First Horizon Corporation (FHN) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the First Horizon National Corp Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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, Rachel. 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 Web site 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 in our most recent annual and quarterly reports. Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in our earnings materials and in the slide presentation for this call, and is reconciled to GAAP information in those materials. Also, please remember that this webcast on our Web site is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan; 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.

Thanks, Aarti. Good morning to everyone. Thank you for joining us. I am very pleased with the results in the third quarter. We continue to see good momentum across our business. We reported net income of $0.28 per share. When you adjust for the unusual items, which BJ will describe in more detail lately, gives you a core EPS of roughly $0.32 per share. We saw very good loan and deposit trends across the business. Feel very, very good about the credit quality, what we were able to put on the balance sheet, and really the mix of new relationships -- new to bank relationships that we were able to build over the last several quarters culminated in loan closings in the third quarter. Our credit quality continued to stay strong, and our net interest margin improved. Fee income was relatively stable when you exclude for the extraordinary items, which BJ will discuss earlier, our fixed income business was relatively stable and modestly more profitable during the quarter. The expense control was good. Feel very good about the focus that the organization has on controlling expenses, which is especially important as we go into the final stages of merger integration planning, and continuing to build that momentum in execution as we integrate the merger in the early part of 2018, with Capital Bank. The economy from our perspective continues to look steady. We see an environment very much like over the last several years, where you have sort of low single digits' economic growth, customers continue to be somewhat optimistic. There's a bit more optimism about fiscal or tax reform, and the ability to see that improved growth rates in the economy. As we look out over the next several quarters, the loan pipelines continue to look pretty steady. We do see a little bit of a seasonal impact, so some of our businesses are likely to impact mortgage warehouse lending and things like that in the fourth and first quarter due to home closing, so on and so forth, but we're reasonably optimistic about the fourth quarter and the turn into 2018. And as I mentioned earlier, we're excited about the pending merger that we have announced with Capital Bank, and what opportunities that presents for us. So with that, let me turn it over to BJ and ask him to walk you through the details of the quarter, and I'll come back with a couple of closing comments, and then we'll be happy to take your questions. BJ?

