Apr 13, 2017
Executives
Aarti Bowman - IR Bryan Jordan - Chairman, President and CEO William C. Losch III - EVP and CFO Susan L.
Springfield - EVP and Chief Credit Officer
Analysts
Steve Alexopoulos - J.P. Morgan Ken Zerbe - Morgan Stanley Jennifer Demba - SunTrust Robinson Humphrey Ebrahim Poonawala - Bank of America Merrill Lynch Michael Rose - Raymond James Geoffrey Elliott - Autonomous Emlen Harmon - JMP Securities Casey Haire - Jefferies & Company Chris Marinac - FIG Partners
Operator
Good day and welcome to the First Horizon National Corporation First 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.
Aarti Bowman
Thank you, Francheska. 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, 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. 2017 is off to a good start.
We are pleased with the results in the first quarter. We saw good loan and deposit trends.
Our pipelines remained strong as we wrapped up the quarter and started into the second. We did see some expected volatility in our mortgage warehouse lending business.
As you know and as we've talked about in the past, it is a seasonal business and it is impacted by how our interest rates and that slowed down in the first quarter. We have seen some recovery as we move into the second quarter and are optimistic about the remainder of the year in that business as mortgage activity picks up seasonally and interest rates, particularly 10-Year Treasury, have come back down.
You will see a corresponding benefit of the average $900 million decline. You will see an impact on the net interest income of the average $900 million decline in the mortgage warehouse lending business.
In fact, if you look at the decline in net interest income, mortgage warehouse lending explains about 150% or more than the total decline. You add to that day count decline in the first quarter, you see roughly double the impact on net interest income, so the net effect of that is, we had good growth in other businesses, we saw the benefit of our asset sensitivity and they significantly offset the impact of declining mortgage warehouse volumes.
Our fixed income business was a little soft in the quarter. Our average daily revenue dropped to $689,000, a little bit down from the fourth quarter.
As we talked in our fourth quarter call in early January, we saw the business tailing off a little bit as interest rate spiked following the election. That environment continued through the first quarter and into the early part of the second quarter.
We announced earlier this week we have completed the merger with Coastal Securities. We are excited about that.
It adds a fifth product desk [ph ]and a strong product set. It brings a lot of very talented bankers onto the platform, so we're optimistic that that business will continue to drive forward and help that business.
You will see an impact, and BJ can talk more about it, but you will see an impact in average daily revenue in the future just through the acquisition of Coastal Securities. Credit quality throughout the quarter was strong.
You saw net recoveries again in the first quarter, second quarter consecutively. We had a slight provision reduction or reserve reduction, but our reserve coverage ratio actually increased slightly.
Our non-performing assets and delinquency trends continue to look very good and we're very optimistic about credit quality throughout the year. Our expense control in the quarter was good.
We have continued to focus throughout on the appropriate investments in the business by hiring the right people and building businesses like our restaurant franchise finance business, our healthcare sponsor finance business, and a number of our specialty businesses as well as our banking markets throughout the footprint. We also have the ability to maintain strong expense discipline, and you saw that in evidence in the first quarter.
And as a result, you saw operating leverage on a year-over-year basis in our banking business and across the Company. With the help of BJ and his team, our people continue to deploy tools to focus on returns and focus our business on those activities that drive towards our bonefish targets, principally around our return on tangible common equity.
Our capital position in the first quarter was strong. We increased our dividend by 29% or $0.02 per share per quarter, and we continue to have strong capital ratios which we think gives us tremendous flexibility to continue to grow the business or redeploy capital to shareholders or otherwise.
We remain focused on driving towards those bonefish targets and seeing us hit those higher ROE targets that we have laid out, and again feel good about the progress we have made there. We are reasonably optimistic for 2017.
The economy in our view is still very much like it has been for the last several years. It's growing at a modest pace, somewhere in the 1.5% to 2% range in all likelihood.
Trends seem to be positive. In all likelihood, we do expect that the Fed will raise rates much like the market does a couple of times over the remainder of the year.
In our view, the breakout of this growth pattern, we're going to have to see some legislative victories, taxes, regulation, things of that nature, which are really dependent upon the White House and the Congress being able to enact some of the President's agenda. But in the absence of that, we think the economy will continue to chug along and we are optimistic that we will stay in this sort of steady growth pace that we've seen for the last several years.
So with that, let me turn it over to BJ and he can take you through the details, and then we'll come back and deal with some questions later.
William C. Losch III
All right, thanks Bryan. Good morning, everybody.
I'll start on Slide 5. In the first quarter, we reported net income available to common shareholders of $54 million, $0.23 a share, up 15% from last year and steady from the fourth quarter.
We did not have any notable items in the quarter. I'd say from my perspective the highlights of the quarter were; we saw strong balance sheet growth and positive operating leverage in the regional bank; expense discipline was evident; credit quality remains excellent; and fixed income performance was muted in the quarter but still generated positive returns.
