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First Horizon National Corp  (NYSE:FHN)
Q4 2018 Earnings Conference Call
Jan. 18, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning and welcome to the First Horizon National Corporation Fourth Quarter 2018 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 of Investor Relations. Please go ahead.

Aarti Bowman -- Investor Relations

Thank you Gary. Please note that the earnings release, financial supplement and slide presentation we'll use in this call are posted on the Investor Relations section of our website at www.firsthorizon.com.

In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from the forward-looking information for a number of reasons outlined in our earnings materials and on our most recent annual and quarterly report. Our forward-looking statements reflect our views today, and we are not obligated to update them. The non-GAAP information is identified as such in earnings materials and in the slide presentation for this call and is reconciled the GAAP information in those materials.

Also please remember that this webcast on our website is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch. Additionally, our Chief Credit Officer, Susan Springfield will be available with Bryan and BJ for questions.

I'll now turn it over to Bryan.

Bryan Jordan -- Chief Executive Officer

Thank you, Aarti. Good morning, everyone and thank you for joining us. The fourth quarter and 2018 were very good. I'm very proud, the work that our team did. 2018 was a transformative year for our organisation. We completed the integration of the merger with Capital Bank greatly expanding our markets and really into very attractive market. In our November, Investor Day presentation we laid out, so the key drivers of the business in 2019 and beyond and the differentiation in our markets and our business. And I think the fourth quarter did an excellent job of highlighting those. You saw good growth across our new expansion markets. We saw good customer acquisition. And I think you saw foundation or the opportunity to see the foundation that will drive strong performance in 2019 and beyond.

In the fourth quarter, across all of our markets which are good customer acquisition both in our consumer and our commercial banking businesses. Then we started the year 2019 with very strong momentum headed into this quarter. We saw good progress made on our merger, cost saves and our expense trends. And we are very optimistic about our ability to continue the realization of our cost saves in the first quarter of this year and continue to drive efficiency across the organisation. Our asset quality continue to be very good NPAs and delinquency trends were steady to down. Our credit quality on the whole continues to look good. And I'll come back and talk in a minute about the economy and a little bit of the outlook.

In the fourth quarter, we saw a 3% increase in our tangible book value per share. We also bought back as if the market corrected in bank stocks, we bought back $80 million of common stock bringing our total for stock repurchases to the year to around $100 million. While doing that increasing the tangible book value and buying back the stock, we also saw a steady common equity tier 1 ratio at 9.8%, so strong capitalization in our business and the opportunity to continue to lever that capital in the future.

Our economic outlook as we transition into 2019 is still very optimistic. There's nothing that we see particularly in the economy that is transitioned or taken effect at this point that causes us concern about the economy in 2019. Clearly, there are some opportunities for clouds on the horizon with trade disputes and/or shut down in Washington or even policy mistakes or much higher interest rates. But at this point, we don't see those becoming problematic. Customers continue to be very optimistic. We see customer balance sheets continuing to be very strong, and customer activity continue to be strong as evidenced by what we saw in loan and deposit growth in the fourth quarter. So as we look into this year, we're still very optimistic about the operating environment. (inaudible) off a little bit from 2018. In our likelihood, it probably will be a little bit softer from the strong growth we saw there, but we still are optimistic about growth in 2019.

So all in all, we think we're very well positioned for strong 2019. We have very good markets. We've improved those markets with the integration of Capital Bank. We've got good momentum and good demographics to build on. And so, I'm very optimistic about how we're positioned.

So with that, let me turn it over to BJ. Let him take you through the numbers and I'll come back with a few closing comments before we answer any questions. BJ?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Great. Thanks, Brian. Good morning, everybody. I'll start on slide 5 with the financial results. So on the fourth quarter, as Brian talked about, our reported EPS was at $0.30 and $0.35 on an adjusted basis. Our full year results reflected the successful execution of our Capital Bank deal as Brian talked about, as well as solid performance in our core franchise. In 2018, our reported EPS was $1.65 and adjusted was $1.41, up 26% from 2017. You'll see on page 5 that our fourth quarter notable items were $13 million of acquisition related items which included a $2 million of fair value mark associated with a loan sale and we also had a $9 million pre-tax impact related to the return of excess fees from Capital Bank debit cards. I'll talk about that a bit more in a minute.

On an adjusted basis, linked quarter revenue was down due largely to a few factors. First, you'll see in the fee line an $8 million decline in deferred compensation related to the equity market volatility in the fourth quarter. It's important to note that this was also offset in expenses. Second, you may recall we had a $4 million gain on a sale of TRUPs loans in the third quarter that did not repeat. We did not have any similar sales of any other kind either in the fourth quarter. And third, we had a slight decrease in NII because of lower accretion and a seasonal decline in our higher yielding loans to mortgage companies portfolio.

