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First Horizon National Corp (FHN -0.94%)
Q4 2019 Earnings Call
Jan 17, 2020, 9:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the First Horizon National Corp. Fourth Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [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 -- Head of Investor Relations
Thank you, Sarah. 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 our most recent annual and quarterly reports. Our forward-looking statements reflect our views today and are not -- 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 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.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Thank you, Aarti. Good morning and thank you for joining our call. I'm pleased with the strong performance we demonstrated throughout 2019, including the fourth quarter. We ended the year with very good momentum, positioning us well for 2020. Over the past year, we showed profitable balance sheet growth, including growth in key markets. We have delivered significant earnings contribution from our counter-cyclical businesses, improved efficiency and deployed capital effectively.
We spent much of 2018 integrating Capital Bank into our legacy business. In 2019, we successfully leveraged the combined platform with an expanded market presence and increased balance sheet capacity. We were able to deliver good earnings power and delivered merger synergies. Our announced transactions with the IBERIABANK MOE and the Truist branch acquisition should further enhance our growth prospects. We should also deliver nice earnings accretion in 2020.
Our strategic focus paid off with broad-based loan and deposit growth in key markets. Our higher return specialty areas were especially strong. Our diversified loan portfolio was up 7% from 2018 to 2019, and credit quality trends remain stable. We were able to favorably shift our funding mix, with customer deposits replacing wholesale funding with a regional bank average deposit growth of 9%.
Our counter-cyclical business mix helps us to produce solid returns, even in a challenging interest rate environment, such as 2019. Our fixed income business benefited from falling interest rates and market volatility. Fixed-income revenue was up 52% from 2018 to 2019, and average daily revenue was over $1 million in the fourth quarter of 2019.
Our mortgage warehouse lending business was also helped by lower rates in customer expansion, and showing 133% growth year-over-year.
The momentum we accomplished through balance sheet growth, expanded market presence in counter-cyclical businesses resulting in the achievement of the financial targets we laid out for 2019, in our 2018 Investor Day. We now have a strong foundation to build on this momentum, and we'll use our experience with the Capital Bank merger to successfully execute on our MOE with IBERIABANK.
We will also have meaningful opportunities with the acquisition of the 30 branches in very attractive markets, that will provide additional earnings accretion. Throughout the next year, we will remain focused on growing our balance sheet and not getting distracted, while we close and integrate these transactions. I am pleased with our integration planning to-date, and are more confident today about our ability to deliver the announced synergies and build a leading regional franchise.
The current economic environment is relatively steady in our view. Our markets are still showing solid growth. Our customers broadly remain relatively optimistic with the economic outlook.
I'll now turn the call over to BJ to go through the quarter. Then I'll be back with some closing comments. BJ?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Great. Thanks Brian and good morning everybody. I'll start on slide 7; by reviewing our EPS trends we saw quarter-by-quarter through the course of 2019, which gives a good perspective of how the momentum of the business has accelerated over the last year. Our key financial objectives this year were primarily two-fold; first to accelerate the strong loan and deposit growth momentum that we were seeing toward the end of 2018, post the Capital Bank integration. And number two, leverage the full year impact of merger cost savings and continue expense efficiency efforts.
Coming into 2019, we like others, expected a rising rate environment. Yet that outlook quickly shifted at the beginning of the year and put significant pressure on our net interest income growth. However, our business model and our teams adapted as we expected.
First, we did an excellent job of growing loan in deposits, with total average loans up 7%, and total average deposits up 5% year-over-year. Second, we maintained strong loan and deposit pricing discipline. In particular, our ability to continue growing core deposits, while lowering our deposit rates paid from 1.03% in 1Q '19 to 82 basis points in 4Q '19, helped mitigate the impact of three Fed cuts.
Third, our counter-cyclical businesses like fixed income and loans-to-mortgage companies generated strong earnings growth, that more than offset the rate headwinds. And lastly, we took out almost 7% of our growth's expense base, through actions designed to both improve our efficiency, and allow for needed reinvestment. Through all this, we posted quarterly earnings growth over the year on an adjusted basis, that continue to strengthen throughout the year, culminating in full year adjusted EPS growth of 18% versus 2018.
As you can see on slide 8, our consolidated financial results for the fourth quarter show the line item drivers of growth, both linked quarter and year-over-year. Few highlights I would point out; average loans from fourth quarter '19 versus fourth quarter '18 were up 13% year-over-year. Despite the challenging rate environment with the multiple Fed rate cuts, we still grew NII 3% year-over-year, due to strong commercial loan growth and managing deposit costs lower. Fees were up materially, both linked quarter and year-over-year, from both continued increases in bank fees from strong customer growth, and excellent performance from the fixed income business. You will see on the bottom right, notable items are related to the merger costs from the pending Iberia deal, a charitable contribution that we made to our foundation, and our previously announced rebranding launch that occurred in the fourth quarter.