Turning to Slide 6, let's take a look at the net interest income and net interest margin trends. Linked-quarter net interest income and NIM were in line with our expectations.
From an NII perspective, we did see benefit from continued loan growth, the December rate increase as well as our proactive actions to optimize our interest rate and portfolio positioning going forward. These positives, as Bryan talked about, were offset by lower balances on loans to mortgage companies as well as fewer days in the quarter.
From a NIM perspective, our excess cash position in the first quarter as a result of deposit growth and in an anticipation of funding the Coastal Securities acquisition as well as the lower loans to mortgage company balances which are higher yielding relative to our overall portfolio offset positive impacts from our asset sensitivity positioning. Moving on to Slide 7, we are very pleased with the continued strong performance of our Regional Bank, as Bryan talked about.
Loan and deposit growth continued to be very healthy. Positive operating leverage continued to be a key focus and credit quality in the bank remains excellent.
Let's go into more detail on the bank balance sheet trends on Slide 8. You can see, year-over-year loans were up 13% and down 3% linked quarter.
Linked quarter decrease in loan balances was largely driven by that expected decline in loans to mortgage companies. Those balances were down about $900 million quarter to quarter from about 2.2 average outstandings in the fourth quarter to $1.3 billion in the first quarter.
The balances were down as higher mortgage rates slowed down refi activity along with usual seasonality with lower home purchasing activity in the first quarter. But if you step back and look year-over-year, our average balances of loans to mortgage companies increased 3% demonstrating our continued growth in market share for the business.
We are seeing continued momentum in several areas that are driving higher yields and improving economic profitability. Excluding loans to mortgage companies, average loans were up 14% year-over-year and 3% linked quarter.
You can see that growth was driven by areas such as commercial real estate, private client wealth and asset-based lending as well as our core C&I lending. Importantly, in the bank, the net interest spread, loan yields less deposit rates paid, was up 5 basis points linked quarter.
Looking ahead, even with good funding this quarter, our loan pipelines remain strong, particularly in our specialty banking areas. Moving on to FTN Financial, our fixed income segment, on Slide 9, pre-tax income in the quarter was $3 million compared to $6 million in the fourth.
Our average daily product revenues were $689,000 in the first compared to $718,000 in the fourth. There were many moving parts in the capital markets that made market conditions soft for our business.
The sharp increase in interest rates starting in about mid-November, the continued drift up in rates thereafter and the expectation of further rate increases, have all combined to dampen fixed income secondary market activity levels among our customer base. The relatively low level of market volatility during the quarter also dampened the ADR results as fixed income tends to perform better in periods with moderate market volatility.
FTN's net interest income, though small, was down approximately $1.4 million from the fourth quarter, due to lower net inventory positions. Expenses were $49 million, unchanged from the fourth, as declines in variable compensation were offset by the normal first quarter impact of FICA tax resets along with higher legal costs.
As we announced earlier this month and as Bryan mentioned, FTN completed the acquisition of Coastal Securities, a Houston, Texas based broker-dealer that specializes in government guaranteed loan products, principally SBA and USDA loans and securities. Coastal's operations have been fully integrated into FTN Financial and approximately 80 Coastal employees including all key leaders and producers have joined FTN.
We are very excited about this transaction which we believe is a great fit strategically and culturally and we look forward to building on the great business our new colleagues from Coastal have built. Moving on to expenses on Slide 7, linked-quarter expenses were down 7% due to declines across various line items, litigation costs, commissions, personnel, advertising, software, legal, as well as several other items.
Linked quarter, our efficiency ratio improved 193 basis points, and particularly the Regional Bank's efficiency ratio improved 225 basis points to about 58%. Year-over-year trends were positive in both counts as well.
As we discussed before, our focus on positive operating leverage includes the continued commitment to expense discipline while also investing in our franchise. We're hiring talented bankers in our expansion markets and in our specialty banking areas, and in the fourth quarter we upgraded our digital banking platform and should benefit from this technology upgrade as customer preferences shift, and we are able to continue optimizing our branch network.
We also remain focused on generating revenue growth that well outpaces expense growth. Turning to asset quality on Slide 12, you can see that the first quarter included a loan loss provision credit of $1 million.
Net recoveries were just under $1 million in the first quarter compared to net recoveries of about $500,000 in the fourth. Credit trends remained strong as we have seen the lower gross charge-offs amounts, a steady amount of recoveries, stability in commercial loan grades and continued run-off of our non-strategic balances.
The consolidated reserve to loan ratio increased to 106 basis points in the first compared to 103 basis points in the fourth. Wrapping up on slides 12 and 13, as Bryan talked about, we are pleased with our results and the overall momentum.
We continue moving towards higher profitability levels with steady higher returns. Our focus on economic profit is paying off as we grow our specialty banking areas.