Not much change overall in the fixed income business in the fourth quarter. Revenues remained muted and we saw a slight average daily revenue decline from the third quarter. We did see higher ADR in the month of December as the business benefited from the market volatility but activity overall is still at relatively low levels.

On the expense side, we saw a quarter-to-quarter decline from that deferred compensation offset, which I discussed in the fee line, which was about $8 million, as well as the benefit of decreased FDIC surcharge, which was about $3 million. We remain disciplined overall on expenses with flat expenses in the rest of the business and expenses will continue to be a heavy focus in 2019.

Circling back on the notable item around debit fees that I mentioned earlier. During year-end reviews, we discovered we had been receiving excess fees related to interchange on Capital Bank debit cards. The $9 million reflects the cumulative amount of excess interchange fees we returned to the vendor. We have corrected this going forward, and absent volume increases, we will see lower debit card fees of about $2.5 million per quarter.

Before getting into the rest of the details on the quarter, I want to make the connection between what we outlined as our strategic priorities during our Investor Day in November and what we saw in the quarter and the momentum we see going into 2019.

As a reminder, our four key priorities are: number one, dominate Tennessee; number two, profitably grow key markets and specialty businesses; number three, transform the customer experience; and number four, optimize the expense base. Particularly as it relates to the first two priorities, we are very pleased with what we saw at the end of the fourth quarter in terms of customer activity and acquisition, specifically around deposit gathering and commercial lending in new markets.

Starting with deposits on slide six, we see that period-end deposits were up 5%, linked quarter and up 3% on an average basis. Deposit trends were excellent in the quarter across the board and both consumer and commercial as well as across all markets in Tennessee, in the mid Atlantic, and in Florida. As you can see in the bottom right chart, Tennessee was up 5% linked quarter, mid-Atlantic was up 4%, and South Florida increased 10%.

Our new customer acquisition emphasis and marketing efforts are making a difference already. As we discussed at Investor Day, we are confident in our ability to build a differentiated business model in our newer markets over time. We have been placing a heavy emphasis on new customer acquisition in both consumer and commercial banking, as well as putting marketing behind our efforts and it's already showing positive results.

Turning to the lending side on slide seven, while average loans were roughly flat linked quarter, we saw a very strong bookings in December. We saw particular strength in core commercial loan growth, which was up 5%, with broad-based increases across our Tennessee markets, the mid-Atlantic and the South Florida regions. We also saw continued positive growth in specialty areas such as corresponded healthcare, and asset based lending.

In the fourth quarter overall, our net loan growth was dampened by loans to mortgage companies being down seasonally as expected, as well as the large volume of payoff's in Commercial Real Estate as borrowers completed projects, transition properties to the permanent market and chose to exit deals through sales. Good news is that our three pipelines are strong and we should be able to profitably replenish those balances over the next several quarters.

Turning to NII and NIM on slide eight. Our NIM declined due largely to the higher excess cash balances from the strong deposit growth we saw. Those excess cash balances were driven by both strong customer deposit inflows as I discussed earlier, as well as higher market index deposits as brokerage customers moved more money out of equities into cash. While relatively neutral to NII, the excess cash compressed the margin by 4 basis points in the quarter.

You will remember that both at our Investor Day and over the course of the last 12 months or so, we have been talking about gathering customer deposits in our newer markets of Florida and the Carolinas, at lower overall deposit costs in betas and replacing the market-index deposits. This quarter was the first where we could confidently start to reduce our contracts on some insured network deposits based on strong customer inflows and you see that we canceled about $200 million of funding and expect to exit more in the coming quarters as deposit growth in the business continues.

NII was down modestly as the positive impacts of the deposit growth we saw were offset by seasonal declines in our higher yielding loans to mortgage companies business. However, we are encouraged by the growth we saw in fourth quarter which we believe will have a positive impact on NII going into 2019.

As you can see on slide eight, expense trends were solid and we demonstrated positive operating leverage and efficiency ratio improvement over the course of 2018. As I discussed a few minutes ago, total expense declined linked quarter from decreases in the FDIC expense, professional fees, employee compensation and deferred compensation. The decrease in deferred compensation was related again to the valuation declines from market volatility and is offset in non-interest income.

We remain disciplined overall on expenses with flat expenses in the rest of the business. Expenses will continue to be a focus in 2019. As you know from our Investor Day, one of our key priorities is optimizing our expense base. We are continuing to look for expense savings to reinvest in growth opportunities across the franchise.

Turning to asset quality on slide 10. Overall credit trends remain stable. Annualized net charge offs at 17 basis points for the quarter and 6 for the year continue to be at historically low levels. We did have an increased quarter-to-quarter and net charge offs related to two C&I credits, one that was fully reserved for and one that had a modest net impact on the provision. To provision overall remain low at $6 million, as overall PD grades in the commercial portfolios remain stable and 30 day delinquencies were down.

