Q2 2020 First Horizon National Corp Earnings Call
[music].
Good morning, and welcome to the first Horizon National Corp. second quarter 2020, <unk> earnings Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to Ellen Taylor head of Investor Relations. Please go ahead.
Thanks, so much I'm good morning, everybody and thanks, so much for joining us we know it's the end of what's going to really busy week, what are called the day, our CEO, Brian Jordan and see if there'd be trailers will provide an overview of our result, and then we'll be happy to take question.
We're really pleased that isn't Springfield, our chief credit officer with us to assist in that effort. Our remarks today, we'll reference earnings presentation, which is available at IR Dot at agency Dot Com I should note that we will make forward looking statements that are subject to risks and uncertainties and you should review the factors.
On page two of our presentation and on our SVP following that may cause our results to differ from those expectations. Our statements reflect our views today, we are obligated to update them.
We will also drive to our adjusted result can RMR for non-GAAP measures and you should absolutely would be the GAAP information our supplement and on page three of our presentation.
I'm going to handed over to Brian.
Thank you Alan Good morning, everyone. Thank you for Georgia.
And this most unusual environment pandemic related economic slowdown we've had a very good quarter I'm very proud of the work that our team has accomplished.
On July 1st we closed our M O <unk> or merger of equals without vary by this merger creates a late in southern franchise with strong demographics, and the ability to drive efficiency and create significant shareholder value.
Given the disruption created by the Cobot might think van den excuse me pandemic.
Our associates across expanded platform had been working tirelessly support clients and communities.
Originating PPP loans, providing long deferral of systems waiving fees, all while effectively managing risk.
At the same time, they have continued to ensure that execution only a very integration as well as the branch acquisition remain on track.
Our expanded franchise strengthens our geographic reach and Dep provides improved ability to better serve our customers and community.
Enhance growth opportunities and gives us scale to complete more efficiently.
This quarter, we delivered solid results with strong PPNR growth driven by strong fee income performance and good expense discipline as our counter cyclical businesses helped mitigate environmental headwinds.
Our fixed income business delivered strong results and then a remained relatively stable as we grew average loans led by loans to mortgage companies and the PPP portfolio.
[noise] during the quarter, we built our loan loss reserve by $93 million, raising our allowance to loan coverage ratio to 1.6% or 2% exploding lower risk loans to mortgage companies and the PPP portfolio.
We're continuing heightened monitoring and review of the loan portfolios in order to evaluate the impact of Cove at night thing on our customer base.
I can assure that we're prudently managing risk, while helping support customers and the economy overall.
BJ will give you details about economic assumptions supporting our reserve level, but I believe we're taking appropriately cautious view.
And the quarter, we further burst bolstered bolstered free further bolstered our capital with debt and preferred share issuances.
As expected our C.T., one ratio increased over 70 basis points linked quarter to 9.3%, which positions us well as we look toward the second half of 2020.
Well, we acknowledge that the macroeconomic backdrop and industry landscape remains very challenging we believe our combined company.
Remains well positioned to drive enhanced shareholder value over the medium term.
With that I'll turn it over BJ to take you through the details CJ right. Thanks, Brian Good morning, everybody Happy Friday.
As I'm sure you know, but as a reminder, art and though he was not very a closed on July 1st therefore, the two key results I'll be discussing our poor first arrived in Standalone later I'll give you some highlights of Iberia Standalone results for the quarter.
Well as some key legal they want impacts from the merger closing that you should expect to see in our Threeq results with that let's start with some highlights of our second quarter adjusted results.
As Brian mentioned, we delivered strong PPNR growth, which was up 13% linked quarter and 2% year over year.
Despite the challenging interest rate environment macroeconomic backdrop revenue was up 7% in the quarter and 11% year over year, driven by strong fee income growth with stable net interest income results. We think this quarter in particular really highlights the benefits of our counter cyclical fixed income.
And mortgage warehouse lending platforms that are helping mitigate some of the headwinds that we are seeing crossed the banking industry.
We generated nice balance sheet growth and continue to manage our deposit costs down and given the environment. We continue to be highly focused on expense discipline.
Of course, C.. So is the factor driving provision costs higher for the banks overall.
As we updated our models for the further down draft in the economic outlook compared to March we built our loan loss reserves by an additional $93 million or 23 cents a share.
