Q1 2020 Earnings Call

Good morning, and welcome to the first horizon National Corporation first quarter 2020 earnings conference call.

All participants will be in listen-only mode. If you need assistance pre signal conference specialist by pressing the star key followed by zero opportunity to ask questions.

Ask a question. You may press star than one on your telephone keypad to withdraw your question, please press * then two.

Please note this event is being recorded and now like to turn the conference over to mister Hardy moment faster relations, please go ahead thank you Matt. Please note that the name that it's and slide presentation will use in this call are posted an investor relations section of our website at ww.w in this call. We will mention boardwalk and non-gaap information actual results May differ from the forward-looking information for a number of reasons outlined in our earnings materials in our most recent annual reports are forward-looking statements reflects our views today. We're not obligated to update them. The non-gaap information is identified as such in our earnings materials and slide presentation for this call and is reconciled the gaps information. And those materials may also please remember that this webcast on our website is the only authorized record of this called this morning speakers included our CEO Brian Jordan our CFO be daily and our chief credit officer season Springfield dead.

I'll now turn it over to Brian. Thank you already. Good morning everyone and thank you for joining our call. Everyone is staying healthy and safe in this environment covid-19 off prices is certainly unprecedented and causing significant economic uncertainty across the world not to mention here in

United States while early in the game. I'm encouraged by the efforts of the Federal Reserve to provide liquidity and and orderly markets and the stimulus passed by the Congress and signed by prep before we go into the quarterly trans. I'll talk about how we're responding to the covid-19 crisis. We are focused on supporting the well-being of our employees are off and our communities where employees we provided resources and flexibility to work remotely and offered extra sick time and financial assistance for childcare month. We understand how critical the role of banks is now and our employees are working incredibly hard to support customers and our communities are Bankers are proactively reaching out to customers to discuss challenges and solutions. We're participating in the PPP program.

So far, we've approved approximately 5,500 applications and process one point six billion dollars of loans. We're also working with our customer customer payment deferrals liquidity lines and fee waivers on Slide Five our business diversification combined with our strong capital and liquidity gives us off a position of strength from which to successfully managed through the current economic challenges. First quarter results demonstrated are solid foundation dpnr was up 90% year-over-year And reasonably steady link quarter driven by profitable balance sheet growth strong counter-cyclical business performance and excellent expense management.

Ernie however, we're impacted by $145 billion dollar loan loss provision building reserves to incorporate the state decline in the economic Outlook in March month. We also adopted Cecil County roll on January first net charge-offs remain modest or seven dollars in the court.

We will continue to closely Monitor and evaluate covid-19 potential impact on the economy a customer base in our loan portfolio.

A current loan loss allowance represents 74% of 2019 stress test losses over a 9 quarter.

As the full impact of the economic shutdown becomes clear. We will make appropriate adjustments if necessary.

Well, let's see Trends were strong but. In loan and deposit growth of 2.3 billion and 2 billion respectively linked quarter loan growth was driven by increases in loans to mortgage companies and hire line draws low rates drove an uptick in volume and Loans to mortgage companies and draws increase from customers preparing for economic uncertainty. Cause it's reflected significant customer inflow so far in April, we've seen deposit growth continued while line draws it moderated. We have also seen some declines loans the mortgage companies which increased sharply in the last week of March.

Our capital and overall liquidity position remains strong with excess funding capacity that will allow us to continue to utilize our balance sheet to support. Our customers needs a. Is a capital ratios were impacted by an increase in risk-weighted assets primarily due to loan growth combined with an incremental provision bill.

I do have a quick update on a merger and Branch acquisition before turning the call over to BJ to provide more financial details merger of equals with Iberia Bank is on track. We've made good progress and integration planning and processes and we've completed an initial Regulatory and shareholder Pilots.

Our shareholder votes are set for April 24th. And the two major proxy advisory firms are recommended boats for the merger. We anticipate closing the the merger by the end of the second quarter 20 20 after final regulatory approval.

Regarding the branch acquisition we've agreed with true as to postpone finalizing the transaction until the third quarter due to the ongoing pandemic situation the postponement willing customer disruption in this uncertain time and allow us to comply with social distancing guidelines.

We believe both both of these transactions will enhance our long-term value would improve funding additional earnings accretion and capital generation and I'll turn the call over to go through the financial highlights BJ's. Good morning. Thanks everybody and I will start with financial results on slide eight year every year highlights included strong VPN are nii growth on strong balance sheet growth and pricing discipline despite said tightening tire fixed income revenue and excellent expense management page. I was up year-over-year due to strong commercial loan growth coupled with solid deposit pricing discipline with the linked quarter declined driven by lower accretion and fewer days in the month. The income was up from continued strong performance from our fixed-income business average daily revenues were one point three million in the first quarter in in Chrome.

73% year-over-year and up $200,000 per day or 19% linked quarter fixed incomes extensive distribution platform remains. Welcome to capitalize on its favorable market conditions in today's environment the inflammation implementation of the new Cecil run lost methodology this quarter which long as you know is supposed to be an estimate of Lifetime losses in the credit portfolio contributed to a much higher provision from eight million in first quarter from eight million in the fourth quarter of a $145 million in the first net charge-offs were again, very low, it only seven million and a quarter with the additional provision increase driven by faith or economic factors in the models related to the covid-19 pandemic. I'll get into more details on the reserve increase in a few minutes.

balance sheet

We're against wrong on both are running deposit side particularly in the last five weeks of the quarter. And as you can see on slide 9, we saw a significant increases in our. And loans with the vast majority of the growth Korean occurring in the last week of the quarter linked order total. And Loans were up 2.3 billion dollars about 1.3 billion dollars of the growth, which was related to loans to mortgage companies got seven hundred fifty million in the loan growth associated with line drawers and about three hundred million worth waiting to organic loan growth across the other commercial and consumer portfolios. So far in April lines all have abated loans and mortgage companies balances are down. And levels and expected to come down about a billion and a half to two billion dollars from. And levels as purchase and refi volumes declined due to covid-19 impacts dead.