Our balance sheet trends are strong. We are well positioned with our asset sensitivity as we benefit from short rate hikes.
Our expense discipline is evident. And we'll continue to prudently deploy capital.
With that, I'll turn it back over to Bryan.
Bryan Jordan
Thank you, BJ. Again, I'm very pleased with the results in the first quarter.
I think our business is right where it needs to be. We see good trends in loans and deposits.
People are focused on controlling cost and making sure that we deliver high levels of quality service to our customers. We are investing in our product set and building the business for the long term to create high returns for our shareholders.
We are very, very pleased with the progress that we're making and we think that the economic environment will continue to facilitate a modest and steady growth across our business, and are optimistic about the rest of the year. Thanks to all of our First Horizon, First Tennessee, FTN Financial employees for all you do to meet our customers' needs and make their experiences unique and beneficial.
And with that, Francheska, we'll open it up for questions.
Operator
[Operator Instructions] The first question is from Steve Alexopoulos of J.P. Morgan.
Please go ahead.
Steve Alexopoulos
I'd like to start on the loans. If we look at core C&I, so back out the mortgage warehouse, it looks like you had modest growth.
Can you talk about the pipeline and specifically what you hear from your commercial customers during the quarter?
Susan L. Springfield
We are seeing very good pipelines really across our markets, and if you – let me go through some of our core markets from an on core commercial. We actually were in Middle Tennessee where we've had a concerted effort to grow market share, add talented bankers, core commercial was at 4% quarter over quarter.
And then in West and East Tennessee, which are slower growth markets where we have a higher market share, we also saw growth there, commercial up 2% quarter over quarter. And then good growth also in Mid-Atlantic and Houston as well where we have higher growth rates on a smaller base.
The pipelines do look strong. The customer sentiment, as Bryan talked about, I think is largely, feels like another year much like the last few years, potentially some less regulation for some of the business owners.
I think we're still waiting to see how that pans out in terms of what Washington does. But we are encouraged by pipelines in both core commercial as well as our specialty markets.
Bryan Jordan
Steve, this is Bryan. I'll add to Susan.
It's a good environment for our customers and we are seeing, as Susan said, universally leaning into economic recovery and people are generally optimistic across the footprint. We continue to pay attention to some of the disconnects in the data.
Loan growth has been a little softer in the H8 data, and there is some disconnect in terms of consumer confidence and what's happening in consumer spending numbers. But in our customer base, people are still very optimistic.
And as we look at the loan pipeline, the 50% or greater probability loan pipeline at the end of the first quarter, it exceeds where we have been over a trailing 12-month period. So, customers are still optimistic and our outlook is still positive for 2017.
Steve Alexopoulos
So Bryan, if we think about the increased optimism, which we are hearing across the industry, but lack of loan growth, is it just the uncertainty over how regulatory taxes, healthcare, all of these items play out, is that what you're hearing from your customers?
Bryan Jordan
Well, a little bit. It would be hard to put a pin in and say, it's exactly this, because it's different in every situation.
I think there is clearly some expectation that built after the election that regulation, healthcare, maybe taxes, more optimistically would have some impact, and whether that softened or not I don't know but I think people are looking at that and paying attention to it. But I wouldn't say that that's the single determinant.
Ultimately people make decisions about the customers that are walking into their business. There are opportunities to buy or build plant and equipment and what they can do with it.
And in certain businesses, we're seeing demand – if it's infrastructure, road and bridge building, we are seeing that demand already picking up. And so there are some aspects of it that are not really related to legislative effect, but as I said in my opening comments, we believe that the breakout of this ban that we've been in, seeing some relief, particularly on taxes and regulation, will be very helpful and we could accelerate growth in the economy beyond where it has been.
William C. Losch III
Steve, I'd also mention, there are two particular areas I think that have maybe moderated, mortgage and mortgage lending, if you look at the data industry-wise, is certainly down quarter to quarter. But also there is a lot of discussion, as you well know, about commercial real estate and what's going on in the commercial real estate market, particularly let's say multi-family, across the industry.
And if you look at the data, that's a line item that's starting to moderate as well. As you know, with our portfolio, we are underweight commercial real estate by a pretty meaningful amount relative to other banks, and so we still have a lot of capacity to lend there and we're seeing interest and well-priced deals that we can take advantage of there.
But I think those two areas in particular are ones that are dampening some of the overall industry growth.
Steve Alexopoulos
Okay.
Susan L. Springfield
One thing I would just add to what BJ said about commercial real estate is that we are seeing the ability to get higher levels of equity, upfront equity on new commercial real estate opportunities as well as, as he said, other good structural elements.
Steve Alexopoulos
Okay, that's really terrific color. BJ, if I could ask you one other question, in the release you guys talk about running deposit promotions, which seem to push up deposit costs, and I was a bit surprised to see that given how much loans came down in the quarter.