Let's take a deeper look at the broad-based loan growth we're seeing on slide 9, and as you can see here, the 13% growth in loans, which is well ahead of industry growth, comes from all parts of our franchise, in both our specialty businesses, which grew 31%, and 8% excluding loans to mortgage companies, which had an outstanding year. And across our markets, we saw healthy growth, with particular strength in our highest opportunity markets like Middle Tennessee, South Florida and Texas. Encouragingly, pipelines into 1Q also remained strong and we expect that favorable momentum to continue.
Taking a look at deposit trends on slide 10, you see that our core deposit gathering in the regional bank is strong, and as with our loan growth, our growth in deposits is also broad based across both our specialty businesses, and our markets. And again we've done this while being very disciplined on pricing. Deposit rates paid declined 13 basis points linked quarter, and are down 21 basis points since the first quarter of 2019.
Turning to slide 11; this brings us to the fixed income business, which again as Bryan said, had an outstanding year. We've known that this business had the nimbleness and capability to quickly capture revenue opportunities when the market turned, and with the decline in interest rates and the market volatility, it was favorably impacted in terms of market activity in our sales and trading, across all of our desks. And in addition, our other product revenue increased with customers continuing to execute rate swaps, resulting in higher fees in our derivatives business. And during the last few years, the management team has repositioned the expense base for improved profit leverage, as volume returned, which is clearly evident in the results we've seen this year. Given the general level and direction of rates along with some expectation of continued market volatility, we expect the fixed income business to continuing delivering solid results into 2020.
Let's turn to net interest income and margin on slide 12; linked quarter, we saw increases in both NII and NIM, as strong loan and deposit growth, coupled with deposit cost discipline and a rebound in accretion, led to a 3% linked quarter increase in NII, and a 5 basis point expansion in the net interest margin. In the bottom left, we wanted to dimension for you, how much of a headwind the change in the interest rate environment was, yet how well our teams were able to manage through it, through strong customer growth and solid pricing discipline.
Now let's turn to expenses on slide 13; underlying the great growth in revenue performance we saw across our markets and businesses, we also continued to actively reposition our expense base for improved efficiency. The disciplined approach to expense management we've had over the last several years was a major contributor to our earnings tower over the last year as well. And on an adjusted basis, we were able to reduce expenses slightly versus 2018, despite a $40 million increase in fixed income expenses that supported its higher revenue.
We did it by both lowering our core expenses through the achievement of cost saves from the Capital Bank deal, and continuing with further efficiency actions, such as branch closures, decreases in vendor and discretionary spending. The $80 million of expense reductions we've referenced here, equates to about 7% of the gross expense base. By continuing our efficiency efforts, we were able to make some reinvestment in our customer experience and technology initiatives that will be critical to our future success.
And by driving significant positive operating leverage, we are able to bring down our efficiency ratio substantially, about 600 basis points from 2018 to 2019 on an adjusted basis, to finish fourth quarter at 59.9%. We believe expense management is the strength of our company, and this track record gives us confidence in our ability to gain the expected further scale and efficiency benefits from the Iberia merger.
Turning to asset quality on slide 14; our credit trends remained excellent throughout the year, as we maintained our underwriting discipline. Net charge-offs in the quarter were at only $3 million, with delinquencies and non-performing loans declining both linked quarter and year-over-year as well, with provision growth largely due to the strong loan growth. Again, credit quality remained strong and we expect our credit trends to remain stable.
Slide 15 gives you a preview of our expected CECL impact, which as you are aware, we will adopt in first quarter of 2020. We currently estimate that the adoption of CECL will result in allowance to loans ratio of 100 basis points to 110 basis points. We will experience an increase in the reserve, largely due to longer-term consumer loans, and establishing a reserve for previously marked and acquired loans. Other commercial portfolio reserves are expected to remain relatively stable. As a reminder, we will also see an impact on the reserves, when we close our Iberia transaction, and we have repeated these and laid them out at the bottom half of this slide.
On slide 16, you see a brief update of our Iberia merger and branch acquisition activities for both, the closing and integration planning remains on track. In addition to holding townhalls and engaging employees, we have already completed several steps in the regulatory application process and commence integration planning. Our current expectation is to close and integrate the branch transaction in the second quarter of 2020 and to close the Iberia merger sometime mid 2020
Wrapping up on slide 17; again, 2019 was a transformative year for us. Our successful execution of the Capital Bank deal strengthened our franchise, improved our efficiency, and favorably shifted our funding mix through market and customer expansion. We delivered on our financial targets in 2019 that we had laid out at our Investor Day. We showed meaningful earnings growth, despite a challenging rate environment. We showed strong business momentum by generating earnings and balance sheet growth and demonstrating the benefits of our complementary business model. Our merger of equals with IBERIABANK and the Truist branch acquisition will expand our opportunities in attractive, high growth markets, enhance our scale and lead us toward top tier profitability. We're not done. Momentum continues across our business into 2020. And that's all I have.
Bryan?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Thank you. BJ. To repeat BJ a little bit, we've accomplished a great deal over the past year. We delivered on our financial targets we set out in our Investor Day. We grew earnings, despite the challenging rate environment and successfully executed on the opportunities from the Capital Bank merger.