This uncertain environment. Our job is threefold in terms of lending. Number one utilize the government programs particularly apt to get funds into the hands of those who need it back to to keep credit flowing too strong credit worthy borrowers and three protect our balance sheet and capital levels. And in this context where we are seeing the majority of our lending are in areas with these boxes over the next quarter. We expect the majority of new loan growth to be driven by DPT loans, which carries 0% risk waiting. We expect loan companies given the industry Dynamics related to covid-19 impacts become dying meaningfully in the range of a big and 5 to 2 billion from 3:31 levels, and we expect line drawn do occur, but it lesser rates while mute funding's declined and offset those incremental line drawers.

Turning the deposit Trends on slide 10. You see we saw strong deposit inflows towards the end of the quarter with balances up two billion dollars link order on. Basis the growth was driven by be an eight increase in market index deposits in March. We saw a significant inflow of these balances as customers exited the equity markets and put their cash into fdic-insured accounts. Additionally we've executed on an additional 1.4 billion dollars of insured Network deposit contracts at a track race currently between 5 and 30 basis points. We've seen similar Trends in April quarter-to-date deposits, which are out up by about two billion dollars or 5% 5/331 levels. The driver's the deposit growth in April are related to organic customer activity consumers receiving stimulus checks seasonal Pub.

Funds and increases in non-interest-bearing commercial deposits as customers hold more cash in addition to continue to influence of market index deposits.

Londa capital and slide 12th, as I noted earlier we had strong ppnr in the quarter of that led to Capital generation that supported the dividend and the increase the provision as you can see on this Slide. The decline in CT one ratio was due to the increase in risk-weighted assets at the end of the month about 54,000 was related to commercial loan growth from the. And uptick in Lonesome mortgage companies. In addition to the increased line draws about 16 basis points of the impact which related to higher risk assets in our fixed-income business increase was largely driven by a large spike in value rent due to the extreme volatility.

Therefore if you all have Capital ratios are calculated on. And assets not average assets. So even though average assets were roughly two point eight billion dollars lower than. And the capital ratio calculation is sensitive to the spot balance at the end of the quarter to put the impact of the. End run-up in asset in perspective of sun for us instead of not a 450 million dollar increase in rwa is equal to about a 10 basis-point Capital ratio impact there for that increase in a day and time. And assets over the last five weeks of the quarter versus the average assets in the quarter. It's about a 65 basis-point impact to the CT one ratio that is different way if anyone was calculated on average risk-weighted assets versus. End or CT one ratio would have been about 9.2% as I said earlier.

Talking about loan growth. We expect risk-weighted assets to go down in the second quarter. As long as the mortgage company balance has declined and new loan growth and driven primarily by 0% off was created PPP lumps with the expected reduction in rwa combined with continued strong ppnr. We would expect our Standalone ct1 ratio would move back more towards the 9% range in the second quarter slide thirteen shows. The drivers have changed under Cecil adoption. As you know, she replaces the incurve Lost methodology with a life of loan estimate concept while net charge-offs were only seven million dollars in the quarter the initial impact and so called economic factors related to the Future economic Outlets drove the aggregate increase in our reserves to put numbers to it as you can see in the log.

Getting Reserve as of twelve-thirty one. Ninety-nine was $200 million. We then booked a day one impact as of 120 of 106 million and subsequently by quarter end, even though we had very little change in portfolio characteristics from things such as charge-offs grading changes or loan growth in the quarter calling twelve million wage economic factors, the associated changes in the future economic led to an additional $126 million have reserved resulting in an ending one loss Reserve balance at home. And as of March 31st, we believe this represents a healthy Reserve particularly, when compared to both peers and around severe stress test, which you can see on slide 14.

Turning to slide.

14th there are several key points that I'd like to highlight here first as noted in the top of it our Title Loan portfolio is predominantly commercially oriented at 75% off with a meaningful portion of them about 42% considered investment grade equivalent and within that 20% of those commercial loans at quarter-end. We're loans to mortgage companies, which as we've discussed many times. Minimal credit risks, ninety percent of learned to mortgage company balances are collateralized with government guaranteed loans while these loans are commercial loans and therefore carry a hundred percent risk waiting if held individually on our balance sheet, they would be 50% risk-weighted. It is a very high quality portfolio second. The Consumer loans that we have are of high quality as well as evidenced by the high average refresh FICO scores and a lack of a meaningful higher wage.

Account and credit card exposure about 12% of our total loan portfolio still has $65 million dollars of unamortized loan marked an additional 2 million dollars of reserves which provides additional loss absorption capacity. And finally as you can see on the right hand side of this slide are reserved coverage the loans and to q1 annualized net charge-offs are very healthy relative to peers and we have prudently built reserves that equate to 74% of our severely adverse model losses. Well above the peer averages and if you add in the additional $65 million of an amortized loan Mark rear at approx 85% of our wage really adverse model losses a very healthy number.

Turning to slide fifteen since this is both the first quarter using the new methodology and the factors related to the Future economic Outlook are such large drivers of birth the size of the aggregate loan loss reserve and the first quarter provision. We thought it might be helpful. You give you some details on our economic assumptions as you other Regional Banks, utilize various meetings scenarios and wait them to arrive at our quantitative model outputs. We then use more severe scenarios on specific portfolios as wanted to come up with additional qualitative overlays to the model results. So as you can see on this slide fifteen in the upper-left are most heavily weighted Baseline scenario had the following characteristics it consider the covid-19 pandemic impacts including the cares act the FED stimulus including the open-ended quantitative-easing wage.