What are the thoughts there, what exactly you're running and how are we thinking about margin here, are we going to see deposit pressure eat away some of the benefits from higher rates? Thanks.
William C. Losch III
Sure. So, good question.
First of all, we'll start with our aggregate deposit portfolio, which is about 50% commercial, 50% consumer, roughly. Commercial is going to be more sensitive to increases in short-term rates, because you're going to have treasures that are going to be much more attuned to the market, and it's a little bit more competitive, et cetera.
And so they are always going to have a higher beta and that's by half of our liability book. On the consumer side, you are right that we did run a promotion across our markets in the first quarter in one particular line item.
It would be consumer savings, if you're looking at the financial supplement. So we saw a meaningful increase in balances there.
The average rate pay did go up. But in aggregate, when we step back, we look at this every month in our ALCO Committee.
We're actually ahead of where we thought we would be in terms of moving beta. So, we made a trade-off, if you will, of growing balances in the consumer portfolio, and those balances, the benefit of those to our asset liability position offset any incremental interest expense, and net-net we are much better off.
And as I talked about in my comments, our net interest spread in the bank is actually up 5 basis points linked-quarter, and so we are seeing the expansion that we expect to see.
Operator
The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.
Ken Zerbe
First question, just in terms of the lower expenses sequentially, how much of that was very specifically variable, I'd say variable cost, but expenses related to variable items that came down with say capital markets revenues being lower versus just a core focus on expenses?
William C. Losch III
I'd say, Ken, it was a very modest amount from variable expenses. I mean if you look at FTN and what the revenue was down, it really wasn't all too different than what they were at in the fourth quarter.
So, variable comp was down a little bit but not much. Much of it was expense discipline.
As we talked about a lot on the fourth quarter call, we have always had a focus on this even as we look at the positive operating leverage over time. And so, we wanted to certainly as a firm come out of the gate in the first quarter very strong on expense discipline.
We had a ton of conversation about it. Our people are very good at executing and spending dollars very wisely, and we saw that in the first quarter and we are proud of that.
And so, we think a lot of that, ex of course what we showed you on the page we have in here on efficiency, that's more legal, accruals and one-times, all that other stuff we expect to manage very tightly and see flow through the rest of the year.
Ken Zerbe
Okay. And then with capital markets, I guess just fixed income trading generally speaking, have you guys considered the possibility that maybe this is just, it's a business in secular decline, because there is always something if ADR is certainly under pressure, and essentially that is it possible that over the next year or two or three that you do have to just keep making more and more and more investments in the business or acquisitions in the business just to kind of keep revenues let's call it roughly flat?
I mean is that a possibility or is it just we're just in a really unique period?
Bryan Jordan
This is Bryan. Certainly we have considered that and there is no doubt that interest rates on the whole have fallen for 30 plus years, and when you get to the floor, that's going to level out and around zero I assume is the floor.
I'm excluding for the moment the possibility of negative interest rates. So clearly we have thought about that and we know that will be a headwind.
In many ways it's going to be, whether it's two or three years, your issue is going to be longer term determined by what investors want to do in terms of making loans versus investment securities, particularly in financial institutions, the ability to pick up yield. We don't sit around today and worry that we can't be profitable at these lower levels.
Clearly we're more profitable at higher levels, but we drive profitability here. We still provide adequate returns on the capital we have deployed and we would like to see it higher.
We didn't think about the Coastal acquisition as really a way to prop up or level out average daily revenues. It was a fantastic business.
It provided an enhanced product set that is attractive to buyers of fixed income securities. As BJ described, it's government-guaranteed loan-backed products, securitizations, principally SBA and USDA loans, and they tend to be floating in nature, particularly as rates start to move up.
So we think it's a great product enhancement. We think a lot about the various possibilities, but as we look at it today, we think that the business has sort of been bouncing along at low levels, much like it did in the mid-2000s, and that when volatility and movement picks up in interest rates, that we'll see enhanced activity in the business.
And so, we don't see it as a place that's going to draw up a huge amount of capital or investment to remain profitable. We think we can do that with the infrastructure we have built.
Ken Zerbe
Okay, got it. And then just one last question, just going back to the comments on commercial real estate, I think I heard that you guys are getting greater equity on the deals that you are doing.
But just given the industry concern about slowing CRE growth, about potentially lower prices in commercial real estate or weakening credit quality, like how should we reconcile that, because your growth in CRE is awesome this quarter? I get that you are under-levered to CRE but how do you guys view the growth in CRE plus the better equity positions that you are getting versus more the broader industry, growing industry concerns about commercial real estate?
Susan L. Springfield
Ken, the commercial real estate segment of our portfolio obviously gets great attention, and I would say, couple of years ago we started moderating multifamily in certain markets taking a look at supply that was coming on, more recently also really paying close attention to hospitality and retail. As we have mentioned on this call before, we have remained incredibly disciplined in terms of portfolio limits to make sure that we are diversified across product type in commercial real estate as well as geography.