We ended the year with strong momentum and we see that momentum continuing into 2020, as we work on the integration of our MLE with IBERIABANK and our branch acquisition from Truist. Thank you to all of our employees for all their hard work over the past year, on behalf of our customers, our communities and our shareholders.
With that Sarah, we will now take questions.
Questions and Answers:
Operator
[Operator Instructions]. Our first question comes from Steven Alexopoulos with JP Morgan. Please go ahead.
Steven Alexopoulos -- JP Morgan -- Analyst
Hey, good morning everybody.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Good morning Steve.
Steven Alexopoulos -- JP Morgan -- Analyst
I want to start on the margin, maybe for BJ, how are you thinking about the core NIM here, like near-term as well, as we work through 2020?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah. So I think -- what I would say, into 2020 Steve, is we would expect net interest margin trends to remain relatively stable through the next couple of quarters. There usually is a seasonal decline in the first quarter, related to seasonality of loans to mortgage companies, which is a point of our higher yielding businesses and day counts and that type of thing. So there could be a dip because of those factors in the first quarter. But generally speaking, given the pricing discipline that we've got on the deposit side and the loan side, we would try to hold that relatively stable over the next couple of quarters.
Steven Alexopoulos -- JP Morgan -- Analyst
Okay. That's helpful. And then appreciate the CECL disclosure. As we think through the Day 2 impact and we look at the 1% to 1.1% range, should we assume that you stay in the middle of that range or is the bias a decline over time, as items such as non-strategic run-off, for example?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah, I think as you know, the CECL impacts really are largely on us [Phonetic]. There is a significant effect of future views of the economy, as we get into the use of CECL. And so, if we're assuming that the future economic environment is relatively the same as how we view it today, then I would expect that the 100 to 110 basis points largely stays. Our non-strategic portfolio now is well under $1 billion and so, not nearly as big of an impact as it used to be.
So if we continue to have a commercially oriented balance sheet, which we expect, then I think largely that range will likely hold.
Steven Alexopoulos -- JP Morgan -- Analyst
Okay. And does the potential capital hit from CECL change your thoughts around buybacks at all?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Not necessarily. Now, of course, we can't do any share repurchases with the pending Iberia merger, right. So nothing would be occurring till that closes. But not really. I think you're moving from one pocket to another. In terms of capital in my opinion. So all of that will be put into our stress test, which again is the foundation for how we think about deploying excess capital and with that, we feel very strong.
Steven Alexopoulos -- JP Morgan -- Analyst
And then finally, I'm curious if you guys look at the synergies post the Iberia deal closing, the benefit from the SunTrust branches, do you guys feel consensus properly captures the earnings power of this new company? Thanks.
William C. Losch III -- Executive Vice President & Chief Financial Officer
Probably the short answer is no. I think the momentum that we've got in our business is going to carry on into 2020. Bryan talked about it at the beginning, as being a major focus of not losing sight of continuing to run the business as we integrate. So that's one of our top priorities. Then if you look at how we're performing today, how we are taking cost out of our own organization, how we've done it in the Capital Bank deal, how much expertise Iberia has, integrating and doing the same types of things. We feel very confident in our ability to put these two companies together well and deliver that profitability profile over time, that we expect from the deal.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Steve, this is Bryan. I have to add to what BJ said, we don't think about how we influence consensus in the short run. Our role is to deliver on the commitments that we make, and we are very optimistic about what we see in both of these transactions. And as I said in my opening comments, the more planning that we do, the more optimistic I am that we will not only deliver, but potentially over-deliver on those commitments. So we see both of these transactions accreting to earnings and we see both of them delivering significant shareholder value over time. We recognize, that it is our responsibility to manage the business day to day, and to execute on what we said we're going to do, and that's what we're set out to do.
Steven Alexopoulos -- JP Morgan -- Analyst
Great. I appreciate the color. Thanks for taking my questions.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yes, thank you. Have a good weekend.
Operator
Our next question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey -- KBW -- Analyst
Thanks. Good morning, guys.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Good morning Brady.
Brady Gailey -- KBW -- Analyst
So in your opening comments, I mean you guys said that expense management continues to be a strength of the company. You took out another $80 million, 7% last year in 2019, and that's above and beyond any sort of deal-related cost savings. How do you think about that going forward? Do you think there's still opportunity to reduce the legacy expense base from here, or are you to the point where reductions are not going to be as notable?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Brady, this is Bryan. I will start. I think it's going to be really really difficult in the next year or two to separate out what's associated with our integration or the merger or merger of equals with Iberia. But we continue to believe that through this period and beyond that, we will continually have to rethink our expense base and think about how we manage expenses to what BJ said, control costs, but also invest in the technology and infrastructure to deliver the products and services that our customers are looking for.
The short answer to your question is yes, I think there are other additional opportunities in the legacy expense base, as well as on the IBERIABANK side, that will allow us to deliver our merger synergies, and will allow us to fund the investments that we need to make long-term. So I am optimistic that we will be able to do exactly what you described. And as BJ said, if you go back 10-12 years, we have consistently worked on our expense base. We have consistently deliver greater efficiency, and it showed up on our overhead efficiency ratio improvement in 2019 and I expect that you'll continue to see that improve throughout the merger and the integration of the two transactions that we've talked about.