Great. Thanks, Bryan. Good morning everybody. I'll start on slide five. Third quarter highlights included great loan growth, strong net interest income, and good expense discipline. And we also continue to see favorable trends in asset quality. By the numbers, 3Q '17 net income available to common was $67 million, with diluted EPS of $0.28. As Bryan talked about, we had some notable items that impacted EPS by about $0.04. So, on an adjusted basis, EPS was closer to $0.32. As you can see at the bottom of this slide, notable items included first, a previously disclosed loss on an equity securities repurchase of $14 million, the previously disclosed tax favorabilities that we expected in the quarter of about $14 million, our normalized effective tax rate should be around 32%. Acquisition expenses of $8 million and expenses incurred related to legal matters of $8 million. Turning to slide six, we've seen steady earnings results from our business segments over the past year, with the Regional bank continuing to drive the bulk of our earnings power and momentum. I'll talk about that business in a little more depth in a few slides. But on Fixed Income, their contribution remains modest yet positive. While we've seen declines in ADR due to lower flow from the agency and MBS desks, it's been somewhat offset by growth in our government-guaranteed lending products from the Coastal acquisition. This desk had a very good quarter. The Non-Strategic segment, while continuing to wind down has give us a nice tailwind in the loan loss provision line as we've seen net recoveries and reserve releases for several quarters. On slide seven, you can see the profitability of the balance sheet improvement as net interest income, net interest margin, and net interest spread were all up meaningfully on both a linked quarter and year-over-year basis. The higher NII reflected an increase in commercial loan balances primarily, the benefit of higher term -- short-term rates on our asset-sensitive balance sheet, and improving net interest spread. NIM was up 12 basis points linked quarter due to lower cash levels and higher rates. And the net interest spread improved nine basis points from an increase in loan yields and continued active management of deposit costs. Regional Banking deposits were up 8% year-over-year, with non-interest-bearing DVA up 9% year-over-year, and 2% linked quarter. In the quarter, our overall consumer and commercial deposit beta was actually negative 3% from second quarter to third quarter. To optimize our funding mix we intentionally reduced balances on the higher cost market indexed deposits in the quarter, but they remain a good variable funding alternative for us. Turning to slide nine, as we've mentioned several times, the Regional Bank posted strong results again driven by continued balance sheet growth translating to NII growth, coupled with continued expense discipline. Linked quarter PPNR increased 8%, and was up 12% on an adjusted basis, demonstrating positive operating leverage. NII was up 4% from higher rates in loan growth for specialty areas. Fee income was relatively stable. And we maintained our ongoing expense discipline evident with an adjusted efficiency ratio of 53% in Bank, an improvement of almost 400 basis points linked quarter and over 500 basis points year-over-year. Slide nine highlights the Bank's broad-based loan growth across markets and loans business. We compared favorably to industry loan growth with 9% year-over-year, driven by commercial lending particularly in the specialty banking areas. Average commercial loans were up 11% year-over-year and 5% linked quarter with areas of particular growth in the quarter in loans to mortgage companies, asset-based lending, private client, and our core commercial lending businesses. As expected, our loans to mortgage companies increased linked quarter reflecting the strong home purchase season in the third quarter and the benefits of additional new customer relationships we have been building over the last 18 months. Year-over-year declines were primarily driven by lower REIT buy volume in today's higher rate environment. We do expect the normal seasonal decline imbalances in the fourth quarter and the first as Bryan talked about, but the business remains very healthy. As we saw last quarter as well, all our regional markets experienced growth on a linked quarter basis. Our focus in our expansion markets in particular is paying off [ph] with both Middle Tennessee and our mid Atlantic markets seeing strong growth. Moving on to asset quality on slide 10, credit trends remained positive. The allowance to loans ratio remained steady in the regional bank while decreasing in the non-strategic portfolio as expected. And our net charge offs continue to remain at historically low levels. On slide 11, you can see some integration planning highlights related to the Capital Bank acquisition which remains on track. We have received shareholder approval from both sides. We developed target operating models for all lines of business. And we have identified and announced the top three tiers of leadership from both organizations that will lead our combined company. We are also continuing our work to identify cost saves and revenue opportunities as well as prepared to execute on a seamless integration and conversion next year. As Bryan mentioned, we are pleased with the progress we are making through this integration and continue to anticipate the deal closing this quarter. Wrapping up on slides 12 and 13, one of our major objectives for the last few quarters was to maintain business momentum as we prepared for our merger with Capital Bank. And we are very pleased with our organization's response to that challenge. Our returns, profitability, and growth are as strong as we have seen in them in a decade. The balance sheet revenue growth coupled with expense efficiency gains and strong asset quality continue to improve our ROA and our return on tangible common equity. On an adjusted basis, our ROTCE was 13.5% and our ROA was almost 1.1%, within striking distance of our long term Bonefish targets. This great organic momentum combined with the addition of Capital Bank should further accelerate our performance and the achievement of our Bonefish targets while still affording us continued growth opportunities as well. With that, I will take it back over to Bryan.

Thanks, BJ. Again we are very, very optimistic about the outlook for our business and the integration with Capital Bank. I'll reiterate or echo BJ's comments. It is no small feat to plan the integration of the merger with Capital Bank at the same time keep up the momentum that is evidenced in our balance sheet, in our customer acquisition. I am very, very proud of our colleagues and what they have done over the course of the last several months continue to build our business both through the traditional customer organic focused activities as well as to prepare for and plan the integration with Capital Bank. So, thank for all that you are doing. Rachael with that, we will turn it over and take any questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Steven Alexopoulos from J.P. Morgan. Please go ahead.

Hey, good morning everybody.

Good morning.

Hi, Steve.

I'll just start on the margin; you guys obviously had really strong margin expansion in the quarter, and looking at the slide seven, some of those will continue into the fourth quarter. Maybe for BJ, how are you thinking about the margin in fourth quarter, both with and without the Capital deal?

Hi, Steve. Good morning. So, as we usually see in the fourth, we would expect a little bit of downward pressure on the margin primarily from loans to mortgage companies, seasonal declines. So we would expect that as we usually see from third quarter to fourth quarter, you'd see declines in that business for the first decline, and then it would start to build again second and third quarter. So, that will primarily be the pressure on the margin itself in the fourth quarter. From the Capital Bank side though it's going to be -- we believe and as we've discussed before, net positive, because of where their margin -- their contractual margin is. They have a little bit more of fixed rate loans, and their margin is modestly higher than ours. So the combination of both we think, as well as the repositioning of our funding will actually help there as well. So I expect the margin to be around this level, plus or minus a couple of basis points going into the fourth quarter.