As well as the various denounced liquidity and credit facility programs. It assumes the 4th stimulus and 4020 the recession starting already in the first half of them here with only a partial bounce back in the third quarter then slow growth with acceleration of GDP growth not occur until later in 2021 June and no return to Full Employment until 2023 for certain select portfolios. We felt might have more stress such as aspects of the rep franchise can answer Hospitality portfolios. We used more severe moving scenarios with characteristics such as in the upper right at the bottom. We also lead out for you. Give me a logical assumptions that corresponded with our various waited scenarios.

They don't fly.

We thought it might be helpful to Grass out. Some of the key economic assumptions driving the law estimates and compare them to our stress test assumptions off. Each of these graphs. You have five lines. The lighter dotted lines are the individual upside Baseline Baseline and downside scenarios utilized. The heavy black line is the weighted average of the scenarios. We utilize across our portfolios and a heavy grey line is the 2019 stress test assumptions.

Few observations that I make you first on Race assumptions such as for the 3-month treasury yields and fed funds. They're very similar on both zdt off the current waited scenario shows a deeper GDP drop and steeper spike in unemployment initially that over the following eighteen months the severely adverse effect of options are worse for longer than 40 price indexes such as free or home prices for the Dow index for Equity markets. The stress test assumptions are worse both here and longer-term while the Outlook obviously remains uncertain a key difference between the stress test assumptions and the current environment to be determined is the ultimate effects of the massive Federal Reserve recording programs and the unprecedented Financial stimulus programs via the cares act regardless with our Reserves at the 3:31 a.m.

74% of our severely adverse model stress test lawsuit, we believe we've been proactive is building healthy loan loss reserves for an uncertain environment.

Wrapping up the section on slide Seventeen wanted to remind you of our stress test results to show the resiliency of our business first RPP and are running power remains strong zero County counter-cyclical Business and fixed income and we are seeing that kind of cyclic causality played out currently and second the lower lost content mix of our credit portfolio off with a meaningful portion of dni and very low risk loans to mortgage companies and underweight kre portfolio and a de minimis credit card portfolio should serve as well in a stress involved with that. I'll turn it over to Susan to give you a little bit more color on our credit portfolio CJ. Good morning everyone. I'll start with which gives an overview of like a power loan portfolio has evolved over the past ten years since the last financial crisis.

Since 2009 we have meaningfully reduced our real estate exposure and exodus certain risk your portfolios.

@dj said our loan portfolio is now commercially oriented with more than 40% of our loans would map an investment-grade rating and the portfolio is Diversified by age categories and geographies note also on the slide Arlo create a total Capital ratios versus peers during this time. We've built off. S teams across line and credit leadership significant experience in underwriting within our commercial loan portfolio specialty areas comprised about half of that off this specific industry knowledge by these teams allows us to have strong client selection and strong underwriting disciplines and we'll provide expertise in navigating through unprecedented economic crisis. Now, I'll turn to slide twenty this slide shows the detail of our commercial loan portfolio based on naics industry code.

Carlin balances are

Several sectors and seeing I was also broken out certain commercial real estate balances as well as as well. The overall free portfolio is Diversified across and geography. We've remained disappointing requiring significant Equity across property type and that size new loan amounts in Ark rebook using a minimum wage rate. That was typically two hundred basis points are more higher than the prevailing rates the time of underwriting this type of underwriting build some conservatism into the portfolio at the exact origination across all our portfolios. We believe we've taken the right approach to risks and have been prudent in our credit discipline. I'll go over some of the specific portfolios in the next month on July twenty one take a look at the health care portfolio is Diversified among Physicians Offices Medical Centers hospitals dead.

and residential facilities

just one point six billion of average balance is includes the healthcare specialty area as well as other healthcare-related loans on our balance sheet.

The energy portfolio is 735 million or about 2% of our total loan portfolio about half. The energy portfolio is comprised of Reserve Base loans with a bulb actually 70% of Reserve Base borrower revenues hedged 3:20 and with approx 50% hedged through 2021. The remainder of the energy portfolio is Diversified between Midstream compression refineries terminal storage and other also Services, obviously with the price volatility and the energy Market these report phone number that we discuss on a very regular basis.

On flight 22, I'll go with the hospitality restaurants in the hospitality portfolio is about 600 million with roughly three-quarters of it related to Hotel in this hotel portfolio of more than 90% or flagged hotels and are predominantly business traveler oriented with very few properties and Resort destination categories off the average loan size for a hotel loan is about fourteen million dollars.

The restaurant portfolio is 1.3 billion of average balances and includes the 1 billion franchise Finance specialty area. These farmers are experiencing the owners and if typically had access to multiple sources of capital and we're about 70% of our borrowers have more than 20 locations.

As we've talked about previously about two-thirds of this portfolio is limited service meaning fast food representing well-known Concepts.

The full service restaurants are mostly family style restaurants and we have limited exposure to fine dining.

I should note that the franchisors are working closely with their franchisees during this time and a number of ways deferring discounting or waving marketing fees and royalty fees lowering prices on supplies that are provided by the franchise or so in addition to the government programs. We are seeing work across segments trying to help businesses during this difficult time on 5/23. I'll talk about loans and mortgage company one of our specialty areas that we talked about. Every quarter month. And balances were 5.7 billion is CJ noted earlier over a billion dollars of the growth came in the last five days of the quarter.

the growth reflected elevated levels of typical month

Increase is driven by largely by increased refinance activity.