We also track exceptions to policy and make sure that those are under a certain level. We remain in tolerance for those.
And then we also have additional things that we do, such as on the retail side limiting tenant exposure so that we are not over-weighted to any certain tenant looking at the types of retail that we are doing. So, our underweight combined with our disciplined approach to underwriting portfolio limits has allowed us to remain open for business.
In addition to that, we have excellent customers who have been through certainly the last downturn, some of them more than one recession, as it relates to commercial real estate, and doing business with commercial real estate developers who have been through cycles I think is very important. In addition to that, we also have a number of senior management visits with some of those larger customers to understand what they are seeing, how they are thinking about the business.
So yes, we remain cautious and we have discipline associated with upfront equity. We also when we underwrite, we manage to a debt service coverage that is based on higher interest rate than the current rate, usually they are 200 basis point shock or more, to make sure that we have got cushion in our underwriting.
So we remain very, very disciplined. We also are doing, are really focused on those professional commercial real estate developers, again who know when to pull out of the market and come back into the market.
So overall, we feel good about the portfolio that we have. The last thing I would mention is we have also actually had – we've slowed commercial real estate commitment growth.
You have seen some funds out in terms of balances and we've seen ones that we have underwritten over the last few years that were construction ones, that wanted to get stabilized and go into the permanent market. So we feel like we are doing a great job in terms of underwriting and servicing the portfolio, but again, it's something we absolutely watch and talk about as it relates to various product types in certain markets.
Bryan Jordan
Ken, this is Bryan, I'll add one final thought, and Susan hit on this a little bit. When people pull back in sectors like commercial real estate, good borrowers and good deals that ought to get done, sometimes just don't.
And we tend to position ourselves in commercial real estate to be steady through the market, not to run up big outstandings and pull back completely. And so, we look for those good opportunities and good relationships.
And as Susan said, we're doing a lot of business with relationships that we have been doing for decades and decades and decades and we're also having the opportunity to pick up some nice projects and new relationships in certain markets. So, we are going to be disciplined about it as we have been through good cycles and bad cycles, but we think we're seeing good opportunities to create some good relationships and profitability and some good outstandings at the same time.
Operator
The next question comes from Jennifer Demba of SunTrust. Please go ahead.
Jennifer Demba
Just wondered if you could give us an update on your thoughts on M&A interest this year and whether you are still kind of interest-biased towards the larger transactions?
Bryan Jordan
As I have talked about for years, I think that, fundamentally, consolidation is good for the industry. There is going to be need for further cost takeout in the industry and we think that there are opportunities in that.
From our perspective, it's important to do transactions that would be, one, additive to our returns on equity and be good allocations of capital, and two, give you leverage in terms of cost takeout. Clearly, the larger the size, the greater the efficiency in terms of transaction and creating efficiency for the time invested in it as well as the regulatory approval process and the securities filings and all of that.
So, as you look at the operating environment, I don't think that really anything has changed in the fundamental operating environment that would change our view that if the right kind of opportunity came along with the right kind of structure and price, we clearly would be interested.
Jennifer Demba
Great, thanks a lot. And a second follow-up question, you changed some billing procedures on your fee income, can you give us some color there and is this a good run rate going forward, the first quarter number?
William C. Losch III
It's BJ. We essentially made a few tweaks to our deposit fees that are more customer-friendly, and so it had a modest impact on deposit fees in the quarter.
It's also combined with seasonality in the first quarter, so it probably looks a little bit worse than it actually is. So, there will be a modest impact I think going forward on the bank fee line from the changes that we made, but I don't think it's all that material.
Jennifer Demba
Thanks so much.
Operator
The next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawala
Just wanted to follow up on the margin, BJ. One, if you can sort of, I know it's tough, but if you can help us understand how we are thinking about the cash, whether how much of that you think goes into the warehouse, given the rebound probably in 2Q?
And then, where else can you redeploy that cash? So I think if you could first start with that?
William C. Losch III
Sure. So we had about average balances of maybe $2 billion of excess cash in the quarter versus $700-ish million in the fourth, so clearly a huge build-up.
Part of it was, like I said, deposit growth, part of it was getting ready for the Coastal acquisition. I expect that to come down meaningfully in the second quarter back towards fourth quarter levels.
And so that will certainly help alleviate some of the pressure that we saw on the margin. It's just simply a timing of cash.
So, there will be that Coastal close, that will help, it will be loans to mortgage companies bouncing back, as well as continued loan growth. So I'm not worried about it.
I had talked about us expecting to build excess cash in the fourth quarter call, and that's what happened. So you should see it come back down.