Moving to slide seven you can see that solid loan growth and disciplined deposit pricing helped us generate modest in high growth in the quarter. Despite a 26 basis point decline in the margin.
As a reminder, our asset sensitivity as most highly correlated to one month LIBOR floor, which was down 105 basis points on average during the quarter, putting significant pressure on loan yields.
In addition, because of strong customer liquidity. The NIM was pressured further by excess cash balances with which created an additional nine basis point drag on the margin.
The same time, we continued to lower deposit costs overall, which were down 40 basis points in the quarter and the margin benefited from the addition of over $2 billion and PPP loans and the associated fees, which helped offset some pressure from lower accretion.
As we look forward, while it will be challenging to offset the additional headwinds from the rate environment. We will continue to look for opportunities to being bring deposit pricing down further and more efficiently manage the balance sheet, while still maintaining a prudent stance on liquidity given the uncertainty in the overall landscape.
Looking forward, we could see the NIM to impress further possibly in the mid teens range, primarily due to the addition of the truest branches. Those branches will provide about $2 billion of additional excess funding, which will further improve our liquidity profile loan and deposit.
The ratio and profitability over time, but will temporarily depressed the margin, while we find ways to put the excess funding to work over the next few months.
Recently on site slide eight fee income was up 18% linked quarter and 31% year over year. The fee income growth was driven by strength in fixed income and deferred compensation, partially offset by lower deposit card another bank fees given impacts from coated.
Wow more traditional banking fee income lines were challenged in the quarter as others have seen across the industry.
Given that some of our markets have begun reopening we did start to see some improvement at the ended the quarter in debit card and ATM volumes as well as the pickup and well.
Fixed income revenue in particular was up 19% linked quarter and 77% year over year as we saw strong sales activities and a turnaround in trading results. Following a challenging conditions that occurred in March.
As a result, the team delivered average daily revenue of $1.6 million during the quarter compared with 1.3 in the first.
Given the overall landscape, we believe the fixed income business remains very well position to capitalize on its extensive distribution platform and experienced Dale Salesforce to drive continued.
Solid results.
On slide nine quickly cover expense trends as we may remain committed to a highly disciplined approach to managing the cost base.
Given the swing in market valuations, we saw an increase in employee compensation costs, driven by a $20 million increase in deferred comp related to market changes, which is offset by increases in other income.
Outside of this our results benefited from lower stock based compensation.
That's 91 deferrals and lower operating costs overall, largely tied the impact of the shutdown.
Importantly, though we were able to take an additional $3 million of costs out in connection with our Iberia merger during the quarter.
As was Iberia.
So overall, we have achieved a total of $10 million in merger savings between the two companies over the first half of this year meeting our expectations. We set back in November when we announced the transaction.
We continue to be very confident.
Our ability to generate the merger cost savings of $170 million over the next 18 months.
On slide 10, and 11, we provide a view of our loan growth and funding profile as I mentioned, we generated healthy average loan growth of 11% linked quarter and 18% year over year, driven by loans to mortgage companies, which were up on averaged $1.7 billion linked quarter reflect.
In strong rifai volume due to low rates.
We also picked up $2 billion in PPP loans as well.
And the balance to the see an eye portfolio saw declines tied to lower line Utilizations from the peak that occurred in early April it's got commercial customers position started to improve in the wake of government programs and Reopenings, resulting in a reduction in the defensive draws that we saw me ended the first quarter.
As Brian mentioned customer sentiment remains cautious and we do expect only modest loan growth at best for the second half of 2020.
The same time, we've continued to work to further enhance our funding mixing capital stack.
Deposits were up 11% linked quarter, driven by strength in VVA and savings.
In the regional bank, we saw a customer deposits.
Rates paid decreased to 24 basis points from 59 basis points overall, we lowered our interest bearing deposit cost 52 basis points in the quarter to 38 basis points.
And while the mix of our deposit base will be a little different going forward. There in the last rate cycle with the addition of Iberia and the truest branches. We do think it's helpful to note that in the third quarter of 2015, our interest bearing deposit costs ended at 15 basis points.
We also felt that in the face of continued economic uncertainty there is important to continue to augment our capital and liquidity stacks since April we've issued one and a quarter billion dollars of senior.