Once the mortgage companies are counter-cyclical business since my rates tend to drive mortgage activity.

The lines the mortgage companies include correct collateral that are 90% government guarantee mitigating those the credit risk.

It's BJ noted earlier if these lines were directly on our balance sheet, they would require only a 50% risk waiting. We have over 25 years of experience in this life in our balance sheet capacity knowledge strange at focus on operational control and expertise have led to increase market share.

With are commercially oriented diverse loan portfolio and are consistent balanced approach to risk in addition to our Reserve build associated with Cecil adoption month and the increase associated with the unknown economic impacts of Covent. We believe we are well-positioned to whether the current crisis. I'll turn it back to Brian for the wrap up.

Thank you, sir. That's why we're excited about our merger of equals with Iberia Bank. We see it as truly transformative wage a great deal of progress planning the integration the merger strengthens our presence in key markets diversifies our loan portfolio both geographically and in Industry wage situations, and it gives us a unique a unique opportunity to drive greater efficiency.

From the day we announced the merger. We have each been comfortable with the combined loan portfolios. And while the economy has changed due to the coronavirus pandemic. I believe Thursday. We were a stronger and better institution position to drive attractive shareholder returns and strong earnings accretion.

All these are clearly unusual times. I believe we are well prepared to deal with the Fallout of covid-19.

We have a strong capital and liquidity base. We've maintained consistently strong underwriting standards and it built a diversified portfolio that is focused on profitability and our loan loss allowance is strong. We have good expense controls in place and very importantly we have solid underlying earnings power.

We're pricing an economic environment that differs from any in the past but we're also seeing unprecedented government programs aimed at mitigating covid-19 economic effects, and hopefully leading a report the recovery. Our company stands ready to continue to assist our employees our customers and community in an effort to overcome covid-19 impact and Revitalize the economy.

The health and safety of our employees remains of utmost importance. It's almost unimaginable unimaginable the the amount of work that our folks did over the last several months to help the treasury and the roll out the PPP and really serve our customers and communities teams of people working around the clock off for all of the the dedication and commitment that my colleagues are shown and dealing with these unprecedented times many of them working remotely. So thank you for all that. You were doing wrong with that. Nick will now take it will tell you turn it over to you and ask for questions.

when I begin a question

Intersection to ask a question. You may press star them one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star than to this time. We will pause momentarily to assemble our roster.

First question comes from Steven alexopoulos JPMorgan, please go ahead morning everybody. I wanted to start on reserves. If we look at the two Q Reserve build. It seems fairly aggressive in terms of the reserve covering 74% of DFAS losses, which is well above peers and we look at most banks their risk for another size will Reserve increase in 2 Q just given the how look and the economy seems to his worse and since 3/31. How do you guys think about this for First Horizon? Do you think you're at risk also or do you feel like with the assumptions you made which seemed more harsh than others that you've gotten ahead of the Curve.

Hey Steve, it's it's DJ. Good morning. So we obviously as I talked about used the meetings economic scenarios, which were done very late in the quarter. And then even through April we continued to monitor the economic assumptions. And so while we ran our models using waiting from the movie package goes as I talked about earlier. We also overlaid qualitative reserves on top of those specifically stress sectors to make sure that we were trying to take into account as much as we knew at the end of the quarter to to be able to build as healthy reserve and try to follow what is supposed to be the rule around peaceful, which is truly estimating your lifetime losses as of a. End date and so with all those dead

Here's we tried to be as we tried to be over the last ten plus years very prudently conservative in terms of transparency and not rebuild those reserves. And so as as you talked about we we built it much more towards a severely adverse environment.

Clearly the unknown going forward is what does the economy ultimately do? How do borrowers actually behave how do the stimulus programs and the unprecedented said programs ultimately softened the impact but those are hopeful and what we wanted to do is make sure that we were building as healthy egg Reserve as we possibly could right now so next quarter as we would in any given quarter, we'll re-evaluate our existing phone folio and the portfolio changes as well as any new economic factors over the next ninety days and re-evaluate what the bottom line is. We feel very good about the healthy reserves that we built this corner. It's saying this is this is Brian. Adam22 BJ's comment. This is a is a vowel.

that we sit around and

And we like the rest of the world clearly have a lot of of things. We we don't know what we don't know and and maybe more than any other environment than my career. There are more known than we've seen that at any point in time and have you really if you go back to the 2709 time frame to make sure that we provide as much transparency about what's in our portfolios and we try to be realistic not overly conservative but realistic and conservative about what with the lifetime losses are in the portfolio and lay that out for our investor base and and our Regulators as well at the end of the day. I risk profile is very very different today than it was in two thousand eight nine and ten, but we've taken the same approach which is to be realistic will take what we do think the economic environment looks like and is BJ's Club?

Baseline and then those portfolios that we think will be adversely impacted used more severe scenarios around them again for by transparency and be realistic about how we think it plays now. It's BJ said facts on the ground are going to change we're all going to know a lot more in ninety days. And we know today we're going to know a lot more than a hundred eighty days and off and we'll make adjustments as necessary. That's helpful. Maybe for Susan. Can you give us a sense as to the loans which you provided deferrals modifications in the quarter cup overall balance and maybe some color on which segments

Certainly, if I look at the deferrals that we provided business Purpose deferrals with Beyond about 3.3 billion dollars worth of underlying blown off of that about six hundred million, which would be what I consider small business the two biggest portfolios you would imagine had about eight hundred and fifty million increase or about 20% of the cream up and about. I'm not quite 40% of the franchise finance and then the remainder was in just 1 Concourse D. And I so we are we are dedicated to working with these great customers who are experiencing this difficulty related to the pandemic and believe that this could be a factor in addition to the government programs that can help get them Beyond this point in addition to that on the consumer side. We've had squirrels on dead.