Ebrahim Poonawala
Got it, that's helpful. And on the other side, like when we think about the deposit beta, like I was looking at a year ago, 1Q 2016 over 4Q 2015, and when you compare this, it feels like the pace of the increase in deposit cost is picking up.
As we think about the March rate hike and what impact that would have in the second quarter, and you gave your comments around commercial versus retail, I'm just wondering the trajectory of this funding cost, is it reasonable to assume that what we saw in 1Q 2017 somewhat repeats itself again in 2Q on the deposit side?
William C. Losch III
So I'll refer back that 50% is commercial and it's going to be a higher beta. On the consumer side, the only place where we moved was on promo balances.
And so you saw an increase because of a promo that we made, but we like running promos to build balances because it doesn't re-price the entire portfolio. We had let's say $4.5 billion of consumer savings deposits and we built several hundred million promo balances that will then re-price back down in six months.
So it's a little bit of a timing issue, but if you think and step back and look at the bottom right-hand chart on Slide 6, all of the changes that we are thinking about in beta, the promos that we are running, the growth assumptions that we are running, are all going to be in this sensitivity impact, and if you notice, those numbers really haven't changed. They have stayed pretty steady.
So, our asset sensitivity is intact, we are managing deposit cost well, and we are trying to optimize balance growth, new relationship growth, new money growth which we are getting from these promos, with the rates that we pay. So we are confident we're doing the right thing.
Ebrahim Poonawala
Understood. And just separately in terms of capital, so Bryan, you talked about M&A and the right type of deal, you would entertain that.
In addition to that, like any talks about on the dividend or buyback front, are both those probably lower priority relative to organic growth or M&A?
Bryan Jordan
Organic growth is always at the top of the list in terms of priority for us. I wouldn't say that we think any differently about dividend or buyback today than we have.
Clearly we pay attention to prices and we look at values, and we think that as prices have come down that it makes buyback a more effective tool in terms of capital repatriation. As I mentioned in the opening comments and as mentioned in our documents here, we increased the dividend 29% in the first quarter.
I think it was payable or paid on April the 1st from $0.07 to $0.09 a quarter. So, we continue to look at capital and we evaluate really the whole range of alternatives and we intend to be disciplined in the way we deploy it and we think we have got a full arsenal of tools available to us.
Operator
The next question comes from Michael Rose of Raymond James. Please go ahead.
Michael Rose
Maybe just to follow up on Ebrahim's questions, you guys have about 190 million in buyback that I think expires at the end of next January. Would you expect to start to be a little bit more aggressive in terms of buybacks given that authorization?
Bryan Jordan
The short answer is, it's going to depend on what the stock price, how the stock price performs and how it performs relative to tangible book and to peers in our view of evaluation. But we have the buyback in place because we think that is an appropriate tool to return capital to shareholders.
And so we expect that we will continue to be targeted and opportunistic and when we see opportunities to buy the stock, we will certainly do that. We go in and out of blackout periods from time to time, particularly around earnings, and we'll use the tools as appropriate.
Michael Rose
Okay, that's helpful. And then maybe on a follow-up back to the mortgage warehouse, the balances in the third and fourth quarter I think were around $2.2 billion.
Do you think that with the increased market share and the normal seasonal ramp that you guys are experiencing thus far in the second quarter, rates coming down a little bit, do you think you can on an average balance basis get close to where you were for full year 2016?
Bryan Jordan
This is Bryan again. Couple of points.
One, I think if you look at average balances first quarter of 2017 to first quarter of 2016 with all of the backup, we still were up year-over-year. So we have had in my view very good success in gaining market share and we continue to work on that.
I don't want to try to pin the number down to 2016 averages because it will depend on what happens with interest rates, one, and two, what happens with the selling season. But we certainly expect balances to move back up over the course of the year.
They have done that in the early part, really the late part of March and the early part of April in the second quarter. So we do expect to see higher balances than we saw in the first quarter across the year.
Michael Rose
Okay, that's helpful. Thanks for taking my questions.
Operator
The next question comes from Geoffrey Elliott of Autonomous Research. Please go ahead.
Geoffrey Elliott
On the fixed income side, could you help us understand, what is the perfect environment for that business? It kind of feels like sometimes rates go up, rates go down, and it's been tough to get back to where you were historically on average daily revenue.
So, what is the kind of dream environment for that business?
William C. Losch III
The optimal environment is one like we had in 2009 when everything else was falling apart and the business had a $3.2 million average daily revenue. And so, when widely talking about the business, yes, it's at an ebb right now, yes, it's been lower than what those 'normalized' levels would be, but when things go south, that's when the business makes a lot of money.
But even with that said, what's going on right now is, since mid-November the 10-Year has gone from 2.35% to 2.75%. There is anticipation of further rate increases.
The Fed is looking at reducing their balance sheet, which will put further pressure on the long end. And so, there is a lot of factors conspiring in our core desks to say that activity is kind of in a wait-and-see mode and a little bit more muted.