Okay. And that's with the Capital deal, BJ?

Yes. You're right.

Okay. And then just talking about some of the deposit remixing, can you give color on the linked quarter decline in the consumer and commercial interest deposits.

Sure. So, on the consumer side we had talked about, in the first quarter that we had run a promo. That promo we talked about starting to tail off in the second, but really in the third, and largely moderated in the fourth. So that was the largest driver on the consumer side. The commercial side there's not much that's different. I would point out though that our non-interest-bearing DVA is up very strongly, both on a linked quarter basis and year-over-year. Linked quarter is up I think 2%, year-over-year is up 9%. So there's not a lot of negative dynamics on that as well. So we've seen continued healthy deposit growth, and we're expecting that to continue.

Thank you. If I could just ask one more on the capital deal, do you guys have a sense as to the expected close in the fourth quarter? Maybe just talk about progress thus far, and maybe, Bryan, how you're feeling about revenue synergies here that we're getting close to closing the deal. Thanks.

Yes, I'll start in reverse order, because the first two are a bit more of a mystery. I feel better about the revenue synergies, and actually the cost synergies as well as we've done the integration planning that BJ described, and I've touched on. And the teams have done an awful lot of work looking at business models and trying to understand opportunities for using the best product set of both organization, whether it be mortgage from the Capital Bank platform or treasury management, wealth management from the First Tennessee platform. We think there's a tremendous amount of opportunity there. And while we can't do specific customer planning, it is our sense as we've gone through these models and looked at the synergies in the way we both do business and the kinds of approach we have to the marketplace, we think there will be other revenue synergy opportunities for us in lending relationships and things of that nature. So I get a better feeling every day that we've progressed down this path, that there are real revenue synergies here. We obviously didn't claim any credit for them in our model. And I think you'll start to see those flow not long after we get the transaction completed. As we've said all along, we expect that we will close some time in the fourth quarter. As BJ mentioned, we do have shareholder approval still waiting for approval from our primary regulators, the OCC and the Federal Reserve. We still expect to get that at some point in the fourth quarter. I wouldn't endeavor to try to pin a date on the calendar in particular, but I'm still fairly confident that we'll get it this quarter, and that we'll hit the ground running in 2018.

Terrific. Thanks for all the color.

Sure thing. Thank you.

The next question comes from Emlen Harmon of JMP Securities. Please go ahead.

Hi, morning guys.

Good morning, Emlen.

A little more, talking about capital being integrated somewhat shortly, I guess a good point to talk about just -- Bryan, your appetite for more M&A? And where do you feel you need to be from a capital perspective before you would consider doing something else?

I assume your last question from a capital perspective meant the equity section as opposed to where we are in the integration or is it an integration question.

The lower case C, the capital in terms of the balance sheet, yes.

I'm -- first, I would describe appetite as very low for doing anything incremental. As we've tried to emphasize over time, execution and doing things right one step at a time is very important to us, and so all of our energy is focused on that in the short run. We have a lot of planning that has been put in place. And while it's too early to say we'll have it done by X date, I expect by the middle of next year we will have made very substantial progress in the integration. And only when we think we've made the progress that's required to be successful in integrating, retaining customers, retaining employees, building a business model that works on what we've got on the table, then we'll start to think about other things. So, I don't expect that we're going to spend any time thinking about other things until sometime in the back half of 2018 at the very earliest, and maybe not that early. I think we will continue to see as we did this question, very strong returns, and the business will generate a tremendous amount of capital. I don't think we'll have any different focus on how we deploy capital. We'll look at the three major levers, and we'd apply it in an organic growth fashion, do we have the ability to do something strategic and build a business like we have with Capital Bank, or can we repatriate capital with shareholders. So I'm very comfortable with the way we're using the leverage in the balance sheet with the capital transaction. I think by the time we get to the place where we're willing to focus from a business model and an integration focus, I don't think the balance sheet will be an obstruction to us thinking strategically about how we deploy capital. I don't know, BJ, if you want to add anything to that.