Traditional consumer about $256 million of balances and mortgage about 230 million.

Okay, I guess who's think it was mentioned earlier about a hundred thousand dollars in fees waived. Okay. Thank you, and then finally for BJ, I know it's just impossible to forecast the margin here, but in terms of just the ability to absorb losses you talk about do you think you can grow net interest income in the coming quarter with all the pressure of them and some offsets? Thanks.

yeah, so

We do have a slide slide twenty-eight if you want to look at our net interest margin and net interest income Trends in the appendix. But yeah, I think I'm in terms of n i i i i think there's there's going to be continued pressure as we expect Libor to continue to come down. It's remained more elevated than I think any of us would have thought given to Rapid decline in fed funds but we expect that to continue to come down though. It hasn't yet. Come down to Georgia where we think it'll be so that'll that'll continue to to be a headwind. Our teams have done an excellent job both taking care of customers and check the closets while also remaining very disciplined around pricing whether it's base rates or earning credit rates promo rates wage.

Retention rates et cetera. And as you can see in the quarter, we brought deposit rates down quite significantly and I'll expect that to continue into the second quarter. So that would be helpful as well. I would expect that those to the net impact would probably be a net negative because Libor and are floating rate loans would come down more than wage down deposit costs. But as you said the PPP program particularly around the fees that we will generate from the 1.6 billion dollars of funding that we are making will flow through the net interest income line and hopefully be able to offset any of the net negative in terms of the rate Dynamic. So all of that to say is, you know, I do think that we can hold our net interest income relatively steady with the addition of the pppc Dead.

Terrific, I appreciate all the color. Thanks.

Next question from Abraham and put on Walla Bank of America, please. Go ahead. Good morning. Yes, sir, Brian just following up to your comments relative to 2008/2009. I think there's one like you provided a lot of details on the portfolio like at what point like what's your level of comfort around the portfolio as someone who took the bank and trip to the bank in 07 landed through the crisis who the clean up when you look at the portfolio. Do you spell realistic risk with losses exceed your severe loss estimates because I think the numbers you can all look at you should be able to earn it. Even if you have six hundred million instead of 4:43 today, but just talk to us in terms of the portfolio around and and just your confidence around like that number is probably the high Watermark when you think about losses

Yes.

So so was I think about the the portfolios day versus two thousand seven and eight. I don't think there's any comparison at all the risk profile and the month so is is completely different we didn't have we don't have the national businesses. We don't have all of the residential construction. We don't have all of the non palm print home equity exposures and and we didn't have a lot of that. We don't have the correspondent portfolios that we had in 2709 page the day we have made of a very conscious effort over a ten-year period to transform the way we underwrite the way we document the collateral and there was a slide I don't recall which one is the slide in their BJ's showing me page nineteen that shows the the risk ratings and the portfolio and sort of the evaluation, but but yep.

Suggest that I have a a very high degree of confidence in our underwriting and our portfolio management. We we have transformed it in intentionally with our Mantra has been we want a portfolio that we will be proud of in any cycle and this would qualify that any cycle and we believe that this portfolio will perform. Well clearly our losses will go up and everybody's will but we think this portfolio will hold up and perform very very well. And so I think that very little comparison to 2007/8 and and if if the framework that people are applying how do we do a 2007/8 and how we going to perform today? It's night and day. I think the portfolio performance will be vastly differing a vastly better in this cycle.

Go ahead and I guess Susan just following up on that. What like what do you know what percentage of your restaurant Finance customers were totally business customers were wage if I'd for the PPP program.

You asked about franchise Finance customers and you're applying how many qualify for customers have applied Faith golden got it. And in terms of the mortgage Warehouse like ninety percent of the government. Is there any risk in terms of the warehouse where a mortgage company runs into trouble? Like do you see any meaningful credit risk there or not?

Really dumb, we've got that ninety percent of government back another five or six percent is jumbo and really conforms in every other way except for the loan size and a smallish email experience Abraham with those portfolios, even when we've had the the manage out of a position. The collateral is Thursday it is we we liquidate it and and we get out of the position and so we we see it as as more of an operational risk portfolio than a credit risk for my name is Susan just reiterated as you pointed out. It's a highly liquid almost almost essentially a conforming GSE eligible portfolio. So we see it took a little credit risk and it's really most important that we stay focused on what we've always been focused on is that we have good title to good collateral. Yeah for him is dead.

Mortgage Warehouse customers were highly profitable through 2019 and year-to-date.

20 and so their ability should you have a mortgage or two that can't go into the permanent Market their ability to pull it back amortize it take it back from us is their ability issue that has been increased because of the process profitability that they've had in nineteen in year-to-date 2020.

Go to see if I can sneak in one last for BJ. Just when I look at your amended s44 March 9th stocks come down. Just help us think through around how the performs Capital ratio tangible book looks coming out of the Iberia deal. If you could provide some color, that would be helpful.

Yeah, so, you know clearly with significant moves in the stock price. There's been you know some talk around. Do you have Goodwill or do you have a bargain purchase game those those types of things and really when it comes down to it. None of that really fundamentally changes the tangible common Equity that you'll get from the transaction. So, you know the tangible common Equity will be the same what's going to change as we get closer to close is clearly the fair value marks that we're going to be looking at on the portfolio from a credit perspective or an interest rate or liquidity Mark perspective as well as the mix of PCD purchase credit deteriorated versus non PCD loans and that mix and how will have to account for those. So we're we're clearly going through all of them.

At work right now and as Brian talked about we anticipate closing the transaction towards the end of the second quarter and we'll be doing our calculations on Fair Value marks as of that date. Thanks for taking my questions.

