more fixed rate versus variable-rate-type lending business that we thought would also help us with our asset sensitivity. So, I think, as Bryan talked about at the beginning, we don't have high hopes for a lot of rate increases, but we do expect or hope for one in December. And so if lower-for-longer continue to persist, we'll look for opportunities to continue to chop away at our asset sensitivity, while also remaining - also keeping that optionality if rates do rise.

Nick Grant

Okay great, thanks. You guys may have mentioned this. I might have missed it, but can you give an update on your Houston operation? Can you give us like kind of a clue where the loan balances are now and how much that has earned you?

Bryan Jordan

Yes. This is Bryan. I'll get it in the ballpark and then let Susan sort of pin it down. I think we're just under about $300 million in loans, I think. We're just about under $200 million in energy and energy-related credits in Houston. The business that we see there and the opportunity is really, really strong. Gary Olander and the team of bankers that he has assembled there are doing a fantastic job. Their calling efforts are in relationship building with customers of a very strong credit quality and long-term relationship potential. So, we're very, very pleased with the progress that we see in that business, and the opportunity to continue to grow there looks very, very good. We think, as it relates to energy and, to some extent, other parts of the opportunity in the marketplace, we think we're uniquely positioned in that we have minimal exposure. We have the opportunity to lean in or be a little bit more front footed in terms of how we use our balance sheet to build and create long-term relationships. So, we're very optimistic about the trends we see there.

Susan Springfield

To provide some additional specifics, as Bryan indicated, in terms of total Houston average balances for the quarter, about $275 million, about $140 million of that true energy, but in some of the C&I has still services, which is somewhat related, so around $200 million in terms of total related to energy. And then we've got about $70 million in the commercial real estate book in Houston. And as Bryan said, we continue to be optimistic about the opportunities there while still being appropriately cautious and prudent in terms of the underwriting. The leadership team here spent a good bit of time going to Houston, visiting with customers, really, in all these lines of business, so energy, commercial real estate and C&I. And it's been, I think, very good time spent in terms of understanding that market. And many believe that Houston is emerging from - beset from oil as the oil prices have stabilized and increased.

Nick Grant

Okay, great, thank you. And then one last question with a lot this theory concentration guidelines, we've seen a lot of banks kind of pull back in that market. I don't know if that's providing an opportunity for you guys. And are you seeing any better pricing there?

Bryan Jordan

Nick, this is Bryan again. We do see that as an emerging and improving opportunity. In some ways, it does look like that marketplace is, particularly the environment around commercial real estate lending has slowed very significantly. Pricing has shown improvement. Structure has shown improvement. You're seeing better structure, better pricing. And given our relative underexposure to that space, we do think that is an opportunity, much like we had in 2009, 2010, to look to continue to invest in our lending relationships with our strong long-term customers, but also to build some new relationships. So, we do see that as an opportunity or an area where we can be, again, front-footed and lean into a little bit over the foreseeable future.

Susan Springfield

And I think the benefit of the fact that we've been consistent and prudent all along the way in terms of product and geographical diversification in that commercial real estate lending portfolio allows us to continue to be open for business for commercial real estate loans that fit the underwriting profile and risk appetite that we have.

Nick Grant

Okay, thank you very much.

Bryan Jordan

Thank you.

Operator

Our next question comes from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Kevin Fitzsimmons

Hi good morning everyone.

Bryan Jordan

Hi Kevin.

Kevin Fitzsimmons

You mentioned earlier on expenses that you're looking to offset some of the investments in technology or digital platform with branch pruning. And I was just wondering if you can size that up for us at all. Is that more like of a one-off type approach? Or are you really - do you have a certain number of branches already identified? Or you're going through that process now of taking the branch network down a little more meaningfully? Thanks.

BJ Losch

Hi Kevin, it's BJ. Yes, I think we've talked about this before a couple quarters ago. We'll probably reduce our branch network again because of changing customer patterns about 15 to 17 branches this year. And we'll probably save in the neighborhood annualized $4 million to $6 million of expense by doing so. And we can do that because we've got such a strong branch network here in Tennessee already. We have multiple places in terms of physical branches that customers can migrate to, and our retail bankers in the markets do an excellent job of preparing customers that are going to have to move and preparing them for that. We support it with call centers.