Brady Gailey -- KBW -- Analyst
All right, that's helpful. And then the mortgage warehouse was also very strong in 2019, it was up -- average balances were up 75% year-over-year, and you finished on a high note at $4.4 billion, in a seasonally soft quarter. How do you think the mortgage warehouse will trend, as we continue through 2020? And I know you all talked about the warehouse -- the yield being one of your highest or one of your higher loan yields. Does that yield still run about 5.5%?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Brady, this is Bryan again. I'll start. Mortgage warehouse is a seasonal business. The first quarter is historically the lowest, and I would expect that that could be down $400 million to $500 million on average versus the fourth quarter. But as you look at it vis-a-vis a year ago, I expect it to be up. We've gained market share and we continue to grow our customer base and we continue to broaden the breadth and scope of the business. So while it will have seasonal -- fluctuations or seasonality, as we said in the past, we believe it's a extraordinarily valuable business, it creates a tremendous amount of shareholder value by delivering very strong returns. And so we live with the seasonal volatility.
Our outlook overall for the business is good. We expect long-term rates to be low. We expect purchase activity to continue to be very good in 2020. Refi is a little less than half of the business, we're seeing today. So overall, we're optimistic about the outlook for mortgage warehouse in 2020.
Susan L. Springfield -- Executive Vice President and Chief Credit Officer
A few specifics I would add to what Bryan said; if you look at where we are just the first 10 days of January compared to the January average last year for mortgage warehouse, we are more than double where we were last year for January. So the tick-up in the number of clients we've added, 17 net new clients year-over-year and we're continuing to do business with good-sized companies, medium and large sized mortgage companies, where we've been able to increase our average mortgage warehouse relationship from about $22 million to $30 million over the course of the last 12 months.
So in addition to the the economy, leading to that great work by the team on bringing in new customers and continuing to deepen relationships with customers, that will really help sustain that business, even through some seasonal and cyclical fluctuations.
Operator
Our next question comes from Ebrahim Poonawala with Bank of America Securities. Please go ahead.
Ebrahim Poonawala -- Bank of America Securities -- Analyst
Good morning.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Good morning, Ebrahim.
Ebrahim Poonawala -- Bank of America Securities -- Analyst
Just one, wanted to follow up on the margin. BJ, how should we think about the accretion, at least through the first half, before you close either of the deals relative to the 15 basis points in the fourth quarter?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah. So we've put here on slide 12, just to dimension for you, the total loan accretion in the year was $42 million. That continues to step down every quarter, right. So accretion by nature would be lower in 2020. than it was for 2019. The other factor that's going to drive it even lower, is the impact of CECL, which takes away some, not all of the accretion that you have from purchased or acquired loans. So loan accretion will continue to come down over the next few quarters.
Ebrahim Poonawala -- Bank of America Securities -- Analyst
Got it, OK. So a step down from the 15 bps in the fourth quarter. I guess?
Brady Gailey -- KBW -- Analyst
Oh, yes. Yeah. Yeah, because we were -- if you think about it. We should have been averaging something like 10-ish a quarter. Third quarter was abnormally low. Fourth quarter was abnormally high. Put the two together, and it is right around the $10 million. But it will continue to come down a couple of million dollars a quarter.
Ebrahim Poonawala -- Bank of America Securities -- Analyst
That's helpful. And just going back to the Iberia deal and is it safe to assume that -- I know you said mid 2020, but the deal could close by the second quarter or by the end of the 2Q '20, given just the timeline we've seen with other deals like DCF last year? And Bryan, would love to get a little more color around -- just your confidence around the expense savings. As you said, Iberia has done a fantastic job in terms of getting expense savings from its deals historically, and you guys have done a great job on expense management. If you could just talk to in terms of the possibility that expense savings from that deal could run ahead of schedule, and how do you think -- just how the integration plan like? Do we see a good amount of savings come through by the end of the year or by the first half of next year? Would love to hear any color that you can provide on this?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yes, sure. So the first part of your question was timeline, and we have no reason to believe at this point that we won't get the requisite shareholder and regulatory approvals by second quarter of this year. So we expect to close late first half of this year. So as far as we know, everything there is on track and as BJ mentioned, we have made the required filings and so the ball is rolling in that regard.
To your point, clearly the experience base with the Iberia team has been very-very strong. They've done a number of mergers and integrations over the years. And so, when I step back and think about their experience base and couple with ours, I think fundamentally, we have the right focus on how we execute on these transactions.
The thing that has really encouraged me, has been the way the eight executives that we announced in the merger announcement, as well as our ability to roll that out further in the organization. The way these teams are coming together in planning for this integration is very-very good in my view and I've seen a lot of these over the years, and there is a strong focus on, not only how we deliver on these commitments, but how we build the franchise to be in a very strong and stable place for the future, delivering strong shareholder value and products and services that our customers won't [Phonetic] need for the long term.