Yes, I would just add on the small C capital. Our Bonefish targets have always been 8 to 9. We've reiterated that with the Capital Bank deal. Will the pro forma on CET1, will probably be there. As the earnings power builds we'll probably be increasing that over time. And so we feel very comfortable with those levels from an operating perspective. And candidly, we never thought that we needed to warehouse capital in anticipation of M&A activity. As a matter of fact, the cash portion of the Capital Bank deal would tell you that that cost us a lot of questions from an investor perspective when you use cash in deal. So we're going to run our capital levels for safety and soundness first, and then optimization of our balance sheet and returns second. And then as Bryan said, down the road an opportunity to enter into some M&A, we'll look at it that way and come to shareholders for their votes.

That's great. Thank you for all the color there. And then just a quick one on the servicing portfolio purchase you guys announced earlier this week. Just what did you find appealing in that business, and just given you didn't give us much on the financial side, I'm guessing it's probably a pretty small impact, but just any kind of color no the potential financial impact from that?

Yes, this is BJ. I think it was a business that some in our commercial real estate business knew very well. They have a very solid reputation on the commercial real estate servicing side particularly with light companies. We had run into them before and thought that they would be a nice value added service and product capability for our commercial real estate business. So overall, in the grand scheme of First Horizon, you probably won't see much of an impact on it. But in our commercial real estate business it broadens our product and service capabilities to the clients that we want to deepen relationships with. And allow us to do more business with a broader array of clients over time. So we're pleased that we have the team in place, and we look forward to good things from it.

Emlen, this is Bryan. I'll pick up on that. This is something we've worked on for a little while, it goes back into 2016, I suppose. We have a very strong discipline about mix in the balance sheet. And particularly portfolio limits. And as you've heard us talk about in the past, we have a tremendous ability to originate very good commercial real estate assets. And this gives us a capability to originate strong customer-oriented activity, and place it in the long-term permanent markets. And it gives us greater flexibility to meet the needs of our customer, to do it in a way that is transparent or accommodative to the way that they do business. And at the same time, allows us to say yes more often. So I'm excited about the capability it gives us to continue to manage the risk in our portfolio, and say yes to customers more often.

The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.

Great. Thanks. Good morning.

Good morning, Ken.

Good morning. First question, just in terms of the expenses, can you guys give us some sense of where you think core expenses might be as we head into the fourth quarter, because I know it jumps around quite a bit with some of the one-timers. But also, when you think about capital, how much is our expense base can actually come out sort of on day one, right, where it doesn't show up in your results versus like being taken out over the next few quarters.

I'm going to say how good, BJ, is avoiding a trap on core expenses in the fourth quarter.

Yes, right. Yes, because it's going to be a lot of moving parts, as you would imagine, in the fourth quarter. But our expenses from a core perspective have been trending very, very well. I think if you take out all the noise this quarter I think we were probably in the $220 million to $225 million from an expense run rate. I think fourth quarter would largely look like that, maybe a couple million dollars higher, but not a lot. I think our people have done an excellent job of managing expenses. So we expect that to continue. That's been a mantra that we've been preaching for quite some time. In terms of the day one impacts of Capital Bank, I'm not going to tell you there's going to be a ton of those. What we'll see though is that expense efficiencies will build towards mid-year, which is our current assumption on when we'll do our large core systems conversion, the one that'll be most visible, it's the branch conversion -- the branch systems conversion, et cetera. That's when you'll really see the bulk of the expenses able to be recognized and realized. So we're still looking at capturing about half or so of the efficiencies that we think we'll ultimately get out of the Capital Bank deal in 2018. And obviously that will be backend loaded post that large conversion with a full-year run rate in 2019.

Got it, okay. That's helpful. And then just going back to the deposit growth or sort of the runoff of interest-bearing deposits this quarter on an average basis, I get that you reduced some of your excess liquidity, right, and obviously you don't need some of those higher cost deposits or liabilities that offset that cash. But on a core basis, like, how much -- I think you did say you expect growth in core deposits, but how much of that growth is coming from -- because you are running specials versus -- or maybe you can even comment just on the overall environment for deposit competition, like, is it really picking up in a big way, and does that pose a risk to your deposit growth? Thanks.