Wrapping up on slide 11, we are pleased again with how we performed in 2018 and are proud of all of our employees and what they did to make our Company successful last year. We're also very pleased with the momentum we see going into '19. You'll recognize this slide from our November Investor Day and we continue to be focused on doing what we say we will do and building a sustainable long term business model. Our returns were solid, profitability strong, credit quality stable and our opportunity for capital deployment is attractive.

And on that last point, as Bryan talked about, we were very opportunistic with our share repurchases in the quarter as we saw meaningful stock declines across the industry and in our own stock. We're confident in our business outlook and therefore, bought back $80 million of shares in the fourth quarter alone, $100 million over the course of 2018. At the same time, we kept our capital levels relatively stable. Our balance sheet and capital position are strong, and we have continued opportunity to deploy capital profitably in 2019.

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

Bryan Jordan -- Chief Executive Officer

Thank you, BJ. 2018 was a solid year, and we're delivering on our strategic priorities of beating our core Tennessee relationship, profitably growing in key markets and specialty areas, optimizing the expense base as BJ mentioned and deploying capital effectively. We're excited about the opportunities ahead of us, and we will continue to execute and deliver for long-term profitable growth. As BJ did, I want to also thank our colleagues for all of their hard work this year and in the fourth quarter, and we're counting on them to deliver another strong year in 2019.

Gary, with that, we will now take any questions.

Questions and Answers:

Operator

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

Steven Alexopoulos -- JPMorgan -- Analyst

Hey, good morning everybody.

Bryan Jordan -- Chief Executive Officer

Good morning, Steve.

Steven Alexopoulos -- JPMorgan -- Analyst

I want to start on the loan growth, so you guys had the strongest core C&I loan growth quarter in many years. We've had other banks also talking about a strong December. Can you get more color on what you saw in December? Are middle-market companies stepping up the pace of the investment? Like what drove this?

Susan Springfield -- Executive Vice President & Chief Credit Officer

We're seeing loan growth opportunities on several fronts, Steve. There are companies that are making additional investments, capital expenditure investments. We're also seeing some M&A activity among our customers and that can be an opportunity for us to work with clients who are buying other company. So, we're seeing -- it's not any one thing, I think it's across the board. We, specifically as you know, saw an increase in production through second quarter to third quarter and additional third quarter to fourth quarter related to the bank post merger and our banks are seeing out calling on those customers and prospects. So it was really kind of a broad-based loan growth.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. That's helpful.

Bryan Jordan -- Chief Executive Officer

And I'd say too, Steve. It was also very strong new-to-bank growth. We saw a significant pickup in new-to-bank that accentuates Susan's point about our bankers being refocused on outbound calling on prospects in addition to helping customers through the conversion process.

Susan Springfield -- Executive Vice President & Chief Credit Officer

That's right. About in the fourth quarter on the wholesale side about 55% was increased but 45% was new to bank. So really great work on both.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yes. And just to add to that, our new to bank commercial loan production for the year was up more than 20%. So really once we got past our integration, our folks have done an excellent job really getting out and building new to bank relationships and we started to see the bookings late in the year.

Steven Alexopoulos -- JPMorgan -- Analyst

And BJ, is that in the newer markets that you guys enter with the Capital deal or is that Tennessee?

William C. Losch III -- Executive Vice President & Chief Financial Officer

That is overall in the franchise that I would say is disproportionally related to the newer markets.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And then -- thank you. Just on the NIM, so we think about NIM, so you'll see a benefit in 1Q because of the December hike. Assuming the Fed pauses from here BJ, how do you think the margin will progress after the first quarter?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah, so we have still assumed one in June of '19 which we think would incrementally help. But if there are no rate increases going forward, we would be thinking more about NIM stability and trying to manage the NIM to stable. It's been interesting though to look at our asset liability position over time particularly as deposit competition has heated up. So whereas before we used to be very asset-sensitive, we started to float down toward moderately asset-sensitive, and we're pretty darn close to neutral now.

So I think the volume growth that we're seeing in the new production we're getting will be incrementally helpful to the margin. I think loans to mortgage companies, particularly given the back up in the 10-year that we saw in the fourth quarter could be helpful going in to next year that could certainly be a tailwind to us, but less rate increases because of the net position of our asset liabilities could be a modest headwind.

So all-in-all, you saw that we're at roughly the same outlook as what we had in November at Investor Day in terms of the 3.40% to 3.50% overall NIM and that's what we're shooting for.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And then just final one. In terms of 3.40%, 3.50% NIM guidance, you had $13.7 million contribution from the CBF accretion. What's the range -- reasonable range for accretion in 2019 which would be in that guidance?

William C. Losch III -- Executive Vice President & Chief Financial Officer

I'd say maybe $40 million in aggregate. And I think it'll come down $1 million or so a quarter is what our current forecast is.