So without trying to fine tune where expenses will fall throughout the back half of this year, I would say that I am optimistic that we're going to hit our synergy numbers, and I think over time, we may prove that there is some upside to that. So I'm optimistic in the way the planning has gone to date. I love the way that the team is working together, to plan the combined organization. And as we get through this approval process and shareholder vote, I'm excited about bringing the team together, to manage the combined business.
Ebrahim Poonawala -- Bank of America Securities -- Analyst
That's great to hear. Thanks for taking my questions.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yes, thank you.
Operator
Our next question comes from Tyler Stafford with Stephens. Please go ahead.
Tyler Stafford -- Stephens Inc. -- Analyst
Hey, good morning guys. Nice quarter.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Thank you.
Tyler Stafford -- Stephens Inc. -- Analyst
Just following up on one of the earlier questions about Street estimates, perhaps not reflecting the earnings power of the combined company. Obviously, there is a lot of moving pieces this year with the branch purchase and Iberia acquisition. Just curious, why you guys chose to not provide 2020 guidance, even on a stand-alone basis, given the momentum coming out of 2019?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah, I think generally speaking, as you know, we don't provide guidance. We did -- I guess you can call it our Investor Day targets, a form of guidance, that I think was a little bit unique. I think if you listen to what Bryan and I said in some of our opening comments, you can take some trends away, strong business momentum, loan pipelines remain strong. We maintain pretty good discipline on deposit pricing. We talked earlier in the Q&A, on what we thought around margin. Fixed income, given continued market volatility and the level and direction of rates, we feel good about the level of what we're seeing there. And our expense discipline will remain a key focus for us, through the first half of the year. Now again, as Bryan said and as everybody knows, it's going to get a little noisier, as we get to close with Iberia deal and things are going to start to come together, but the fundamental business momentum that we're seeing, continues into the first quarter.
Tyler Stafford -- Stephens Inc. -- Analyst
Okay. Thanks BJ. And just thinking about loan growth for 2020, I think Bryan mentioned perhaps roughly a $500 million step down in mortgage warehouse balances. But just trying to triangulate what that could mean for 2020 growth last year for '19, you had the 3% to 6% growth expectations. Obviously you came in ahead of that. But is that a good range that we should think about -- on a stand-alone basis for 2020?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah I think so. Yeah, I think clearly, we had really really strong loan to mortgage company growth. It would be great if that continued, but we'll assume that that's going to come back in a little bit, but the fundamentals of the rest of the growth feel really good, such that that low to mid single digit range feels feels appropriate.
Tyler Stafford -- Stephens Inc. -- Analyst
Okay, thanks for that. And then just one more for me on expenses, backing out the onetime expenses, it looks like the employee compensation expense was up, call it $10 million or so quarter-over-quarter on a core basis, even with the FTN expenses up only $2 million or so. Can you just give us any color on what drove that step-up in employee comp? Did you guys hire? Was that incentive kind of catch-up for the year, or just any color you can share on that increase? Thanks.
William C. Losch III -- Executive Vice President & Chief Financial Officer
It was a variety of things. It was fixed income, variable comp driving much of it. But then year-end bonus accruals, given the strong year that we had as well, both on the front line side, related to volume-based incentives, as well as overall corporate results.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
BJ, you may correct me if I'm wrong, but Tyler referenced the step up in FTN expenses. Last quarter, was high because of a legal settlement that was reflected in those numbers. And that didn't recur in compensation expense, it was higher as a result this quarter.
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah. That's a good point.
Tyler Stafford -- Stephens Inc. -- Analyst
Yeah, thanks for that. I think I was taking that into account, but regardless -- yeah, that was -- the FTN was definitely a driver of that step-up. So I can appreciate that. Okay, thanks guys. That's it for me.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
All right. Thank you.
William C. Losch III -- Executive Vice President & Chief Financial Officer
Thank you, Tyler.
Operator
Our next question comes from Jennifer Demba with SunTrust Robinson. Please go ahead.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Hey Jennifer.
Jennifer Demba -- SunTrust Robinson -- Analyst
Hi, good morning. Question on asset quality, you indicated you think things will be relatively stable this year. Your net charge-offs were so low in 2019, just wondering how you kind of think about it going forward? And also, your franchise lending, I know it's a small business for you, but just wondering how that's performing these days, given restaurant pressure? Thanks.
Susan L. Springfield -- Executive Vice President and Chief Credit Officer
Jennifer, our outlook for asset quality is -- remains stable and strong at this point, based on what we're seeing in our portfolio. And I know Bryan touched on the client sentiment as well. We continue to be selective and disciplined, in terms of both increases to existing clients and bringing on new clients and disciplined around servicing.
Just as a sidebar, I would add that I think client selection throughout, for a long-term sustainable portfolio is so critical, and our bankers really do a great job with that. I think that's a tribute to the model, of having market presidents and local credit officers in the market, who know those markets and the people that we're doing business with; because if you do have a situation where you need to come to the table, it's always great to see clients who step up and do the right thing, and that's, that's something that we talk about day in and day out. So I feel very good about the asset quality that we're seeing and the way in which we brought business on the book.