Sub debt and preferred securities, we issued 800 million of Holdco senior debt Prefunding of 500 million dollar maturity coming due in December 450 million of bank sub debt at $150 million of holding company preferred.
On slide 12, you'll see that as expected.
We had a nice bounce back in our capital position from on usually low first quarter levels that were driven by outsized period end loan growth primarily from loans to mortgage companies. The C.T. one ratio was up over 70 basis points to end the quarter at 9.3%, while total capital increased to one.
Hundred 70 basis points to 12.5%.
Our strong PPNR sub debt and preferred issuances and a reduction in risk weighted assets drove our capital levels higher and give us ample cushion as we prepare for the future.
Well, though while there will be many moving parts next quarter, obviously as we close both the Iberia transaction and the Truest branch acquisition sitting here today, we would expect RCT one ratio.
To be into low nines in the third quarter.
Additionally, on slide 13, you can see we ended the quarter with really healthy levels of reserves allowance for loan losses totaled 538 million or over eight times annualized net charge offs.
We've built the reserve by 93 million entirely attributable to anticipated further deterioration and overall macro trends. We think it's important to note that while our models most heavily weighted the Moody's may 27 baseline scenario, we supplemented that with alternative scenarios.
And did very detailed portfolio reviews of industries currently affected by the pandemic.
We also incorporate additional factors such as the reemergence of covert cases, additional geographic data impact of stimulus programs and overall economic uncertainty.
For your reference we have a detailed table in the appendix that shows reserve coverage by portfolio, our coverage again, excluding PPP and loans to mortgage companies, which have exceptionally low to no loss content and I'm.
Stands at around 2% on a standalone basis.
Moving to slide 14, you can see video that overall the asset quality pictures still remains relatively benign.
While we continue to monitor our loan portfolios carefully the net charge off to average loans ratio came in at 20 basis points with the losses. This quarter driven primarily by two credits one loan in energy and the other in the franchise finance portfolio.
We've given some details on deferrals at the bottom of the page and as you can see total deferrals to both commercial and consumer portfolios were 3.8 billion, representing low percentages of customer accounts overall.
Interestingly more than 40% of customers that that Aston received deferrals have made at least one payment seen since being on deferral status. We will continue to work proactively with these and all of our customers and monitor the portfolios carefully.
Let's shift now to slide 15, and look at Iberia results and expected impacts from the closing of our Emily.
First we provide iberiabank standalone second quarter financial highlights on slide 15.
We plan to file pro forma financials for the combined company later in the quarter, but thought it was important to provide some information to continue to illustrate the power the new expanded and more diversified franchise Iberiabank also delivered solid PPNR, which was up 7% linked quarter.
Our.
Net interest income was relatively stable as loan growth of 7% linked quarter was more than matched by 8% deposit growth, helping to mitigate some of the interest rate headwinds.
Period generated record fee income.
Over 30% from the first quarter and over 45% year over year fueled by strong momentum in mortgage origination income with a healthy mortgage pipeline at the end of the quarter.
Of course provision expense in the quarter was up significantly as well given the impact of the updated outlook of the macro environment.
But now let's move on to cover our expectations for the impact because the merger accounting on slide 16 17.
As of July 1st we updated our estimates for the marks on the portfolio based on the current landscape and a detailed review of those portfolios.
You can see on slide 16 that we expect to record a total of $720 million or 3% of loans, including total marks of $560 million for credit and interest rate flashed liquidity.
And 160 million of.
Non PCB double count.
The 720 million of total initial marks will show up as follows approximately 460 million of it will go into the allowance for loan losses.
Approximately 260 million 160 million related to the non PCB discount and $100 million of interest in liquidity Mark.
We will be an initial reduction of capital, but will accrete back through net interest income over time and at the bottom of the slide we have laid out for you. Our current estimate of the timing of that accretion coming back into income and capital.
In the table at the top of the page you can see that we now currently estimate total credit.
The of the total.
Credit marks that a little over half were about 12.6 billion of the portfolio will be considered purchase credit.
Deteriorated PCD with the remainder of the portfolio designated as non PCB.
It's important to note that the PCB designation as defined by Cecil does not mean that the loans are bad and it's not intended to be an indication of perceived lost content associated with the portfolio.
So the initial marks will reduce RCT capital by about 20 basis points at close on page 17, you can see the current estimate of the merger accounting adjustments, which will result in a roughly 500 million dollar nontaxable gain that will be recognized through the income statement in our third.