Steven Alexopoulos -- JPMorgan -- Analyst

Terrific. Thanks for all the color.

Operator

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

Jeff Fleming -- Executive Vice President, Chief Accounting Officer of the Corporation and the Bank

Good morning, Jennifer.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Hi, Jennifer.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Good morning. Question, what industries were the two C&I charge-offs in this quarter?

Susan Springfield -- Executive Vice President & Chief Credit Officer

Yeah, Jennifer. The one other one, we (inaudible) talked about last quarter that we had taken non-performing and put a reserve against in it. It's a non-bank financial services company. The other is manufacturer of paper products.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Okay. All right. And question just on your fixed income business outlook. Could you give us a little more detail on what you're expecting in 2019?

Jeff Fleming -- Executive Vice President, Chief Accounting Officer of the Corporation and the Bank

I'm sorry, Jennifer, (Multiple Speakers)

William C. Losch III -- Executive Vice President & Chief Financial Officer

I'll start fixed income outlook. We expect maybe modest improvement from where we were in the fourth quarter. Actually, the -- what Steve asked about interest rates and outlook, the market reset interest rates after Chairman Powell made some follow-up comments to the FOMC meeting. And then more participation in the fixed income markets in early part of the first quarter. So, we expect to be just modestly better. I wouldn't say significantly, I'd probably the mid-500 is probably a reasonable range to think about it.

And the other thing that I think is, there's a little bit of a factor and we have to pay attention to as well. It is one of the impacts of the government shutdown is that they shutdown the flow of SBA activity. So that will have a little bit impact on coastal securities. Not just the trading environment is there, but there's still no flow of SBA loans to pull and to securitize. So that might have a little bit of impact. But on the whole, our outlook for first quarter in 2019 is probably slightly better than the run rate that we had in the fourth quarter of this year.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Thank you very much.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Sure.

Operator

The next question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Hey. Good morning, guys.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Hi, Brady.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

I understand how the expense base was impacted with the lower stock price and the $9 million reduction in deferred comp. Maybe just talk a little bit about how that impacted fee income by $8 million?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah. You're going to test my accounting skills, aren't you, Brady? So really, deferred comp, people can choose to defer compensation, which is then putting the rabbi trusts, and those assets are invested on behalf of those participants. And so, the asset side shows up in fee income in terms of the fluctuation in the value of what those assets are appreciating or depreciating. And on the expense side, we have a liability because we owe that to those participants at any given time.

And so, when the markets go down like they did in the fourth quarter, the value of the assets go down , the fee income is then a contra fee income. But then, our obligation to pay them out over time is obviously less. And so, they are largely mirror. I don't know why the accounting rules are such that, that's not netted, but I would suspect that you would see that from other banks going forward. So again, they largely offset because visibly they cause an issue, but it's an offset.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Okay. And then also in fee income, if you look at deposit fees, they were $25 million. If you add back the $8.7 million kind of one-timers, that gets you back up to about $34 million and then, you're saying to expect a reduction of around, I think you said, $2.5 million per quarter going forward. So does that get you down to kind of a $32 million quarterly run rate and maybe a little less as we start in 1Q '19?

William C. Losch III -- Executive Vice President & Chief Financial Officer

That's in volume increases. That's probably reasonable.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. And then just finally on the buyback, I mean it was a big number in the fourth quarter. The stocks are even cheaper today. How -- I know you all gave a fairly wide range on the payout ratio for '19, but I've got to think what the stock trade and how it's trading and you're going to be toward the upper end of that range.

Bryan Jordan -- Chief Executive Officer

Hey, Brady. This is Bryan. We go into a blackout period around earnings. And as we've noted in the past and noted through our actions in the fourth quarter when we think the stock is undervalued, we will buy and have an follow-up to this earnings release. If the stock in our view is undervalued, we're going to take opportunities to repurchase it. And as BJ has indicated, we expect to repatriate a significant portion of our earnings in 2019. With strong earnings, strong capital ratios, we think with undervalued stock, it's a great opportunity to buy some.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Got it. Thanks, guys.

Bryan Jordan -- Chief Executive Officer

Sure, thanks.

Operator

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

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning guys.

Bryan Jordan -- Chief Executive Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So I just wanted to clarify on expenses. So the deferred comp adjustment that's going to reverse in the first quarter, like should we expect both the fee and the expense impact reversing in 1Q or does this stay here if there is no move in the stock?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah, I mean, it fluctuate again based on the equity markets and asset valuations, but, yeah, it should just normalize.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Okay. And so if we look at the expense base, BJ, at $270 million in the fourth quarter and you mentioned multiple times the focus on expenses like where's that $270 million headed as we think about 2019 absent any sort of capital markets revenue upside?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Well, we talked about at Investor Day that we are focused on managing expenses down from 2018 levels. And so 2018 levels, I think would be more in the $280 million to $280 million -- low to 280s range and so that's what we're focused on doing.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And separately just in terms of credits, obviously of a pretty benign outlook for credit in terms of charge of guidance. Your previous -- I think going back to the bonefish for normalized charge offs of 20 to 60 basis points, do you still think that would be a range if and when credit normalizes next year or with the coming years.