Sure, Ken. So, on your first question around how much of it is related to deposit promos, the answer would be none. We had that first quarter promo that we talked about, but that has been burning off, and we haven't had any meaningful promos from there. So, this growth is organic. The second is if you look at non-interest bearing deposit growth, which is where we've seen particular strength of consumer and commercial, that's just good old fashion relationship banking with clients. And so, we're pleased that we're seeing the non-interest bearing grow as much as we can. That's a great value proposition for customers and for us. You'll see the discipline that we've shown on managing our deposit status. Part of that is because we have number one market share and that we can be smart and fair about what we pay, but then also use that market shares to make sure that we are being as prudent with our balance sheet as possible. So, I think our growth can continue. We've seen good health growth for several quarters now on the deposit side from an organic perspective, we will use promos from time to time when we see opportunities, and we'll use them selectively. But in terms of competition, on the consumer side, we've really have not seen broad-based deposit pricing competition as of yet; we certainly are prepared for it and would likely expect it, if rates do move up another turn or two, but we haven't really seen it from a broad-based perspective yet. On the commercial side, we have seen deposit competition increasing with that to look closely at earnings credit rates, we had to look closely at what our posted board rates are for commercial clients; I think others in the industry have seen that as well, and we expect that will continue. If you go back to the beginning of this rate increase cycle, so for us if you go back to third quarter of '15, which would be before the first rate hike to today, I think our total all-in deposit data is about 24%. And as we talked about through this cycle, we would expect that to be around 40%. So we're well ahead of where we think we'll ultimately end up with another couple rate moves, which implies that we think that competition could still ramp up, but we are prepared for and we feel good about where we're positioned.

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

Thank you. Good morning.

Hi, Jennifer.

Hi, Jennifer.

Hi. BJ, questions on expenses; just wondering over the next several quarters where you kind of see the puts and takes in terms of where you will be focusing your investments and where you'd be working for kind of net cost savings? And is branch pruning still going on? I've noticed they've been basically flat versus last year.

Sure. So, obviously, our Capital Bank acquisition and creating efficiencies from that combination is going to drive most of our cost save opportunity. Branch consolidation is a big piece of that. We've already announced about 26, 27 branches that would be consolidated through the combination, and -- because of customer behavior et cetera, we continue to expect that we'll see further branch consolidation opportunities over the next couple of years. So, that will certainly be helpful. If we step back and look overall at where we see our cost save opportunity from this Capital Bank combination, it's about 65% related to personnel efficiencies and about 35%, 40% related to vendor technology-related saves. So, as we talked about, we feel very good about the announced targets, 30% of the Capital Bank expecting space ultimately coming out, and we believe very strongly that we'll exceed those targets.

Do you see pruning anymore branches within the legacy footprint?

We do over time. Customer behavior and customer trends are warranting that. That's why we are also investing fairly meaningfully in online and mobile banking capabilities. We've got a strong call center. So, we are prepared for multi-channel use and trends changing with our customers. So, that also means less physical branches needed, and we'll be smart about doing that over time as well.

And also, on artificial intelligence, in terms of using that to reduce personnel headcount, what's your perspective on that right now, and how quickly will you guys be using that to reduce cost?

Jennifer, this is Bryan. We have a great deal of focus on how we use technology in the business. And fundamentally, we see technology changing the business very significantly over the next 5, 10, 15, 25 years. And I think in many ways, the advances in technology are going to be led basically on two fronts; the significant amount of money that, for example, JP Morgan or Bank of America, spending only on leading-edge technology, and the second being the Fintech Community. We see investments in artificial intelligence and labor reducing technologies as potential benefits. We are not ready to invest in those today. We think they need to move further along the spectrum. But we have a team of folks who focuses on that; they spend a lot of time not only thinking about it, but talking to our leadership team about how technology is developing and how it is being used in other businesses. And with that, we'll implement those technologies at the appropriate time. Fundamentally, we are very strong believers that our competitive advantage is created by our people, and those bankers' ability to create unique in differentiated relationships with their customers. And so, we are a little bit reluctant to remove people in the interaction of people and customers, our people and customers from the equation until we see technology that is truly advanced. So, that's a long way of saying; we are looking at it, we are studying it but we're not ready to make a leap in the near term in terms of how we implement artificial intelligence to replace the strong interaction we have between our bankers and their customers.