Quarter results with a roughly 2.8 billion dollar addition to tangible common equity.
On page 18, we provide a reminder of the 170 main an expense savings that we are targeting for the combined company in connection with the merger.
And as I mentioned earlier, we have achieved around 10 million so far in the first half of the year with $6 million in this quarter alone.
We expect to have an exit run rate at the end of 2020 of 25% of our targeted cost saves and we're well on our way to achieving that our integration efforts are on track and we're confident in our ability to deliver on the savings.
And the benefits of the merger with the strong belief that we will be able to exceed our targets so with that Brian I'll hand, it back over to you.
Thanks BJ.
With our strong balance sheet business mix, including our counter cyclical businesses are strong capital base and liquidity they will all service well in this difficult environment.
We have maintained underwriting standards that are very strong and built a diversified portfolio focused on profitability.
Despite the economic headwinds, we're uniquely positioned to capture merger opportunities with enhanced scale better efficiency and improved earnings power to create shareholder value.
We will continue to assist our associates communities in clients efforts to overcome covert night things impact and revitalize the economy.
Thank you to all of our associates for your outstanding commitment and efforts in dealing with these unprecedented times.
With that Andrea will now take questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
She was your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
And our first question will come from Brady Gailey of KBW. Please go ahead.
Hey, Thanks, good morning, guys.
Right Okay great.
If you look at low growth, excluding the mortgage warehouse and excluding PPP.
I think period end balances were down a little linked quarter.
Maybe just comment on saw utilization.
Went down.
Just comment on it to choose along that kind of ex warehouse in X. TPP and then yes, BJ I heard you said you expect modest growth.
Yes for the back half year, but maybe just a little more color on how you're thinking about loan growth going forward.
Hey, Brady this is Brian I'll start and Susan or BJ can pick up.
Our.
Loan growth on absolute basis outside of PPP and mortgage warehouse was down a little bit most of the that was driven by what you saw in the significant line Drawls that occurred late in the first quarter in the March timeframe. When the economy started shutting down more broadly those lines.
Paid down if you looked at the loan growth through the the second quarter you could characterize it as BJ did earlier is reasonably modest most of the new loans were to existing customers and tended to be.
At levels that would be very low relative to say the last 18 months or two years. So that's our expectation is that we will have some activity that the wind draws of sort of work their way through the system that will continue to support customers both existing and operate.
<unk> entities to take on customers in the marketplace, but we don't expect a tremendous amount of loan growth throughout the rest of this year at least until we get to the other side of this pandemic.
Yes.
I would really add brady's, we remain very focused as we always have on on full relationship and so continuing to work with our client.
And in some prospects that we brought into the P.P.T. program, but we remain as you can imagine very pregnant our underwriting.
Have a higher level overview for new extensions of credit, but we do believe that there could could be some some limited opportunities, but as Brian said, we'd expect loan growth would remain.
In the lower range, certainly compared to the last 18 to 24 month, Yeah, I would just add one more thing I mean with Brady. We're we're definitely opened for business. It's not that question is just lower activity from clients.
Looking to extend credit because of like Brian talked about the pandemic. There's just there's just.
This caution across portfolios, but we'll look we'll continue to look for good opportunities to continue to grow customer relationships.
All right. That's helpful. The next on your common dividends I think there's been some investor focus.
On your dividend post.
When we saw the C Corps results you didn't earn the dividend last quarter you earned at this quarter, but the payout ratio was pretty high. If you include the $500 million game next quarter you will.
Earn it by multiples, but how are you thinking about the stability of your dividend going forward.
Hey, Brady this is Bryan again.
The board considers the dividend every quarter and and we looked at the the rules have at least been publicly made available from the fed and and our modeling and our outlook indicates to us. It we will be in a position to continue to recommend our dividends to the board of dry.
Directors.
I would say that as a backdrop, while we were confident in it we don't know what we don't know about this economy and it's important that the board not only looked at dividend, but looks at capital and Cata capital adequacy long terms, so that could change, but based on our modeling based on our outlook based on our understanding of the rule.
Sales in the fed framework.
We feel very confident that we will be recommending to our board that they consider continuing the dividend at current levels.