The franchise finance team is no different in terms of discipline around underwriting client selection. The way that they follow various concepts and look for both opportunities and threats, that portfolio -- excuse me, portfolio is performing well. But that is an area, and I would tell you, even though customer sentiment across the board is very strong, the one thing we're hearing both from franchise finance clients and really others, is the pressure on wages and quality of labor. So we do talk a lot with customers about that, and you also have many states, who went to a higher minimum wage that was expected, and so these clients have put that in their run rate, but it is something that we watch closely.
Jennifer Demba -- SunTrust Robinson -- Analyst
Great, thank you. Another question -- just Bryan, wondering how you're thinking about retention of key Iberia revenue producers? One of Iberia's competitors reported yesterday, it seemed very excited about a potential merger disruption. Can you just talk about what your strategy is there? Thanks.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yeah, absolutely. Look the -- when you're in merger, it's even more of a focus. But the reality of our business is, is that our people are very important to us all the time. And so we spend a lot of time thinking about how we really create a culture, where people want to be here and serve their customers. And we are working really really hard with the team at Iberia to think about how we bring together these two organizations.
And it really starts with a fundamental similar culture, as the way we do business, as the way we view credit, as the way we fundamentally think about how we serve our customers and communities and so I don't expect very much, if any change on most of our bankers in terms of the way we do business. We've also been able to say very clearly to our frontline bankers that, given the limited branch overlap that we have, that we are going to have a role for the folks that are facing our customers in the organization.
So we don't think we're going to create very much disruption. But we're also thinking about how we use all the tools that are available to us, to ensure that people are committed to the organization. They're committed to serving their customers and committed to growing the business. So I understand, people might express optimism or whatever they may express. But we are clearly going to work very-very hard to keep all of our bankers engaged in serving customers and community, keeping up the great momentum with full knowledge, that when we put these businesses together, they're going to be in a better place and better products and services to serve customers and do a better job for their communities.
Operator
Our next question comes from Casey Haire with Jefferies. Please go ahead.
Casey Haire -- Jefferies -- Analyst
Thanks, good morning everyone. Wanted to touch on the liquidity profile post close, once you guys do close these deals, they obviously bring a lot of liquidity. The network deposits were up this quarter, around $4.4 billion. What's a reasonable level for those network deposits this time next year, given all the liquidity? Because that could be a potential NIM defense lever for you guys?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yeah. Casey, it's BJ. That's a good point. Particularly the Truist branch acquisition gives us probably a net -- little over net $2 billion of very low cost incremental funding that we can then build a profitable loan and deposit business on, in some attractive markets. So as a thought process, on the corporate finance case for those branch acquisitions is, bringing on net $2 billion of deposits at 50 basis points, and letting go the market index deposits. And then over time, reshaping further the funding mix. And so, yes, that is clearly a benefit that we expect to gain in the second half of the year immediately, and then and then leverage it further.
What we'll do is I -- I can't really give you an idea necessarily yet of what we think market index deposit levels will be going forward, simply because we want to put the two companies together and see where we need net funding with those types of deposits. Clearly a gap filler if you will, much like how we use it today for excess growth in loans to mortgage companies or movements in our fixed income trading inventory.
And so the key point though is that, the branch acquisition will certainly improve our funding mix, and we'll continue to optimize it with the Iberia merger as well.
Casey Haire -- Jefferies -- Analyst
Okay. And just switching to the NIM outlook, it sounds like it's stable -- core NIM stable near term, even with mortgage warehouse sort of going against you this quarter. You guys did a decent job on the core deposit side pricing this quarter. Is there still some room to push that lower, and offset some of the mortgage warehouse?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yeah, I think so. There is a lag effect as you well know, when rates -- when the Fed cuts rates, LIBOR comes down pretty much immediately. It actually leads into a cut, whereas deposit pricing takes a little bit of time to flow through. And so the margin compression that we saw in the third quarter reflected that dynamic with pressure on loan yields, which continued into the fourth quarter. But we started to see the benefit of the pricing changes we made on the deposit side coming through in the fourth quarter. Those deposit rate changes will continue more into the first quarter, where we believe the pressure on loan yields will moderate a bit.
So all in all, I think your theory is correct, that that will help loans to mortgage company balances and yields coming down will be a headwind. But all in all, I see our margin being relatively stable a couple of basis points here and there, to either side of where we ended the fourth quarter, based on what I can see today.
Casey Haire -- Jefferies -- Analyst
Okay, thanks. And just last one on capital markets, sounds like the momentum is continuing into the first quarter here. I was wondering if you could just give us a flavor as to where ADRs are trending year-to-date?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah. So I think through the first 16, 17 days of the year. I think we're between $950,000 and $975,000 a day. We had $1.1 million in the fourth quarter, which was great and so we expect something around the range of -- between those levels to to be where we're at in the first quarter.
Operator
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Brock Vandervliet -- UBS -- Analyst
Great, thank you. I just wanted to probe more on Tyler's question on expenses. BJ, I had been thinking more in the range of $2.75 million to $2.80 million or so in terms of core core expenses, I know there is a lot of moving parts here, but is that too optimistic? Should we really be around closer to $2.90 million going forward?