But we believe that, number one, adding the Coastal Securities in the fifth desk will add 175 plus of average daily revenues. So that will certainly help us get more into that range.
But just kind of a moderation of rate movement, some stability in the 10-Year would certainly help getting to some kind of level that feels right from a short rate perspective, such that people don't think it definitely keep going up or definitely keep going down, just something little bit more stable, and then an environment that there is active trading in the fixed income markets and less sector rotation or rotation out of fixed income in equities, which we've seen over the last several quarters. There is so much that goes into it, but fundamentally, our business is a lot better positioned, a lot leaner than it used to be to capture any upside that we might get.
Bryan Jordan
Geoffrey, this is Bryan. Susan and I voted while BJ was talking.
The other thing about the first part of 2000 now we didn't like, and so you pointed back into that environment. Fundamentally, as I said earlier, we can be profitable at lower average daily balances, and for the last couple of years we've said that that $1 million to $1.5 million range was not sustainable and in some regards I'm a little regretful we ever put it out there because it sort of pins an expectation that we weren't profitable if we weren't $1 million average daily range.
We can do that. Our business is not going to completely track what happens with the Wall Street firms, principally because we don't run a trading business.
It's basically matching of buyers and sellers. We are basically managing our inventory based on what our customers are buying and what they need.
As BJ pointed out when he was talking about the net interest margin much earlier in the call, the inventories at FTN Financial were down. So, we manage that business for efficiency and for profitability and we manage our business so that we don't run outsized value at risk or VaR and we try to go home pretty close to flat on a nightly basis.
And so, if customers are able to, particularly financial institutions and total return accounts, are able to meet their yield needs by making mortgage loans or whatever, sometimes that's the way the market will go and we'll see lower volumes. That will shift and we think over the long term, that business will come back.
But as we said for the last couple of years, I wouldn't get caught up on the $1 million to $1.5 million in average daily revenue. We're going to manage it for profitability and for return, and we think that the Coastal acquisition merger will be additive and will create some additional momentum for us as we work through the rest of 2017.
Geoffrey Elliott
Thank you. And then maybe following up on the earlier question on M&A, CBS is a bank which has got a footprint with a certain degree of complementarity to yours in the Carolinas and Tennessee and it's being reported in the press as thinking about an exit.
Are you able to give us any thoughts?
Bryan Jordan
I wouldn't – it's never appropriate to comment on any particular market or press speculation or any acquisition. We have talked a lot about the markets that we think are attractive and those markets look an awful lot like the markets that we serve here in Tennessee.
And we are a border state. There are eight surrounding states.
And so there's a lot of opportunities in those markets. We have talked a lot in the past.
We have continued to make investments in markets like Charlotte and Winston-Salem, Raleigh. We completed the Trust Atlantic acquisition in October of 2015 I think.
So we are always thinking about what is the right way to deploy capital and we continue to hire bankers. We made a number of significant hires over the last two or three months in our Mid-Atlantic region and we think we'll have opportunities to do that from Richmond to Jacksonville.
So we see the ability to grow in a number of different markets.
Operator
The next question comes from Emlen Harmon of JMP Securities. Please go ahead.
Emlen Harmon
So in terms of expenses, just expenses excluding the capital markets expense look like they are up about 6% year-over-year just on a quarterly basis. I know you like to keep those as close to flat as possible.
What do you have explicitly planned to kind of narrow that growth rate?
William C. Losch III
In terms of year-over-year growth?
Emlen Harmon
Yes, so like if I look at first quarter 2017 expenses ex capital markets over first quarter 2016, they are up about 6%, and I know last quarter you guys were talking about you are hopeful that you could keep expenses close to flat on a year-over-year basis. And so just trying to get a sense of what you guys have planned to help control cost through the rest of the year?
William C. Losch III
Sure, Emlen. So keep in mind that when you add it, and we've talked about this before, we've added several businesses and teams since the first quarter of last year.
So we completed the GE Capital portfolio acquisition and added a dozen or so new team members from that. We added a specialty healthcare team in Middle Tennessee and Nashville that has a regional national calling effort.
We added music and entertainment team and also several strategic hires in our expansion markets, Houston, Mid-Atlantic, et cetera. So, those things are certainly driving incremental cost, but we are taking cost out of the system as well in other ways, whether it's back-office improvements, branch network, we're down probably 15 branches year-over-year, so that will be flowing through the numbers this year.
We are optimizing corporate real estate footprint, like multi-use facilities, moving into owned facilities versus leased facilities. If you look through the supplement, kind of as I talked about at the beginning, P&E is down, supplies are down, foreclosed costs are down, professional fees are down.
So, we are very closely managing and monitoring expense and we expect to see a flattening out of the expense line going forward through the rest of the year.