Okay, and then finally, a quick one BJ was helpful to have the forecast for the yield accretion for the next few years, but that is just probably just scheduled.
Accretion right that doesn't include any on schedule. So reality is what some payoffs, you'll probably see numbers a little higher.
Right way to think about that.
Yeah that.
That is that correct, yes, it's going to be based on this is this is based on our.
Our assumed timing and you're right if theres, if theres an acceleration than than the there could be a change much like we've seen another.
Other transaction Brady.
Great. Thank you guys.
Yeah.
Our next question comes from John Pancari of Evercore. Please go ahead.
Hi, a this is a has bought deal on behalf of John.
I just had a.
A question around the loan Mark I'm. So I know in mid April a you've had a provided an update on and I was little Mark and I believe the total market around that time was around $500 million to $550 million. Then you know one could argue that the macro has kind of worsened since mid April.
Through the deal closing July how come that didn't influence the credit Mark and I'm looking at the total Mark Fysixteen right now how can that didn't influence your credit Mark and then also it looks like the the leap Mark of 40, Bips sort of consistent with.
With the level that you had announced back in November 2019, and obviously rates have come down quite a lot to Dan and I'm, just wondering like how did that not into NCR make mark 'cause. It looks like that also see that 40 bips. So just a couple of clarification question that on that.
Sure. So it's it's BJ so.
It's been a wild ride on trying to.
Estimate marks between November of last year, and and today and so like you said, we gave interim updates.
During the course of that so if you recall back in November we would have had credit marks.
Assumed that announcement of 1.2%.
And.
Interest rate Mark of about 40 basis points.
So that would that would have been 1.6, the interim that you're referring to.
Would have captured a little bit more of a credit mark, but a substantially higher interest rates flash liquidity, Mark and I would put more emphasis on emphasis on these liquidity mark so when we put out that that disclosure back a couple months ago. It was at the height.
[music].
The liquidity crisis in the fear in the markets.
Before the fed programs had fully didn't hold out so the assumption was much higher on the liquidity and interest rate Maher subsequently markets have gotten a lot more liquid that liquidity and interest rate Mark has come back down but.
Our expectations around the future outlook on credit have deteriorated so all in all.
Our credit Mark is higher.
I, probably 40, 40% than what we would've thought back in November interest rate liquidity, Mark Interestingly enough kinda landed in the same place, but as you can see in the table the mix of the PCD non PCD has chain.
Early as well so lots of moving parts in here, but the bottom line is we feel very comfortable that our teams have done.
Great extensive work on the valuation that we're building very healthy reserves that go into the allowance and we've got additional loss absorption capacity that will accrete back through income over time to the tune of about $260 million.
[music].
Well, we're very comfortable with the estimates that we've got.
Okay.
And then just question on the on first Horizons Standalone expense base.
So I believe it was like six months ago, your expectations floor fuss rising expense base was around $280 million to $85 million the quarter and.
Looking at to Q numbers on a core basis. It came in at around $318 million, so that $30 million differential. Obviously, you know partly driven by this is stronger and fixed income business.
Performance, but how much of that differential in the our expense base do you expect to normalize in coming quarters.
Or should we kind of expect like that seek Fannie is maybe normal sort of run rate for first rising assuming you know fixed income kind of strong.
Yes so.
Hello, how I'd describe it is.
The the increase that you're talking about is all related to two things. One is as you mentioned fixed income variable compensation, which comes with additional revenue that we that we gain so there's a 50%.
Net positive benefit to our pre tax income from that additional expense and this quarter.
We had.
Deferred compensation expenses that were up quite materially in the quarter as well we don't expect those to continue that's that's.
That will certainly moderate so yeah, we still believe that.
We'd like to see fixed income remains strong, which we think it will so I would if our you take out the deferred compensation impact in this quarter and then once.
We start to look at our companies on a combined basis start to layer in the merger related cost saves and we expect to see meaningful declines over time in our expense base. They do one more of the that I would add to that list is the provision for unfunded credit which was a lot.
7 million this quarter and 9 million last quarter.
To be a year ago, yes, essentially zero.
Yes, but those two or a fairly significant in their pandemic related in the sense that they're related to credit or potential credit losses for unfunded commitments. It just happens to flow through our expense base yes.
Yes that it's great point I, just want to bottom line reiterate.
We have done an excellent job of managing our expenses.