Susan Springfield -- Executive Vice President & Chief Credit Officer

Ebrahim, as you -- for this year, we think it's going to be on the low end of that and could actually be lower than the 20 basis points low in guidance, and then based on what we know today. And then I would say through the cycle, we still feel good about that 20 to 60 as the range of charge off based on the strength of the portfolio that we've built.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And the way the portfolios today like exit (ph) capital, reserves are somewhere around 90 basis points. If that reserve level appropriate or do we still expect the reserve ratio should run off from here?

Susan Springfield -- Executive Vice President & Chief Credit Officer

I think -- I mean, I know we're adequately reserved today. I would -- based on what I know today, I think we'll probably see that coverage stay pretty steady. Obviously, if we started seeing anything in our portfolio or in the economy, you could see that build. As you saw this quarter, we do have -- we are seeing slower reserve releases from non-strategic as it runs off. But all things being equal based on the positive outlook that we have today, I would see coverage remaining pretty steady.

Bryan Jordan -- Chief Executive Officer

Let me test BJ's accounting knowledge too, because I think it's a matter of accounting math. As the Capital Bank portfolio it runs down naturally and is replaced by new originations that ratio will move up over time simply just by accounting that.

Susan Springfield -- Executive Vice President & Chief Credit Officer

That's right. And I think he talked about the -- having it back here at (inaudible). Yeah.

Unidentified Participant -- -- Analyst

Right. Thank you very much for taking my questions.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Thanks.

Operator

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

Tyler Stafford -- Stephens Inc. -- Analyst

Hi. Good morning, guys.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Good morning.

Susan Springfield -- Executive Vice President & Chief Credit Officer

Good morning.

Tyler Stafford -- Stephens Inc. -- Analyst

Thanks for taking the question. Just on the loan growth guidance for the year, the 3% to 6%. Can you help us understand like I guess the moving pieces within that for example just how much mortgage warehouse growth would you expect in there and just the non-strategic runoff continuing?

Bryan Jordan -- Chief Executive Officer

Yeah. So we had -- I think year-over-year in loans to mortgage companies, we had 2% growth. We added a good amount of new to bank customers in mortgage. So I think we're optimistic that we could see some mid-single digit growth hopefully in loans to mortgage company business. But, as we talked about going into the end of the quarter, we saw really strong growth in commercial. We saw strong growth in several specialty businesses. And the overall growth was dampened by large payoffs in commercial real estate, which I talked about the pipelines being strong to replenish over time.

And I think one of our pages is -- page seven, we show you that regional bank had 4% annualized one growth in the quarter even including the seasonal declines in mortgage warehouse increase. So we're still optimistic that based on what we're seeing based on pipelines, based on customer activity as Brian talked about earlier that range is something that we can certainly hit.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay. Got it.

Susan Springfield -- Executive Vice President & Chief Credit Officer

And we continue to see -- I'll add something to what BJ said. We continue to see the positive momentum of the synergies with the capital bank transaction as it relates to loan opportunities and really invest the wholesale and the consumer business. Based on what we're seeing in the pipeline today that synergies that we expected will be exceeded.

William C. Losch III -- Executive Vice President & Chief Financial Officer

One last point I'll add. You mentioned the mortgage warehouse business and BJ started with that. I think it's important to keep in mind, when you look at our headline loan growth numbers you have to think about it through an annual cycle. The mortgage warehouse business has seasonality in it, people don't move as much in the fourth and the first quarters. And as the refi activity has naturally come down over time, it's driven more and more by purchase money mortgages. And so, we'll see the seasonal effect in the fourth quarter, which we saw first quarter ought to be fairly stable relative to that and then we ought to start to see the growth in the second and third quarters. The wildcard is always what the 10-year treasury is doing and what effect it's having on mortgage rates and they'd come down a bit whether that spurs activity is yet to be seen.

But the bottom line is, when you look at our headline loan growth numbers, you have to factor in or it's helpful to factor in anyway the inherent seasonality and volatility that the mortgage warehouse business has. It's a very profitable business, and we're very appreciative of the contributions that it makes to the business, and we're willing to tolerate the seasonality of it, but it does affect from quarter-to-quarter the headline growth numbers.

Tyler Stafford -- Stephens Inc. -- Analyst

Yeah. Okay. Thanks for that. Of the $13.7 million of accretion this quarter, do you have the break down between just what was scheduled and what was prepaid?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Tyler, we'll have to get back to you on it. I don't it off the top of my head, I'm sorry.