The next question comes from Casey Haire of Jefferies. Please go ahead.

Thanks. Good morning.

Good morning.

Just wanted to touch on the expenses, again, specifically CCAR preparation; if I understand correctly you guys do not have that baked into your budget, I guess, for next year. And the CCAR line could get moved higher, but if it doesn't, at what point would you start to prepare for that event and also what sort of glide pass, you know, how long you think you have before you cross $50 billion organically?

All right, this is Bryan. I've said -- I've been a little surprised that question comes up a lot following the Capital Bank merger announcement, and we think we have got a couple of things that really need to be focused on. One is, I think in terms of the infrastructure and the capability, we have a tremendous amount of that infrastructure and capability built to do the CCAR modeling. And I know CCAR is a narrow part of being a systemically important financial institution, we have liquidated coverage ratios and living wills, and so on and so forth. So, there are costs, but we think that the leap is manageable. I think in terms of when we would organically cross that line, I think, that can be managed whether it's three or five years it would somewhere in that range would be an organic estimate to it. But that can be managed. And I think that as you suggested that there's a greater probability today that threshold be elevated and it will be elevated significantly in the near term. There is a letter last week from a number of democratic senators on the Senate Banking Committee suggesting we need to move forward on regulatory reform. So, those are encouraging signs. And then the final point that I would make is that the regulatory agencies, the Federal Reserve, the OCC are very thoughtfully, in my view, looking at how the CCAR and the systemically important regulations are applied and how they're applied to a $50.1 billion bank versus a multi-trillion dollar organization. And so, I think the combination of all of those things don't cause us to sit around and worry a whole lot about what the cost of CCAR may be three, five years from now.

Okay, great. Thanks. That's all I had.

Sure. Thank you.

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning, guys.

Good morning.

Just I wanted to follow-up BJ on your comments on the margin with CBS, did you say it should stay more or less around these levels even forced CBS?

Yes, I think so. So, their margin, if you take out all their purchase accounting accretion and such and you add ours, which would be much less modest on the combination, their current margin is slightly above ours, maybe 10 or 15 basis points above ours. So, it will be an incremental help to where our levels are today. So, yes, that's why I say there will be a little bit of a help with loans and mortgage companies in the near term being a little bit of a headwind in the fourth quarter.

Understood. And when you sort of think about incrementally, means you have the rate sensitivity on the slide, but if the three to four basis points margin for FHN stand alone that I dread to think about when you put these both banks together, or should sensitivity go down given sort of the balance sheet structure post the deal?

Sure. So, our asset sensitivity are moderate post deal. So, round numbers, Capital Bank assets sensitivity big roughly half of where we are. And so, the combination of that or obviously moderate our asset sensitivity. So, we are okay with that as we've seen our short rates rise at some point you got to get a bias back towards something that's more towards the middle in terms of interest rate risk management. So, we are looking forward to being able to take that balance sheet, optimize funding, and have good healthy net interest margins combined going forward.

Fair enough. And can you remind us if there is any specific action, you mentioned in terms of any debt repositioning or optimization of balance sheet post deal that you may undertake right away in terms of restructuring anything on the asset or the liability side?

Yes, I think we'll do what you would normally expect when you close the deal in terms of looking at combined securities portfolio and trying to optimize that. But in terms of anything beyond that, there won't be a ton of change right away.

Understood. Thank you. And if I can ask a separate question just in terms of ABL loan growth, I was wondering if you can just provide any color in terms of where that growth is coming. Are there any particular verticals either consumer finance or others where you are seeing stronger growth and what your expectations are sort of going into next year?

Yes, since the credit quality story has been kind of quiet, I'm going to ask Susan to answer that.

Asset based lending as you know has been an area of focus for us for 25 plus years. We've been in that business and it's performing well through many economic cycles. We do have seen some additional growth in consumer finance vertical and some other finance type companies like factoring. But we've also seen growth in traditional ABL. In addition to that color relate to the vertical as Bryan and BJ talked about this earlier, we are seeing good growth in terms of new to bank, but also some good solid growth as it relates to growing with some existing customers, so really across lines of business. If you look at that for 2017, I would say on average, 30% to 35% of growth and commitment comes from expanded relationships with existing customers and with the other coming from new to banks. So I think that's a good mix. And asset based lending would be at about that mix as well.