It's questions from Brady Kelly KBW, please go ahead. Hey, thanks gud morning guys, when you look at some of the law degrees in your loan book, that would be deemed higher-risk like energy Hotel restaurant health care. I mean, none of these exposures are big for first Verizon, which is good. But when you look at some of the riskier exposures, which categories are you most concerned about actually losing money as this, you know current economic status continues.

But he clearly we stressed several portfolios were heavily as we previously discussed and you know, the immediate impact to hospitality and restaurants offer significant and then within the health care sector since all non-elected procedures and visits and put it Bay, that's where we bought the same the most requests for assistance either in deferrals or liquidity line. What we don't know as we've talked about previously is the stimulus package out there in the additional stimulus that is planned to be out there with another round of the Main Street lending program to specific programs for Health Care Hospital.

It it could end up being.

Better than it looks right now cuz it's not seen in an economic environment with this much stimulus. So even while we believe those portfolios are probably more at rest based on what's going on today, which is why we did stress some of those portfolios a little bit more heavily.

Really a scientist the next 90 to 180 days. I think all of us will see what is the impact and then the other thing that I've been thinking about is we think about managing is portfolios. Not just the what happened during the shutdown is what patterns of behavior change and how does that drive different things? So I think I think we will all have to be kind of go through this together and see how we emerge from the covid-19 them.

All right, that that's helpful. And then your first ride then it's been great, you know operating leverage and lowering its expense space and getting the efficiency ratio down. I mean when you look at that company now, especially with you know, what's going on with higher provision costs and and the net interest margin coming in is their opportunity to go back and look at the expense side even more to harvest some more savings at this point.

Hey Bradley, this is this is Brian. We appreciate the confidence in in our ability to manage it. I think our team has done a very good job, and we saw this mask a little bit by empty in financial and we had in our expense base of $10 roughly for increasing are reserved for unfunded commitments. If you take those things out with a good credit or good expense leverage and and the first quarter from fourth quarter and from a year ago. We we will have a fair amount of of work to do and we think that there are opportunities to control some calls in the categories of Known Unknown just not clear today of of what I what I work footprint looks like today. We may have about 50% or more of our people who are working remotely. How do we have to space people out and and some of those things but we do think that there's there is operating leverage that wage.

India and the foreseeable future the other thing that that I pointed out when I commented about iberiabank, when we do that merger of equals, we still feel very strongly that we can get a hundred seventy million dollars of cost savings out of of that combination and those are costs that neither one of us to get at if if we weren't doing that merger. So in essence, you know, we we have a Kohl's Tailwind by completing that merger that that also allows us to to restructure. Our entire combines cost base and Thursday. I think there is opportunity for leverage on the cost structure, but there's some things about the operating environment that will need another 90 days or so to figure out how it impacts us.

Right, and then lastly for me BJ when you're talking.

About the mortgage Warehouse coming down 1 and 1/2 to 2 billion. You're talking about end of. Balances. Correct? Correct? Yeah. Yeah. So you you saw I think on one box light Brady that literally in the last 5 days of the quarter. We saw the mortgage companies go up by about a billion to a billion 3 a.m. Huge huge Spike and we actually show you the day by day chart from 12:31 to 3:31 of what Lonesome mortgage companies did so if you go back five weeks before the end of the quarter, it was almost two billion dollar change over five weeks. So significant significant run-up, we expect that to come back down that being 5 to 2 billion dollar range from the. End simply because on the purchase side, we've seen a significant back up dead.

Reduction in application that you might expect because of the covered pandemic and and people just being very hesitant on on new purchases may even with refi they're still activity out there. But a lot of it is just finishing what was already in process and if you think about you know, I'm going to do a reply there appraisers that have to go into houses. There are title companies and closing attorneys that actually have to be able to finalize the paperwork off and with the stay-at-home orders and those types of things. It's made it much harder to actually get those things done. So again the combination of those two, we believe you should cause the spike at the end of the quarter but correspondingly, we think will cause a reduction of a somewhat equal amount by the end of the second birth.

Hey Brady, this is this is Brian to add to the BJ estimates vary but it was something like 20% or so of the mortgage University of benefit from these low rates and a refi environment. And it's BJ set a lot of that started in the March time frame and we'll see the pull through there are some structural issues that BJ mentioned to further wage. I think purchase volume which is a little less than half a day continues to decline and and quite you know, depending on your outlook on life economy. Unemployment rates are going to have an impact on ability to resize so we think that there's a natural downward pressure on that. We we talked about that portfolio and its impact on the capital radio and and as that portfolios shrink those Capital ratios grow up one of the reasons that I don't worry in addition to the strength of the credit portfolio about the the tanjung.

CT one ratio

Is that a given point in time is is if the economy gets bad and that capital is more of an important factor that movies Warehouse business is going to be probably a billion or two billion dollar portfolio. It's going to come down because the economy's past those Capital ratios go up, you know, the neighborhood of a hundred basis points if that happens so that that portfolio took it will will ebb and flow based on the economic environment and the impact of rates. We we like that business. It is a a business that has as students that very strong customer and it has been very attractive to us from a financial perspective. So we're not worried about what that portfolio does BJ's sort of pointing out that it's got a natural tendency down over the next couple of months. So as you're modeling don't forecast it it almost six billion dollars an outstanding.

Got it. Thanks guys.