Tyler Stafford -- Stephens Inc. -- Analyst

That's fine. And then just last one for me on the margin. Maybe, I'm missing something here and I can totally appreciate how the higher liquidity negatively impacted the core margin this quarter, but just liquidity aside, cost of funds were up 12 basis points, but our core loan yields were only up 5 basis points. So, I'm struggling to figure out how we're going to see a bounce back of the core margin from here, just given the earlier commentary about the asset sensitivity and not being as what it once was with future rate hike. So, how does the moving pieces -- will the core margin move higher from here?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah, so loan yields, I was a little surprised when I saw it first as well that it didn't expand more, because we had been seeing more loan yield expansion and I think a couple of different things happened. The CRE payoffs were one, and the loans-to-mortgage company seasonality was another, right. And so, those are a little bit more higher yielding in certain aspects. And so, when you look at the loan mix, we just didn't see the yield expansion that we thought.

I think the cost of funds was bright as we would have expected. The deposit betas have continued to come down from the beginning of last year when again we made a strategic move to shore up our deposit costs for existing relationships. And so, that beta has continued to come down, but it's a very competitive environment. And so, as we said at the Investor Day, we manage the totality of the margin. And so, when we see opportunities for loan yields, when we see opportunities for mix, we'll take advantage of those. When we have to defend deposits and deposit margins, we will do that. But over the time, our focus is to maintain stability and grow the margin in a profitable and sustainable way. And so, as I talked about earlier in terms of what I see on the outlook for this year, that's what we're going to be focused on doing as being in 3.40% to 3.50% range if we can.

Operator

The next question comes from Rob Placet with Deutsche Bank. Please go ahead.

Robert Placet -- Deutsche Bank -- Analyst

Yeah. Hi, good morning.

Bryan Jordan -- Chief Executive Officer

Good morning, Rob.

Robert Placet -- Deutsche Bank -- Analyst

Just on your deposit growth in your new markets, I was just curious what the mix of the new deposits growth in each of the mid-Atlantic and Florida looks like. And then, the average cost of deposits you had it on Slide 6, is that a fair representation of what your -- the cost of new incremental deposit growth in each of those markets looks like?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Hey, Robert, it's BJ. A couple of different things I will say. Number one is the majority of what is coming in on the consumer side in the new markets are as you might imagine, it's money market, it's CDs with a little bit of checking. Over time, obviously, what our focus is to bring those money in and then cross sell, I'm not just in deposits, but obviously other banking services. Even at the levels that we're bringing those money markets and CDs in, they are better costs than the market index deposits that we currently have that we are, as I talked about letting go. So I think that's going to be a very, very good trade for us and for our margin over time.

On the commercial side, we are seeing very good success building commercial deposits. I would say probably two-thirds of it to three quarters of it was on the interest-bearing side, but we are seeing very, very good activity on treasury services. As a matter of fact, in the mid-Atlantic region , so our Carolinas region, our results in the second half of 2018 were excellent. Our close sales were up 61% in treasury. The new business pipeline is up 300%. Client calls were up 200% and that's starting to flow through the margin and the deposit growth. And so over time that's going to really help us continue to sustain momentum there. So all in all, we're very pleased at the pricing and the mix of what's happening. We have to turn it more into core checking which we absolutely plan to do but we like the activity that we say.

Robert Placet -- Deutsche Bank -- Analyst

Okay. And just related -- just on the market index deposit side, I guess, just given the increase this quarter, I was curious to get an update on the timing, kind of the runoff or reduction in those deposits from here. Maybe where you see balances trending over the next few quarters? Thanks.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah, so Rob, what I mentioned earlier was that, because of the deposit growth we saw -- we gave notice on two contracts which are roughly $200 million. We're looking at several other contracts over the next several months that we would let go as we continue to see deposit growth. And so, our market index book was $4 billion-ish and you know we said at Investor Day that over the next several years if we could replace half to three quarters of that with core deposits in mid Atlantic, in Florida and elsewhere, that would be great and that would be helpful to our margin and better for our deposit mix overall. And so $200 million in the first quarter is a really good down payment on that and I expect it to continue.

Robert Placet -- Deutsche Bank -- Analyst

Okay, thank you.

Operator

The next question comes from Garrett Holland with Baird. Please go ahead.

Garrett Holland -- Robert W. Baird -- Analyst

Thanks for taking the questions. Most of it's obviously been covered. But just curious, to what extent is the improving Capital Bank RM productivity reflected in the 2019 outlook?

William C. Losch III -- Executive Vice President & Chief Financial Officer

I mean, it's hard to specifically say RM productivity in the outlook but the short answer is, it's a big part. And if you look at what we've talked about with the mid-Atlantic and South Florida performance that we've seen so far, particularly on the deposit side, if you remember back to Investor Day, our productivity per RM on the lending side from Capital Bank versus First Tennessee was relatively in line. Capital Bank was a little bit lower.