Got it. Thanks for taking my questions.

Sure.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks for taking my question.

Hi, Michael.

Good morning. Just wanted to ask on the Capital Bank side, they have a decent exposure down in the Keys [ph] and in Miami. Should we expect any sort of adjustment to the loan mark and/or the purchase price from any sort of revision or losses that would come out of the franchise that they have down there?

Michael, this is Bryan. They do have a lot of exposure down there. And our first concern was people and their families, and very pleased that that it was very, very minimal impact. And therefore the two or three folks that were impacted is significant, but we are very fortunate that people were safe and sound. Physical structures, there were a couple where we lost or Capital Bank lost air conditioners and things like that. But that largely won't be a problem. And within days of Irma they had branches -- substantially all of the branches back open. So from a business interruption perspective, it wasn't very significant. We don't expect anything significant at all in terms of our pro forma evaluation in May and where we think are today. I think that what we are experiencing both and what we are hearing from customers and what they have been able to ascertain, what we are able to ascertain is that the impact of Irma on credit portfolios et cetera was de minimis.

Okay, that's helpful. Then maybe speaking about credit, lot of focus on the bigger banks on credit card trends, looks like you guys are kind of holding relatively stable, any sort of commentary or insights there?

The credit card as you know is a small business for us. We've got less than $115 million in credit card outstanding today. We actually showed a decline in 30-day delinquencies and charge offs quarter over quarter. Our credit card approach really is one of a relationship of product where existing banking deposit customers we offer credit card. Honestly, we think it's an area where we could probably have some growth as it relates to doing maybe a better job marketing and the application process streamlining that. We are actually looking to do that. So for us in terms of --it's very benign for us because it's a very small book today. And we actually saw as I said earlier improvement in both delinquency and charge off quarter-over-quarter.

Okay, that's helpful. Maybe just one more from me, there has been 10 acquisitions announced in North Carolina. Can you guys just speak to retention efforts and your ability to attract lenders from all the activity that's happened in North Carolina? Thanks.

Yes. This is Bryan again. We have done an awful lot of work in our efforts in terms of merging the organization, really started with the people and the culture of the organization. And you may have heard me say that we went into this transaction feeling very good about the culture of Capital Bank. The way they approach the business with Eugene and Chris, Rick Manley and Ed Holden and Dave Briggs and others did in terms of building a culture in the organization. We feel better about that today than we felt in May. And we have spent a lot of time talking to people across the organization. There is clearly a fair amount of disruption. But we think that our ability to continue with the continuity for customer facing activities is high. We think our retention programs and our incentives and awards program for people will be very well received and very competitive. So we think that not only will we do a good job of holding the existing team of outstanding bankers that have been assembled, we think we will be able to add to it once we get the acquisition closed. So we are optimistic in that regard. And we think that there is continued opportunity for us to focus on that middle market space and the very good and dynamic growth economies and continue to grow business with the kind of momentum the Capital Bank has had and to improve that over time by bringing enhanced products and services and features that will make use much more competitive in the marketplace. So we are optimistic about the outlook in that regard.

Thank you for taking my questions.

Sure, thanks.

The next question comes from Brian Zabora with Hovde Group. Please go ahead.

Thanks, good morning.

Hey, Brian.

Good morning.

Just question on fixed income business and how much did Coastal impact the revenues this quarter. I think you said it was up. I just want to try and get a sense of magnitude.

Yes, so -- this is BJ. As mentioned, Coastal had a very good quarter, particularly strong finish to the quarter. So we now have five major desks with the government guaranteed lending business. That business that we got from Coastal is now our second largest desk. So it had very good average daily revenues, very good flows, and good loan sales add to the portfolios. So we are very pleased with how the business has ramped up. From a legacy perspective, volatility is still very low. It's kind of running out ground balls and trying to hit singles and doubles where you can. The business is very well managed. We are pleased with the maintenance of profitability. And they are doing everything to maintain that. And the good thing is we had very solid core EPS results this quarter with continued very modest help from FDN, which at some point will come back and really be a little bit more meaningful contributor to our EPS results. So again business is tough there, but the customer acquisition has certainly helped to round out and diversify the business.