William C. Losch III -- Executive Vice President & Chief Financial Officer
I think it's probably not the $2.90 million range. It's probably lower than that. But probably higher than the $2.75 million range given, given how well fixed income has been growing. So I would say in $2.80 million, $2.85 million range would probably be more appropriate, going into the first half of this year.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
It all depends on how you think about fixed income and those things.
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah, exactly.
Brock Vandervliet -- UBS -- Analyst
Okay, excellent. And also, the biggest overhang I think right now on expenses is around systems and the integration. And in terms of -- is it Jack Henry? Is it your internal system? Is it third party? When -- can you clear the air at all on that topic? And if not, when do you think you'll have a decision made, that you can share with investors?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Brock, this is Bryan. And clear it a little bit, it's either going to be. Jack Henry or our internal system, Hogan, etc. I think that decision is relatively close. We are doing some evaluation and some work to evaluate the various angles, and I expect that decision will be made in the next 30 days or thereabouts. But it's going to be -- it's going to be one of those two sets of systems. We're not going to go reinvent the wheel or do something completely different. So we're going to keep the organization moving, and I think that it would be a decision that will be solved fairly quickly here.
Brock Vandervliet -- UBS -- Analyst
Okay. And you think you're already kind of bracketed with respect to that decision and expense dynamics of that decision? Or do you think that could result in new guide around expenses?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
I don't think that decision will have any adverse impact on what we've laid out in terms of expense guidance. And potentially, it may -- there may be some value down the road, as we think about how all of the systems lace together. But we think we've put together something in our forecast, and in our estimates, when we announced the deal, that took into account, that we're going to have to make that decision and we think we put something in place, that was very achievable in terms of an estimate.So I don't expect any adverse impact to our expense estimates, as a result of that.
Brock Vandervliet -- UBS -- Analyst
Great, thank you.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
You're welcome.
Operator
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Jared Shaw -- Wells Fargo -- Analyst
Hi, good morning.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Good morning.
Jared Shaw -- Wells Fargo -- Analyst
Just I guess looking at the Truist deal, is that creating any opportunities yet for you, in terms of being able to go on the offensive and maybe hiring employees or seeing any opportunities with customers, that otherwise were tied up? Or is it still too early for you to say?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Jared, this is Bryan. It's probably a little too early to know the full impact, but clearly in the 60 to 90 days that we -- since we've announced that, it had a very positive impact, particularly in the Mid-Atlantic markets, where we already have a presence, and there is a tremendous amount of excitement. And it does create -- it basically allows us to do in the Mid-Atlantic market, call it the triangle and the Triad area of North Carolina in particular. We're doing 20, 25 years of work in terms of building branch share, branch franchise. So that has a positive impact, and we think it will be positive for us in the long term.
We're excited about the other markets that we get an opportunity to acquire in that branch transaction. And so I think longer term, it will be a very positive thing for us, and I'm optimistic that you'll start to see that momentum building, as we close it some time in second quarter, and the early mid-part of 2020 second quarter.
Jared Shaw -- Wells Fargo -- Analyst
Okay, great, thanks. And then, just on the average daily revenue in the capital markets business, is that $1 million, $1.1 million sort of a natural ceiling? Is it going to be hard to see that ever drift higher than that, given the current structure? Or is that sort of the solid wheelhouse right now, given the the outlook?
William C. Losch III -- Executive Vice President & Chief Financial Officer
Yeah, I think -- like I like I said, a couple of minutes ago, I think $900,000 to where we're at today. Near term, what we -- what we think the business should be at over the next quarter or two, its harder to look beyond that. But if you look on whatever slide we had, slide 11 for fixed income, the bottom right gives you at least a bit of a dimension for how to think about it, and how average daily revenues flow in the business, right. So direction of rates coming down has been helpful. Market volatility has been helpful. But the state of the economy continues to be fairly healthy.
If you think back to when we had really really big quarters in fixed income like of 2009-2010, there was a very negative view on the economy, and direction in rates and market volatility were favorable to the business as well. So all of that to say is, I don't think that this is a ceiling. Now we don't necessarily want the state of the economy to be -- I don't know what it would be, to drive average daily revenues higher, but we like the counter-cyclical benefit of having fixed income stronger, if there are pressures on the margin, which is exactly what we saw in 2019.
So business is still performing very strong. Like I said in my opening comments, the management team out there has done an incredible job over the last couple of years, repositioning the expense base, such that when revenue and volume and activity did come back, our profit margins got better. So as an example, three or four years ago, the leverage, if you will, for every $10 or so that we would generate in incremental revenue, we would have $6 or so of expense.
Today if you look at the results in the graph, it's roughly $5 of expense for every $10 of revenue. So they have improved and expanded their profit margin, which will only help us on the upside and mitigate things on the downside.
Operator
Our next question comes from Garrett Holland with Baird. Please go ahead.
Garrett Holland -- Robert W. Baird -- Analyst
Thank s and good morning. I just had a follow-up on loan growth. The ACA [Phonetic] data for C&I lending for the industry has softened considerably. I was hoping you could elaborate on what's driving your improving pipeline activity, following the good performance in 2019?