But on the deposit side, we had a huge opportunity and some of those metrics that I just talked about for example in the mid-Atlantic about the second half of the year with treasury services and commercial deposit sales are indicative of the momentum in productivity that we're seeing from our Capital Bank colleagues. So the 3% to 6% growth in aggregate obviously has -- is very dependent on us doing what we say, we're going to do to grow our newer markets and fourth quarter was a good start on that.

Unidentified Participant -- -- Analyst

Now that's helpful. And then just one quick follow up. The end of period C&I growth was encouraging very strong. Just curious and you guys seen very optimistic on growth heading into '19. Just curious if there is any verticals or geographies where risk adjusted returns are looking a bit less attractive.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah. That's a -- it's a good question. I'm not sure that there's anything I'm looking at Susan as well, that has turned down lately. There's some pockets of lending that we've been watching for a while that are still those that were more cautious about like multi-family lending in certain markets retail, Commercial Real Estate, pockets those types of things. But generally speaking we're not seeing significant stress maybe leverage lending, but we don't do a large volume of that.

Susan Springfield -- Executive Vice President & Chief Credit Officer

In fact yeah, our leverage lending is actually down year-over-year lever. We're not a big leveraged lender, it's like, it was less than 4% of the commercial portfolio, a year ago is now less than 3%. So fairly conservative there. But as BJ mentioned, we always do talk about, are we seeing any emerging risk and that is part of what we do. There's nothing that we've put the brakes on. As he said I think, yeah, we always watch Commercial Real Estate certain segments, franchise finance with rising labor costs such things that we just watch as normal course of managing the business in a good way.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah. I think, at this point, we're pleased with the growth and particularly the mix that we're seeing it's kind of a Goldilocks moment. I think you don't want to be too hot on growth, you don't want to be too cold and I think what we're seeing is core commercial loan growth, which is very solid grade credit quality, good risk adjusted returns and it does well through multiple cycles that's where we're seeing a lot of our growth coming from right now and so we're pleased to see that coming through.

Susan Springfield -- Executive Vice President & Chief Credit Officer

The good thing with the core commercial loan growth is higher opportunities for full relationships, deposits and treasuries. As BJ noted, the great work in mid-Atlantic with the increased treasury management I think its an example of that focus on core commercial in our key markets.

Analyst -- -- Analyst

Got it. Thank you. I appreciate all the detail.

Operator

The next question comes from Brock Vandervliet with UBS. Please go ahead.

Brock Vandervliet -- UBS Equity Research -- Analyst

Thanks for taking the question. I just want to circle back to a couple of the themes that Ebrahim touched on. In terms of the expenses, could you help us a little bit on that? Would you be willing to kind of put a stake in the ground in terms of an efficiency ratio or a figure that we should really consider? I understand the focus on expenses, but is this -- should we read this to mean our efficiency ratio could break below 60% in the next couple of years, how should we look at that?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Hey, Brock. It's BJ. I think, I just pointed to Slide 11, which is our outlook and kind of what we've talking about for 2019. And you'd see that from an efficiency ratio perspective, we expect to make pretty good progress on continuing to improve that efficiency ratio over time. As we've talked about at Investor Day, Capital Bank, plus ongoing expense discipline, has meaningfully reduced our efficiency ratio over the last two years. We know that's a critical ratio for us to continue to improve to be able to improve profitability. And so, discipline on expenses that we discussed, coupled with some incremental revenue growth, is going to be the formula to get there. So slide 11 kind of tells you where we think our outlook is for '19 and we're intent on delivering that.

Bryan Jordan -- Chief Executive Officer

Brock, this is Bryan. In addition to what BJ said, now, here we don't see 60 as the floor. BJ has talked about and we focus an awful lot on operating leverage. We look to grow revenue faster than we're growing expenses. And it is our desire to continue to leverage our expense base for outsized revenue growth relative to that. So in all likelihood, it will push below 60 at some point in future. Yes, in all likelihood it should.

Brock Vandervliet -- UBS Equity Research -- Analyst

Okay, great. Thanks. Now just separately on credit, you've had a long period of net recoveries, especially from non-strategic. As -- can you give us a sense of when that may be tailing off, and how is that kind of feed into your credit guide?

Susan Springfield -- Executive Vice President & Chief Credit Officer

Brock, I -- as we've said, we know that non-strategic is going to continue to runoff. We could still have some small provision releases in any given order out of non-strategic. But again as it -- as that runs off, we're not going to have the opportunity there. For the regional bank, as Bryan started out to call in terms of economic outlook in our portfolio, I feel very good about it.