It's question comes from Michael Rosa Raymond James, please go ahead. Hey, thanks guys. So it looks like if I take those four categories that you outlined just kind of higher-risk. It's about 15 per month alone. Sex Warehouse. Do you have a sense for what that looks like, uh with Iberia included like I know their energy portfolio is about five and half percent you guys are about three and a half percent perform of do you have a sense for a what those you know what that would look like on a complexion basis and then, you know be would you look to maybe be emphasized, you know, some of those portfolios or take a bigger Mark potentially on those portfolios. Once you consummate the deal, thanks, I'll speak to a couple of portfolios as you mentioned your your energy comment was was correct on the combined basis on a phone number for Real Estate just talking about commercial real estate overall. They do have a larger commercial real estate book as a percent of their portfolios, and we do so that will go off.

but I do want to

reiterate we did significantly diligence on each other during the process before the merger was announced and while the energy portfolio will go up somewhat of a portfolio will go up a little bit more. We do feel very good about the discipline to underwriting and client selection that both Banks is employed and so feel like we'll be able to manage that I do think there probably is an expectation that over time as we've already bigger Bank on a as an m o n t that we would look for ways to continue to diversify your portfolio and clearly those could be areas where over time we would want to be emphasized the growth there doesn't look we want to remain open for for good customers. Once we get the young and Emmett, but at the same time that's that's another benefit of being a bigger organization is the ability to continue to diversify. So that's really how we're thinking about that but again condemned macaw

Looking at the portfolio is very similar approach very disciplined approach to initial underwriting servicing and clients.

Okay, that's that's helpful. Maybe just one follow-up for me. If I if I look at the PPP program just one or two questions there. I think if I can find both you and what Iberian announced last week. It's about a half billion. How long would you expect those loans to stick around? And then when you do combine the company do you expect to hold those loans is help for sale or help her investment because of the way I understand is if you hold it and held for investment. It'll impact the the margin, but if you hold it a cell for sale, the the fees will go through not interesting, Thanks.

Yeah, and that last question, I don't think we've fully decided yet. Which which one we're going to do h f i r h f f so we're still still working working through Thursday. I think the terms are two years but forgivable portion or that is is much shorter. So we would expect them to Thursday. We just stay on the balance sheet, maybe maybe through the balance of this year running down towards the end of end of the year. It's kind of zero risk-weighting to my life. And and I think we'll also step back and look at the liquidity facility that the FED has provided because that that looks like an attractive way to find these thoughts waiting. But as you point out there very low spread with a 1% coupon rate and and so we've been running as I said in in in my trans birth.

And the questions we've been running really really hard to get these loans under written booked and find it. And so now we catch our breath and we'll figure out how we Finance him on the balance sheet, but we don't we don't need the problem either way either on the balance sheet or using the FED facilities and and we'll we'll work through that over the next 30 days or so. Yeah and forgive me for stating the obvious. But you know when I'm obviously talking about what we just funded if the government does re-up the program and and comes on new. Well, we'll have it gone on further. But again way I understand the fees as well as the spread are included in the margin. So we'll once we figure out exactly how that's going to flow through and and when recognized that these will we'll certainly be transparent and and disclose all of that.

Okay, very helpful. Thank you. Thank you.

Next question comes from Tyler Stafford a Stevens, please. Go ahead. Hey guys. Good morning. Hey, I apologize. I hopped on really late. So I'm sorry if you've already covered this, but I had a question around the fixed-income business this quarter. It looks like the revenues out of that segment were up around 14 and 1/2 million, but the expenses were up around nineteen million and and there's a footnote that said that the fees were impacted by trading losses given the extreme Market volatility. So, can you just I guess help parse out for us that what what is going on, but I guess behind the curtain and drove negative operating leverage this quarter and why that should uh-uh move differently next quarter. Thanks. Hey Kyler, it's BJ. Yes so long, but we clearly saw in the quarter was the rapid change in increasing volatility which led to our higher Market risk assets because of higher value.

you at risk so

My kids were and the the team and fixed-income did an excellent job working through our inventory and managing our exposures and marks off over the last five weeks of the quarter but as they were repositioning the inventory and having to take those marks those trading losses day-to-day were coming through the revenue side, but the actual activity of the sales force was fully commissionable if that makes sense. So month bill radr was net about one point three million in the quarter. If you take out the trading losses the gross ADR was more than a million seven range, but netting out those trading losses that reduce the ATR so your revenues looked lower with the higher. Commissionable. Yep.

Variable comp on the other side as they work through that inventory by the end of the quarter. It's very much better position such that going forward. We believe we're going to have much lower net trading losses and the growth a t e r and the net NPR will be much more aligned and you'll see the national pattern start to re-emerge between our incremental Revenue growth and any incremental variable comp wrote. This is this is Brian we offer our Thomas negative splits. You've heard it say in the past. We're in the moving business. We're not in the storage business. We we moved these portfolios through the balance sheet and the significant dislocation that happen a particular information site particularly in The municipal-bond Market Place some of the corporate market place and the volatility that sort of erupted in the late March birth.

Was largely stabilized by the the efforts of the FED that I mentioned earlier to bring liquidity and stability to the marketplace. So we think the majority of that is sort of work through the systems and you know there were days in there it would High volatility where we did we did a day. I think it was about a five million dollars in average daily revenue that note it down to about 3 with the negative wage is so, you know, there was a lot of activity and and we think that the stability in the marketplace is largely put that behind as we think it ought to move to more normalized levels off pending on how things play out more normalized levels in the second quarter. The second quarter is offered to a decent start.

Okay. Thanks for that Brian and BJ. So I guess if some of these more extreme Market volatility issues and trading losses have been cured at this point. I mean do you expect but you know, I guess going back to Brian your last comment. They're too cute to be more towards that gross one seven or the the net one three or somewhere in between or or what your kind of near term or what you're saying. You'll have to forgive me on the 21st day of April. I'm not going to take the bait on that way. So revenues have been good. You know, the the there's a couple of things that could impact the business that I think we will keep our eye on one is in his financial institution broadly speaking or funding PPP loans and a number of our cars until they can put loans into the FED facility that will constrain liquidity. So that could have some impact on the bond business and I think

You know our total.