Emlen Harmon
Got it, thanks. And then just on the asset sensitivity, if we look at the interest income pickup that you guys got from the rate increase in December and what that meant for this quarter, it was a little less than kind of what you have talked about getting from each 25 basis point move, and understanding that's not exactly linear quarter to quarter in terms of how it comes in, I mean was there any I guess big driver that kind of kept you below that level or is that something you expect to pick up over time?
William C. Losch III
I'd say it was about in line with what we thought. If you look on Slide 6 and you look at the linked quarter change drivers, that first line item, rates and asset sensitivity, $5.7 million change fourth to first, not all of that is simply from the December rate move.
Maybe about $2 million to $2.5 million of that is from the rate move. So if you annualize that, that's roughly what the 25 basis point move is on the sensitivity impact on the bottom right.
So yes, we are in line. We are capturing the asset sensitivity the way that we thought we were and managing deposit beta the way we need to.
So, again as I said earlier, I'm pleased with where we are and I think we'll continue to perform well.
Operator
The next question comes from Casey Haire of Jefferies. Please go ahead.
Casey Haire
Wanted to touch on credit, obviously a credit provision this quarter, and I think you had talked about getting a bunch of recoveries this year last quarter, and obviously this comes in a little bit late versus that provision guide of similar to 2016. I was just wondering, I know it's difficult, but how are we looking on the provision front?
Susan L. Springfield
As you know, we've had several quarters of either very low charge-offs or net recoveries. We have also continued to experience actually even low gross charge-offs.
So asset quality is very, very strong. In addition, the runoff, the continued runoff to non-strategic allows us to release reserves associated with that portfolio.
And as we have stated, we actually did end up with a higher coverage overall and a higher coverage in the regional bank. So we still see it assuming, and we believe that asset quality will remain stable, but we should not see huge changes in how we think about provision.
We feel like the reserve is adequate for us, that we are well reserved for the portfolio that we have. And obviously we take a look at that every single quarter, do the deep dive analysis on each of the portfolios and make a determination of what that provision should be.
Casey Haire
Okay, all right. And then Bryan, not to beat a dead horse on the M&A, but I mean the last quarter you guys talked about upfront that you thought that M&A activity might pick up but it would be next year.
There's clearly some activity going on in your footprint. Just wondering, are you seeing an increased appetite from a seller perspective earlier than you anticipated?
Bryan Jordan
I wouldn't say there's been any significant changes. As I talked about last quarter, I think there was – the market valuations ran up and there was a belief that we were going to get a lot of regulatory relief and that we were going to see reduced taxes and things of that nature through legislative changes.
Some of that euphoria has probably dissipated. Does that add to the likelihood of M&A?
It may be too early to see. I think that if there is a significant pickup, then it is likely to happen in the latter part of this year or next year.
The economy seems to be pretty steady and people are still optimistic that through the course of this year we will see some potential for lower taxes and things of that nature.
Operator
The final question comes from Christopher Marinac of FIG Partners. Please go ahead.
Chris Marinac
Wanted to ask about the consent order put on the bank level earlier in the first quarter, does that have any meaningful difference on the day to day operations of the bank or any other decisions going forward?
Bryan Jordan
Chris, this is Bryan. Clearly, we are working to meet the requirements of that.
This is, for those that haven't read it, this is an order that relates to a product that we stopped selling in 2006. It was tied to the mortgage business.
It was essentially an add-on product. We stopped selling the product in 2006.
In, I get my years off a little bit, 2013, we did an examination to see if we had any add-on products. We researched it, we identified the problem and we reported it through our primary regulator, the Office of the Comptroller of the Currency.
We have put in place a remediation plan in compliance with the order that you referenced and we have reimbursed substantially all of those customers, not only for the revenue we earned but for the entire premium that they paid for that product under the terms with the insurance company. So, from a day to day perspective, we are containing to wrap that up or to meet the requirements of it, but from an operation standpoint, we stopped selling add-on products a decade ago.
Chris Marinac
Great, thanks for all that background, that's really helpful. Then just a follow up for BJ, when you mentioned about the rising deposit cost in general, do you see anything unusual from competition throughout the footprint?
William C. Losch III
Not really, not yet. On the consumer side, it's where you'd obviously see it the most and we're just not seeing any meaningful change yet in what people are doing.
And so, we anticipate that that's going to change. We've always thought the first couple of moves would be, there would be not much movement from the banks, but we'll have to see what happens going forward.
Chris Marinac
That was great. Thanks again, guys.
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, Francheska. Thank you all for joining us this morning.
We feel very good about the progress that we are making. We are optimistic about 2017.
If you have any follow-up questions or you need additional information, please feel free to reach out to any of us or to Aarti and we'll be happy to try to get that information for you. And again, thanks to our First Horizon, First Tennessee, FTN Financial employees for all you do.
Hope everyone has a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.