As you noted, our delinquency were down like 8 basis points overall quarter-over-quarter. Non-performing loans stable. PD grades in the commercial portfolio were stable and strong. Weighted average FICO very strong at over 750. So the two charge offs that we had this quarter were isolated kind of idiosyncratic types of situations. So we feel very good about the portfolio and the outlook for credit, absent any big change in the economy that could affect really any portfolio.

Operator

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

Christopher Marinac -- FIG Partners -- Analyst

The market index deposits, BJ, is there anything you can do to influence customer behavior there or are you more at the whims of kind of how it goes, puts and takes on the quarter just like you explained at the very beginning of the call?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yeah, so the way these things work is there are multiple contracts that we enter into and we ladder them obviously based on what we anticipate our needs are from those types of deposits. And so you enter into contracts and those contracts have a range of balances that they will deliver to you at any given time. And so that's obviously helpful for asset liability planning.

When something like what happens in the fourth quarter happens, there's a significant influx of cash into brokerage accounts which is where these things come from and you float toward the higher end of the range on all your contracts. And so it's contractually that you are -- you're obligated to take these. We certainly tell them and try to work with them around what our needs are and we don't need more than at any given time, et cetera. But the reality is, sometimes you get more inflows.

Like I said during the NIM commentary or the NII commentary, it doesn't really hurt our NII, because we just turn around and invested at the Fed overnight, but it does dampen your NIM. So we'll continue to optimize this overtime and I'm confident that we can do that and replace it with customer deposits and I think it will build a stronger deposit base in the balance sheet.

Christopher Marinac -- FIG Partners -- Analyst

Great. Thanks for that color and then Susan, just a quick one for you. Can you give us any more color on, sort of, what's happening in terms of classified and criticized, but below the charge offs that were one-time this quarter?

Susan Springfield -- Executive Vice President & Chief Credit Officer

Yes, we really saw criticized loans remain stable in terms of percent of the portfolio quarter-over-quarter and really up or moved back over the year have been relatively very stable as a percent of the portfolio. So, you always have to move them in and out. Things get upgraded or paid off, and you have some things move in. So we're still seeing kind of the normal ins and outs that we've seen. And the overall level, as I said, remains pretty -- very steady over the last four or five quarters.

Christopher Marinac -- FIG Partners -- Analyst

Great. Thank you very much for the additional background.

Susan Springfield -- Executive Vice President & Chief Credit Officer

Thanks, Chris.

Operator

The next question is a follow-up from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Sorry for getting back in. But very quick question. BJ, I just want to clarify we are thinking about the margin correctly given the inflows and outflows of the market index. Is the rate on the market index at 235 basis points (ph)? Is that done going higher if the Fed doesn't raise soon? Is that fair to assume or could that go lower if some of these higher cost contracts go away?

William C. Losch III -- Executive Vice President & Chief Financial Officer

Yes. They're all based on Fed effective, plus a premium, is what they charge in. Depending on the contract, it's probably anywhere between 5 basis points and 25 basis points, Fed effective plus 5 basis points to 25 basis points. And so, depending on the contracts that we cancel, that -- it will impact what the weighted average rate is. But again those are 100% beta, right. So if the Fed does actually lower rates at some point, those rates will get lower as well. But again, they're not customer deposits. We like customer deposits, and we'll continue to be focused on replacing them.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. And to the extent and I appreciate the 2019 guidance, but the margin was at 3.38%, the excess cash all -- like do you expect this to rebound closer to that midpoint of your 3.40% to 3.45% range in 1Q?

William C. Losch III -- Executive Vice President & Chief Financial Officer

I'm not sure I would say in 1Q, but over the course of 2019, we are focused on being in that range.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. Thank you so much.

William C. Losch III -- Executive Vice President & Chief Financial Officer

Sure. Thank you.

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 -- Chief Executive Officer

Thank you, Gary. Thank you all for joining us this morning. We appreciate the time you've spent with us and your interest in our Company. If you have any follow-up questions, please reach out to us. We'd be happy to try to gather the information and respond to them. I hope everyone has a wonderful weekend and a Happy New Year. Thank you very much.

Operator

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

Duration: 54 minutes

Call participants:

Aarti Bowman -- Investor Relations

Bryan Jordan -- Chief Executive Officer

William C. Losch III -- Executive Vice President & Chief Financial Officer

Steven Alexopoulos -- JPMorgan -- Analyst

Susan Springfield -- Executive Vice President & Chief Credit Officer

Jeff Fleming -- Executive Vice President, Chief Accounting Officer of the Corporation and the Bank

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Unidentified Participant -- -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

Robert Placet -- Deutsche Bank -- Analyst

Garrett Holland -- Robert W. Baird -- Analyst

Analyst -- -- Analyst

Brock Vandervliet -- UBS Equity Research -- Analyst

Christopher Marinac -- FIG Partners -- Analyst

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