Hey, Brian. This is Bryan. I'll pick up on as well and it's -- don't lose perspective that Coastal is headquartered in Houston, and they lost basically a week with the tragedy of Harvey during the quarter, and Christ LaPorte and the team did a fantastic job managing through that. And we have a number of bankers there as well. And we are very fortunate, our people were largely -- didn't have long term damage. And we think given the distractions of what happened there and the results we saw in the third quarter with Coastal, we are very, very excited about that platform brings to our organization and the capabilities that that gives us over the next several years. So we see that business or the government guaranteed loan business to be a growing business. And we think are relevance will increase over time.

Thanks for taking my question.

Sure.

Sure.

The next question comes from Tyler Stafford with Stephens Inc. Please go ahead.

Hi, good morning, guys.

Good morning.

Just one question from me on mortgage warehouse; can you tell us what the average yields on the loans to mortgage companies were in the third quarter? And then just can you talk about what you are seeing in terms of pricing -- new pricing on new mortgage warehouse lines and what impacts from the new entrants to pad on -- into that space of add-on pricing?

Yes. So this is BJ. I think our current portfolio yield is around 475 or so in the portfolio. And so, they are still one of our highest yielding portfolios. In terms of what we are putting on, it's a little bit nuanced. There is price competition in the business. So to attract business sometimes or to get additional business from existing clients, we will make some price concessions. But overall, we're seeing LIBOR plus 250 - 300 on the business. And so, we are still very bullish on.

Okay, thanks, BJ. And last quarter you talked about lower dwell and that's obviously impacting the volume that you saw last quarter. Can you talk about any trends you are seeing in dwell time this quarter?

Overall -- this is Susan. Overall, dwell time has year-over-year gone down about two days on average. So that does affect volume. But as BJ mentioned, it actually also helps the yield little bit because the fee is associated with that business and you add -- factor in the lower dwell time, we are getting a little bit higher yield overall. We continue, as I mentioned earlier about asset based lending, the mortgage warehouse team I think has done a great job adding new customers but also increasing business with existing customers as we have seen to make sure that they will continue to get good volume. Obviously, it's a seasonal business and we will continue to be seasonal fluctuation.

Okay. Thanks, Susan.

Last question comes from Christopher Marinac with FIG Partners. Please go ahead.

Thanks. Good morning.

Good morning, Chris.

Hey guys. Just wanted to follow-up on Susan as it relates to the delinquencies in C&I, is that something that is just noise in this time of year or any other trends there? Just want to follow-up on that point.

Chris, that's really driven by two C&I credits. And one of them is a purchased credit impaired one from the GE acquisition. And because of the accounting treatment, we can't put in the non-performing, so -- because it's non-performing is actually showing up in the delinquent. That's about half of the -- almost half of the number there. And then we also had a credit downgraded during the third quarter. And agent bank and [indiscernible] see together are working with that client on renewal for Bayer's agreement type thing. So that was also contributing. But if you took those two larger C&I out, we would trends roughly like you've seen over the last few quarters. So I don't see anything just getting to get old.

Okay, great. That's very helpful. And BJ just one for you, as we think about what the Fed may do a couple of quarters out, how does that change deposits, pricing, and betas? And are you still thinking along the same lines as before?

Yes, we think so, Chris. Like I said earlier since the beginning of the Fed's increase in short-term rates back in 4Q '15, we've seen total deposit beta is around 24%. And we've said that through the cycle meaning when they start to when they got to end, we thought it would an aggregate around 40%. So we're still below where we felt we would ultimately be, which means that we have an expectation that deposit competition could certainly increase. Now we hope that that doesn't occur, but we're prepared for it. And I think we have done a pretty good job to date of managing our deposit cost through the rising rate environment so far.

Sure. That's great. Thanks guys. Appreciate it.

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

Thank you, Rachel. I was reminded earlier of a phrase that we used to use, and I don't think we used it in this call this morning; we used to use it a little bit, we try to control what we can control, and we are very, very focused on managing the returns in the business and own our execution. Now, very proud of the work that our folks are doing to manage the business. We are optimistic about it. We see the tremendous opportunity with Capital Bank, and so, we are excited about where our business has headed over the next several quarters. Thank you for joining our call. We appreciate your interest. Please let us know if you have any further questions, or if you need any additional information. I hope everyone has a great weekend. Thank you.

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