Susan L. Springfield -- Executive Vice President and Chief Credit Officer
Yeah, we are seeing a strong pipeline this quarter, and we've had even our -- what I would call core commercial. So that's our commercial teams that are out in the markets, not specialty. We had good year-over-year growth there. As you know, we've hired additional bankers in some of our -- what we call our expansion markets, or key markets. So, Florida and mid-Atlantic, Houston continuing to hire bankers as has some of our specialty lines of business.
So in addition to -- I'd say just doing the right thing day in and day out, talking with existing customers, bringing in new to bank. Being able to attract new bankers who have a different rolodex they can bring in over time, some of the clients might have been banking at another institution. So we feel good about it and as I've said earlier, not only do I feel good about the type of growth we're seeing, but the continued discipline around which we're looking at these growth opportunities.
Garrett Holland -- Robert W. Baird -- Analyst
Thank you. And then maybe a bigger picture question. In the past, you provided good insight about the heavy lifting involved integrating Capital Bank. With outbound calls and training hours and the company's performance notably improved, as you move past that, how do you sustain the core operating momentum, as you work through the much larger Iberia integration?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Garrett, this is Bryan. It is a reality that as you get into the training around the conversion schedule and start communicating with customers, it does impact, to some extent momentum. The best anecdote to that is, one, trying to compartmentalize as much of the integration as you can, to a small group of people and allow our bankers -- as Susan just referred to them, our core bankers in the market continue to do what they're doing, which is to take care of customers and their community.
So we're going to try to compress any of that outbound calling and communication through a smaller window as we can. We don't have the full integration schedule laid out yet. With the Capital Bank merger, we integrated all over one week in, and we did all the systems conversion. And it's not clear yet, how we're going to do all of these integrations. It could be staged out. So our focus, as we talk to our bankers and the organization and then, the same things happening and on the Iberia side is, is look, let's stay focused on growing the business. Let's say focused on growing customers and community activity, and let's let our integration team worry about the integration. And so while it will invariably have some small impact, we're doing what we can to minimize that.
Garrett Holland -- Robert W. Baird -- Analyst
That's helpful. Thanks for taking the questions.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
You're welcome. Thank you.
Operator
Our next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Thanks. Good morning. Bryan and BJ, I wanted to just reinforce on the systems conversion a few months after the merger. To what extent does the fact that you are a core provider -- that you're such a large part of their business, I think maybe their largest customer. Does that give you some positives that you can leverage off of, and are there any risks that go along with that?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yeah Chris, this is Bryan. A reference evaluation. I think that's part of what we've got to evaluate as we look at these systems decisions, and clearly, if you go one direction you're running systems that are being -- ours for example, you're running systems that are run at Bank of America. So they are infinitely scalable, at least from the perspective of a $45 billion banking organization.
Your references to the IBERIABANK systems, and part of the testing we have to do is, how scalable is it and what does that mean in terms of the ability to grow and invest in the systems over the long term. And that's the work that's going on now. We're trying to make a systems evaluation, that when we get to the end of the integration, it leaves us in the best position to serve our customers and community to grow our business and deliver the lowest landed cost that we can, for that system's decision.
So it's a complicated decision, but there is an awful lot of good people spending a fair amount of time looking at it. And I expect, as I said earlier, in the next 30 days or so, we'll have a decision on it.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Okay. So there is still room for change in evolution on that, and I presume that your merger charges kind of -- long covers the costs associated?
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Yeah, as I referenced to the question earlier, Chris, I don't think that any systems' decision will deliver anything. As we sit here today, I don't expect any adverse impact on that. I think that the way we thought through it on the front end, took an approach where -- while you might say conservative, I would say that it's achievable and deliverable. So I'm not expecting anything adverse from that.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Great, Bryan. Thank you for the background. I appreciate it.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Sure thing.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for any closing remarks.
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
Thank you, Sarah. Thank you again for joining our call this morning. We appreciate your interest in our company. Please let us know if you need any additional information, or if you have any further questions. I hope everyone has a great and wonderful weekend. Thank you.
Operator
[Operator Closing Remarks].
Duration: 61 minutes
Call participants:
Aarti Bowman -- Head of Investor Relations
D. Bryan Jordan -- Chairman, President & Chief Executive Officer
William C. Losch III -- Executive Vice President & Chief Financial Officer
Susan L. Springfield -- Executive Vice President and Chief Credit Officer
Steven Alexopoulos -- JP Morgan -- Analyst
Brady Gailey -- KBW -- Analyst
Ebrahim Poonawala -- Bank of America Securities -- Analyst
Tyler Stafford -- Stephens Inc. -- Analyst
Jennifer Demba -- SunTrust Robinson -- Analyst
Casey Haire -- Jefferies -- Analyst
Brock Vandervliet -- UBS -- Analyst
Jared Shaw -- Wells Fargo -- Analyst
Garrett Holland -- Robert W. Baird -- Analyst
Christopher Marinac -- Janney Montgomery Scott -- Analyst