Return business continues to look good. We're optimistic about the outlook for the corner and it says we started off if if 21 days or so is a trend we're stuck in the same area. We ended the first quarter in so we we feel good about the Outlook, but it's way too early in the quarter. And as I said, there's too many unknowns about the economy and know how this is Jake play out over a ninety-day period that that's totally fair than thanks Brian and then just just one more for me on the on the mortgage Warehouse business how much of the mortgage clients or balances are to mortgage Originators versus mortgage servicers.

It's almost exclusively mortgage Originators. We have we have very very little water service.

Exposure. There's a there's some of our our customers that will service, but we do we don't really Finance in that space are lending is against the the origination a very helpful thoughts for me. Thanks guys. Thank you.

The next question comes from Garrett Holman a bear, please. Go ahead.

Good morning. Thanks for taking the question. I appreciate all the appreciate all the details because you helped us understand the sensitivity and the reserve level and the potential Reserve build. If you waited the Cecil forecast mortgage towards your downside economic assumptions versus the Baseline employee for the current Reserve level at 100.

Yeah, so let's see try to give you a sense of the magnitude. I think the pure downside model probably be up doing this cut my head about 70% more than what the Baseline would be sixty to seventy percent more often. So

You know, I think we took that into account in terms of ratings of Baseline upside and downside as well as what we talked about particular issue around the sectors where we thought they were most vulnerable to that downside and might not have as much support from the various stimulus programs or the feds facilities that others might have so we took all that into account using quantitative modeling modeling multiple discussions on quality of modeling and overlays and feel comfortable about how we've how we looked at the aggregate Reserve to this point.

Thanks, PJ and then just follow up on I. A lot of change on the back or front to the deal and heard the reiteration of the cost savings projections, but you still feel good time frame for realizing those benefits and and maybe some of the performer profitability metrics.

Yeah.

This is Brian. So if I take it in reverse order, can you tell me what the economy is going to be at the end of 2021 and I can tell you better about the pro form of pop up early metric but I think over time yes, I feel very good about our ability to get to the perform of profitability metrics. I think by 2021 we have forecasted about 75% of the cost Savings in 2021 and being at the run-rate by the end of twenty Twenty-One. I still feel good about that long to achieve that it'll be interesting to see how the first year plays out. We we we may be a little shy in year one simply because of all of the the needs to support p p p and and the market that we're in but we think by the time we get to the end of the year even then we will birth.

That are twenty-five percent cost reduction level in in 2020. So we still feel good about it. We still feel good about our ability to hit the pro forma profitability phone numbers. We you know, we're not sure that 2021 will be or 2022 will be back to 100% economy. But you know given that it is we feel good about our pro-forma.

That's helpful. And then just want to ask a quick one about the dividend payout here. Obviously Capital levels are solid but one of the confirm how you're thinking about that claim on Capitol. Thank you for taking the questions. Sure. So, you know, we we think that returning Capital to our shareholders is important in and BJ pointed out several slides and the deck and and in The Dead Zone our stress testing in our stress testing through the most severe adverse scenarios. We assumed that we continued with the dividend at current levels and Thursday are working assumption that we continue to manage the dividend at current levels. And and we believe that capital adequacy is sufficient and pre-tax pre-provision earnings. Even a Provisions will will be adequate to to clearly support the the return of capital to our shareholders.

Thanks, Brian. Appreciate it. You're welcome.

I hope you have a question, please press * then 1.

Our next question comes from Jennifer demo SunTrust, please go ahead.

Thank you. Good morning. Hi, Brian. What do you think the long-term implications of this pandemic shut down are going to be on First Horizon whether or not you know less need for office space or or other implications.

Yeah, we we stood up a good bit of time talking about that. And and we think there are a number of things, you know, operationally office space off and in the short run how you clean off the spaces and things of that nature how you protect customers that come in your Financial Centers. It's it's interesting. I'm doing this off the top of my head. All of our our Financial Centers are open. Most of the activity is happening in in a drive-through facility. Our transactions are down there. But we're we're doing all of it through drive-thru facilities and in some ways you almost have to smile because we're using old technology to serve customers the drive-up facility clearly customers. Are you a call centers are using online Technologies? I do think that we'll have to figure out how we cope with social distancing probably for you. And if you believe that the epitome

Allergist for a year or two maybe longer I think.

People have gotten much more comfortable and we're much more comfortable in our ability to work remote. We've we've done the vast majority of the PPP work on a remote places. I think we have more people working remotely, We'll probably need less office space in in centralized facility within those spaces will probably spread people out more. I think customers over time will do Less business and Financial Centers because they've gotten closer to technology and using the tools that are available to them. So I think it is a opportunity to really rethink how how we do business and that's one of the things that is we plan for the integration on a merger of equals with Iberia Bank is we think about how does this change our business long term and as we make our systems in process decisions, let's think about what this educates is about customers and customer preference in the likelihood of doing business so dead.

More remote banking spread out more and more social more social distancing and using more technology to serve customers in unique and different ways.

Thank you. You're welcome.

This concludes your question answer session not like to turn the conference back over to CEO. Mr. Brian Jordan for any closing remarks, please go ahead.

Thank you, Nick. Thank you all for taking time to join us this morning. Please. Let us know. If you have any further questions or need any additional information most importantly in this environment. Stay safe and stay healthy. Thank you again. Have a great day.

Conferences now concluded thank you for attending today's presentation. You may now disconnect.