And so that the increases here all related to either support of additional revenue on pre tax income or the two things that fine and I discussed and we are.
Can you and give focus very very.
Strongly on expense discipline.
Our next question comes from Jared Shaw of Wells Fargo. Please go ahead.
Hi, good morning.
Andrew.
Just looking at the the margin I guess, the start and the growth in cash and with the expectation for additional cash growth from the from the grain she'll Andy I became CEO, what how should we be thinking about sort of the the deployment of that cash into either securities or I guess securities or you know.
The your expectation for customers deposit use so as we as you go forward through the next few quarters.
It should be looking at that sort of net cash position.
Yes, so has that as I said in my earlier comments.
We think that.
Initially in the third quarter. The addition of the net TB and dollars of funding from truest is going to depress the margin.
Maybe in the mid teens range and over the next few to several months, we're going to figure out ways to deploy that in terms of either securities.
Loan growth managing down other higher cost.
Deposits.
Et cetera, so we expect that to be a temporary.
Type depression of the margin and so said a different way if if the truest acquisition was not.
Being completed in the quarter, we would think the margin would be.
You know relatively stable to just down modestly as opposed to to down in the mid teens because of the addition of the excess cash.
Okay.
Great and then.
You know can you talk a little bit about the deferral extension processing is the as that initial 90 day period and you know how are you approaching a extension there and do you expect to be able to get either additional credit enhancements or any type of beneficial a term restructuring is as though.
Let's go forward.
Hi, Jerry.
Related to the deferrals, we are really getting to the end of the first round of 90 day deferrals of requested by our customers and we are well really on a case by case basis with our commercial customers asking questions about other sources of cash sponsoring guarantor.
Support et cetera.
And often times and we are getting some additional whether it's a.
Guarantee I'm asking.
Guarantor owner to put in more activity potentially looking at other structural elements.
At this point and we've had.
<unk> portfolio reviews, as BJ mentioned in his remarks on our slide.
With a number of all related to specific loans and a number of portfolios in fact.
We covered over.
70% of some of the higher risks portfolios.
And.
We were talking with our bankers about what their clients are telling them. We don't at this point, we're not anticipating nearly the number of second round deferrals. Since we had in the first round really only into real industry pockets do we expect potentially second round deferral could be maybe near what they weren't first trip.
And in that would be some of the the restaurant franchise finance companies and some of our hotel borrowers.
Otherwise based on feedback we've received over the last really 30 to 45 day, we're not hearing of a big increase.
Obviously, we're watching that closely as things continue to.
I'll be very dynamic around the code that situation related to various state that many of our customers are reporting.
Good liquidity good cash reserves, a combination of their operating at lower expenses.
The benefits of the government programs, including the P.P.P. program, the idle program that cares grant programs.
So again, we were glad we're glad to be able to assist customers. During this time, but right now the second round. The deferrals appears to be much lighter request than we had on the first round.
That's great color, Thanks, and I just finally from me on as we look at going forward. If we do see additional macro deterioration you know based on the movies models.
Should we assume that you are all are more willing to use qualitative overlays with the you know the additional credit protection from the from the M. OE or you know should we expect to see that the macro impact from any future deterioration would be.
Similar similar impact.
So actually for the second quarter, and we did it in the first quarter, but even more in the second quarter. In addition to the ladies baseline we actually did apply a good bit of qualitative overlay on a number of portfolios that either all or have the potential to have some effect from coal bed. So as an.
Examples over some of the portfolios that where we had an additional qualitative overlay.
Included not for profit on senior living like nursing homes assisted living health care and.
And then even a more significant qualitative on some other areas, which you would expect things like restaurant entertainment.
Hospitality retail and then.
And then energy we even we took a very very strong lot and did Oh pets.
A great deal of the clients there as we went through borrowing base redeterminations looked at hedged strategies et cetera.
And so we did deploy.
Good qualitative overlay I'm in the second quarter, and we'll continue to do that as we evaluate diesel at this point, we feel like Oh, we're well reserved.
For the portfolios that we have and we'll continue obviously to evaluate that next quarter.
I guess, but this quarter third quarter as we get near the end of the quarter, but we feel like we've got a good robust process and have taken but as I said, the Moody's process, but then the subject matter expertise and it.
That qualitative overlay based on information, we going from the deep data.