We support it with direct mail, et cetera, so we've been very pleased with how that migration has taken place. So, we save that money. And as I talked about earlier, we're investing a significant amount in online banking and digital banking, which is probably our most important customer-facing systems, particularly in retail, which probably cost close to the same amount. And so that's one way that we're trying to be smart about, how we can take money and reinvest it for the benefit of our customers and try to be disciplined on the expense side and have a better product for our customers in terms of convenience.

Kevin Fitzsimmons

Great, thanks BJ. One quick question about the new markets. I know we just talked about Houston a minute ago. Can you talk a little bit about Raleigh? I know that was a small step, a small deal you guys did there. But just efforts that are going on there in terms of hiring and what you think the next step is to expand in that market area.

Bryan Jordan

Yes. This is Bryan. We're very pleased with the progress that we see. Jim Beck and the TrustAtlantic team have done a very nice job in the Raleigh market, building on the progress we had there. Ken Reece, who's running that private banking business, is doing a fantastic job. You may have seen that in probably our press release in the last 30 to 45 days, we have put our Mid-Atlantic headquarters is now in Raleigh. Billy Frank has moved to Raleigh to assume leadership of that business based on the retirement plans of John Fox, who's been running Mid-Atlantic business. We see very good call-in efforts. We see great opportunities in the whole Mid-Atlantic region, from Richmond to Jacksonville. The customer call-in efforts, we see great opportunity in. So, we're pleased with the progress. We're pleased with the progress that we're making in Raleigh. We think that there will be additional talent hires that we'll see over the next several quarters as Billy and Jim and the team in Raleigh continue to build out that marketplace, but we'll see it in places like Jacksonville and Charleston and Charlotte. So, we're optimistic about the opportunities we see in Mid-Atlantic.

Kevin Fitzsimmons

Great, thanks Bryan.

Bryan Jordan

Alright, thank you.

Operator

Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.

Christopher Marinac

Thanks, good morning.

Bryan Jordan

Hi Chris.

Susan Springfield

Hi Chris.

Christopher Marinac

BJ and Bryan, just want to get through on the pickup of the loan yield in commercial. How much of that is tied to specialty lines and the ongoing progress there versus the pricing benefit that Bryan just mentioned on CRE?

BJ Losch

I'd say it's probably more the former than it is the latter. I think we're starting to see what Bryan talked about in terms of CRE trends emerging right now. And we've had several examples of that occurring, but I don't think that that's leaked fully into what we're seeing in terms of origination. A lot of the yield increase that we saw this quarter was loans to mortgage companies, which is our - one of our highest-yield portfolios. So that certainly helps. And the specialty businesses, in general, have a little bit firmer pricing, I'd say.

The core C&I business, as we talked about before, in our markets is very, very, very competitive. And so our bankers have been very disciplined about keeping as much price and getting paid to risk as we could, but that's a very competitive market, and specialties have been where we've been able to get a little bit - get paid a little bit more for the risk.

Christopher Marinac

Great. That's helpful, thanks. And just a quick follow-up for Susan. Do you have a comparable number like you gave us for Houston on either Raleigh or even just the Mid-Atlantic region as you think about it for the size of one portfolio?

Susan Springfield

Sure. For Mid-Atlantic, for the average quarter, was just under $1.2 billion. And that does not include commercial real estate. That's just C&I and private client business. Raleigh is at a little under $385 million.

Christopher Marinac

Great. So CRE has its own bucket back to the whole corporate, correct?

Bryan Jordan

Yes, we run CRE basically as a line of business. CRE is consolidated and reported as one business unit. So those relationships and the relationship managers are in the marketplace. So, we manage it locally from a relationship manager perspective, but we report and manage the portfolio at a more centralized level. So, if you look at sort of our breakdown pie chart of the loan portfolio, you'll see that in our specialty businesses. That's a footprint business. So, when we total up in what's managed in the market, we don't include CRE.

Susan Springfield

But CRE for Mid-Atlantic, I've got that number, too, it is about $420 million. So that's largely a business that we're doing in that Mid-Atlantic footprint. So total, if you add that altogether, you're at about $1.6 billion.

Christopher Marinac

Great, that’s super. Thanks Susan, I appreciate it.

Bryan Jordan

Thanks Chris.

