FHN
#<UNK>, it is <UNK>.
I think the last couple quarters, we have talked about being a little bit more focused on positive operating leverage.
And so, I think you are 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 have looked at where we 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, PP&R is well into the double digits, net interest income is very strong, even without a lot of rate help.
So I think that's why we are 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 have 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 <UNK> 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.
<UNK>, this is <UNK>, if I could, I want to pick up on that.
As I think about how we have, one, focused on expenses, and how we've executed on expenses, really for seven, eight, nine years now.
We have worked very, very hard at driving efficiency, while continuing to invest in the franchise.
And I have used the term, and <UNK> has used the term, both this morning on operating leverage.
In some ways, I think if I could backup and do it again, we would probably be less focused on a range 680, 670, 660, 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 <UNK> just made, and what has been our trends and pattern over the last several years is, we are focused on making the investments we need to make to grow the business and drive inefficiency and controlling costs in ways that we create positive operating leverage, quarter in, quarter out.
And so, we are 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, a cross functional, cross organizational, or horizontal processes, where we can be more efficient.
So in some ways, we have oversimplified the way we have 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, focus on controlling and managing expenses, and I feel pretty good about our ability to control, and to manage expenses in the fourth quarter, and 2017 and beyond.
So thanks for letting me get that in.
It is a slight negative on the margin.
We've got some sensitivity data in there, and I think one 25 basis point move parallel is $10 million, and two is roughly $20 million.
For sure, it has 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 is very little revenue growth opportunities, there's still a tremendous amount of competition for what appears to be a flattening trend line in terms of loan demand, particularly with an environment where there's less emphasis industry-wide on products like commercial real estate, et cetera.
So I think is going to make our business more competitive.
I think that can have some marginal impact on pricing, but I think day-in, day-out we're pretty comfortable we get the 25 basis points, we can deal with that, if we don't get the 25 basis points, we will 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.
<UNK>, it's <UNK>.
So the investments that we continue to make probably won't be all too recognizable from a regulatory perspective.
They are 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 we are rationalizing our branch network, to help offset some of the costs 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 have hired something like 10 or so people to support that business.
We are very pleased with the caliber and the experience of that team, Todd <UNK>es, 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 are 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 are happy to have them.
So 10 people, a couple million dollars to support a $20 million, $30 million revenue stream and growing, we are very pleased with what that acquisition will bring us over time.
It is <UNK> again.
I think a lot of it is volume driven, but over the last several quarters, we have made a significant investment in trying to expand existing relationships, to get them used and utilize more of their existing lines with us.
And use us more as primary relationships.
So that's one thing that we have done.
We also, probably over the last 12 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 are 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 trends, in terms of our ability to grow that business, is sloping upward.
I think it's in the 440 range.
In terms of what we think about in positive operating leverage.
I think, generally speaking, we talk internally in the organization about targeting a 2 times 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 are investing in certain businesses, might be challenged to do that, but overall, 2 times 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, 75, 100 basis points, keep chopping it, and chopping the wood down.
This quarter we were at 70% on the efficiency ratio, I believe, and so, we obviously have that on our bonefish.
That's still part and parcel with how we get there, positive operating leverage, and focusing on driving those revenues is going to be a big part of that as well.
More expense leverage this quarter.
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 normalcy in terms of variable comp decline commensurate with the revenue decline.
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 will have a tremendous impact on the time or the energy we put into completing the DFAST.
I think in terms of MOE and the bright line that is still at $50 billion, that line may be 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 an 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, that's changed, in terms of the way I would think about the $50 billion bright line today, as based on any of the conversation around CCAR and/or the DFAST process.
So I do believe that threshold will get moved up over time.
There was, I think, a consensus even articulated in some ways by the Fed, the regulators in late ---+ or in 2015, not necessarily late 2015, but there was a reasonable place 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 then a tweak here or there with stress testing, et cetera.
Thanks.
Sure.
It's <UNK>.
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 have been successful.
There hasn't been great entry points honestly, to do more of that this year.
Or else we would 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 <UNK> 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 continues to persist, we will look for opportunities to continue to chop away at our asset sensitivity, while also remaining ---+ also keeping that optionality if rates do rise.
This is <UNK>.
I will get in the ballpark, and then we'll let <UNK> pin it down.
I think we're just under about $300 million in loans, I think we're just under about $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 very strong credit quality and long-term relationship potential.
So we are 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 are uniquely positioned, in that we have minimal exposure.
We have the opportunity to lean in, or to be a little more front-loaded 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.
<UNK>, this is <UNK> 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 showed improvement.
You are 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 front-footed and lean into it a little bit over the foreseeable future.
<UNK>, it is <UNK>.
I think we have talked about this before, a couple quarters ago.
We will probably reduce our branch network, again, because of changing customer patterns, about 15 to 17 branches this year.
And we will 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 where 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 have been very pleased with how that migration has taken place.
So we save that money, and as I talked about earlier, we are investing a significant amount in online banking and digital banking, which is our probably our most important customer-facing system, particularly in retail, which probably costs close to the same amount.
And so that's one way that we are 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.
This is <UNK>.
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.
<UNK> Reece, who is running that private banking business, is doing a fantastic job.
You may have seen that in the ---+ probably a 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 has been running mid-Atlantic business.
We see very good calling efforts.
We see great opportunities in the whole mid-Atlantic region, from Richmond to Jacksonville.
Those, the customer calling efforts we see great opportunity in.
So we're pleased with the progress.
We are pleased with the progress that we are making in Raleigh.
We think that there will be additional talent hires that we will see over the next several quarters, as Billy and Jim and the team in Raleigh continue to build out that marketplace.
We will see it in places like Jacksonville and Charleston and Charlotte.
So we're optimistic about the opportunities we see in mid-Atlantic.
I would say it's probably more the former, than it is the latter.
I think we are starting to see what <UNK> talked about, in terms of CRE trends emerging right now.
We've had several examples of that occurring.
But I don't think that that's linked fully into what we are 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 yielding portfolios.
So that certainly helps.
And the specialty businesses in general have a little bit firmer pricing, I would say.
The core C&I business, as we have 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 for risk as we could, but that's a very competitive market, and that specialties have been where we have been able to get a little bit ---+ get paid a little bit more for the risk.
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 our breakdown pie chart of the loan portfolio, you'll see that in our specialty businesses.
That is a footprint business.
So when we total up what's managed in the market, we don't include CRE.
For Q4 yes, 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 have seen in quite some time.
And that's across multiple areas of the organization, not just concentrated in any one or two.
So that gives us pretty good confidence that the loan growth momentum will continue.
Will it be in the high double digits that we are 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 momentum and build upon it.
I think July and 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.
We were 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.
This is <UNK>.
I like the way you describe that pile of capital.
And that pile of capital actually grows as the remaining, call it $1.5 billion, $1.7 billion in non-strategic 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, has been the greatest opportunity.
So we want to invest in customer relationships, and we want to acquire portfolios, where it makes sense.
And really, we consider 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 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 will continue to use all of those levers.
We will 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.
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, continuing 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 requests, please reach out to any of us, or reach out to <UNK>, any time during the day or over the weekend, or early part of next week.
Thank you all, and have a great weekend.