Operator

Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Jon Arfstrom

Hi. Thanks good morning everyone.

Bryan Jordan

Good morning Jon.

Jon Arfstrom

Just if - but - I know it's late, but just a few clarifications here. BJ, on loan growth, can you help us dissect your expectations a bit there? I think you said earlier you're positive on the forward loan growth prospects, but expect some warehouse volatility. I was just looking back during the call looks like you were down a couple hundred million in the year-ago fourth quarter. I know your averages will be up from the GE loans. But help us understand what you're saying on core growth expectations and then some of the warehouse expectations for Q4.

BJ Losch

For Q4, yes. So, I think loans to mortgage companies will likely be seasonally down in the fourth quarter. But as I talked about in the early comments, we still see pipelines that are at some of the highest levels that we've seen in quite some time. And that's across multiple areas of the organization, not just concentrated in any 1 or 2. So that gives us pretty good confidence that the loan growth momentum will continue. Will it be in the high double digits that we're seeing today? Probably not. We would expect over the next several quarters something in the mid-to-high single digits, which I think would compare very well with the rest of the industry. And so we think that we can continue to see that kind of momentum and build upon it.

Jon Arfstrom

Okay. And then on the fixed income average daily revenues, BJ may have touched on it a bit, but you talked about being down in September versus July and August. What was the magnitude of that?

BJ Losch

I think July, August was probably in the $1 million-ish range for both quarters, and so that's why we felt that it was tracking largely with what we saw in the second quarter. And then September was much lower, probably in the $700,000 range or so.

Bryan Jordan

We're tracking about $1 million a day through August, and then we hit in that $700,000 to $800,000 range. And that's really where October has started off. It's been less volatile and less activity in the early part of the fourth quarter as well.

Jon Arfstrom

Okay, okay. And then just last question for Bryan or BJ on the - your capital levels, you obviously were able to bring them down a little bit this quarter with the new loans. Curious how - what your attitude and appetite is on acquisitions and also maybe attitude and appetite on buybacks. I mean, you're still - congratulations for bringing it down, but unfortunately, you're still sitting on a pile of capital. Just maybe give us your latest thinking on that.

Bryan Jordan

Yes. This is Bryan. I like the way you describe that, a pile of capital. In that pile of capital actually grows - is the remaining, call it $1.5 billion, $1.7 billion in nonstrategic continues to run down. Our view on how we invest that capital is really unchanged. We go back to our focus on returns, and we focus on how we put that capital to work in ways that create shareholder value. And so the organic growth and/or the very attractively priced acquisitions, like the restaurant finance - franchise finance business, have been the greatest opportunities. So we want to invest in customer relationships, and we want to acquire portfolios where it makes sense. And really, we consider it an investment or an acquisition when we hire bankers or teams of bankers over time that allow us to grow new and different lines of business. For example, our investment in Nashville and the music industry and the bankers that have come on board to help us build that business.

M&A, we think, is an important part of how we can use capital. We intend to be disciplined about M&A. I would say nothing really has changed very much about the nature of the M&A environment. We do think that pricing is the key to it, that lower-premium transactions, whether you'd see them as MOEs or - but lower-premium transactions are probably the most effective way to create synergy and to create value for shareholders, both sets of shareholders. And so we think that's a priority. And then as we have in the past, we continue to look for opportunities to return capital to shareholders through our dividend policies as well as our repurchase programs. So, we'll continue to use all of those levers. We'll be thoughtful and disciplined as best we can in terms of picking the timing and the opportunity, but we see a fair amount of capital or excess capital generation, that we have the ability to continue to put capital back in our shareholders' hands and invest it in the business and create continued growth opportunities.

Jon Arfstrom

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for any closing remarks.

Bryan Jordan

Thank you, operator. Thank you all again for joining us this morning. We are very, very pleased with the progress that we see in the organization. We continue to see a difficult, but an opportunity-filled environment. And we continue to look for ways to grow our business, continue to improve our returns and capitalize on the momentum that our team has continued to create.

Thank you, again, to all of the First Horizon, First Tennessee team for all you do to help us build this business. If you have any questions or any additional follow up request, please reach out to any of us or to reach out to Aarti at any time during the day or over the weekend or early part of next week. Thank you all, and have a great weekend.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!