And I would add to what season said that as we evaluated the loan marks a very portfolio. We did the same thing.
We we.
Use qualitative overlays, where we needed to particularly around stress sectors as as Susan outlined so we feel likely.
We had fulsome marks family have very healthy reserves on the first rosin standalone side.
This is Brian it's an interesting it's an interesting time to be estimating loan loss reserves and we're all trying to figure out how Cecil works and then the real world and.
And in many ways it is.
Yeah, I'll stick with ill timed and and overly burdensome, but if you if you sort of step back from the loan portfolios and and you looked at the various components you are seeing.
Some places where there are trouble emerging and Susan did a good job enumerating those places.
But there's a disconnect between call it $17 million, a net charge offs and $540 million in round numbers of loan loss reserves.
And.
Yeah, we fully expect while borrowers are doing today that there are a lot of places that this economy can go in and what happens if we have more shut down or re shut down what happens if the Congress and the administration don't put together a.
A bully helpful. Another round of Stamos, what happens if fed liquidity programs change right now the economy is is doing better than you might think in borrowers are doing better than you might think given the economic environment. We're in we attribute a lot of that to the.
Great work that the treasury and of that have done with programs like main street lending, which is not really been used put in place liquidity programs PPP. A this stimulus payment consumers are still relatively strong credit card volume has been picking up since the economy started reopening.
So.
All in all we've got a sober and cautious outlook on what happens over the remainder of the year, but when you and when you talk to individual borrowers and you go through individual elements are the portfolio.
Things are doing much better than you might expect at this point in time and.
Take the the restaurant business if you're in the quick serve restaurant business, you're you're back to where you were pretty good damage largely speaking and in some cases your comps are up 10, 20% dependent on the business. Your end. So it is a tale of many stories out there right now and it's just an odd time to be trying to.
<unk> aspect what loan loss reserves in the life of loan losses might look like.
Thanks for the color.
You're welcome.
Our next question comes from Steven Alexopoulos of JP Morgan. Please go ahead.
Hey, good morning, everybody.
Okay.
Right. It does it stay with the reserve conversation this being an odd time.
Based on everything you're looking at now do you think the majority of the reserve building under Cecil is now behind you.
Well you know clearly from an accounting perspective, we take the information we have and we book what we think are life of loan losses, and and so if the economy plays out consistent with what that set of assumptions, yes, I think so but as I said earlier.
Sure and talking about the dividend, we don't know what we don't know about how this virus plays out it's a medically driven crisis and and until we get a solution to that is hard to know how it plays through the economy, but but I think we have have based on all the information we have available to us book So.
Fishing reserves to cover losses in the portfolios it stands today.
And it is we get to the second half in some of these deferrals are transitioning into default is it likely you'll then need to establish a specific reserve for or is the plan to start using these qualitative overlays that you're building into the reserve today.
Well I think clearly that we built some of these reserves and the qualitative reserves in anticipation of of specific problem. So our intent would be to use those as they evolve yes.
Okay.
And then thank you and then shifting direction to fixed income is nice to see IDR above the prior range. It's been a while I'm curious how did HDR trend through the quarter and do you think it's sustainable at these levels. Thanks.
Yeah, I 80, our transition or trended positively throughout the quarter. We finished the quarter very strong and and I would say a very good start to the third quarter as well. We do think it is it is sustainable and in some of it is sort of the.
Extension of the comment we made about loan growth to the extent macro loan growth is not good across the industry, they're more opportunities for securities in securities portfolios and financial institutions, and and you know the question came up about cash on balance sheet, that's happening across the industry. So that's good for.
For the business the average daily revenue this quarter was impacted a little bit by the reversal of what we call negative splits in the end of the third because she came in as a first quarter being reversed its another name would be portfolio gains are trading gains and losses.
That occurred but average daily revenue.
Has looked good the trends look good and our outlook for the remainder of the year is that our fixed income business will continue to serve as a the as the a or b countercyclical buffer that we've always believed to be.
Okay, great. Thanks for taking my questions, yes, well thank you.
Our next question comes from Brock Vandervliet of you've yes. Please go ahead.
Hi, good morning.
I have to see some of the clouds begin to part here.
Huh.
Following on Steve's question.
I do worry about Chen securities because the performance has been so good its repeatedly beating our expectations and wanted to just go back to.
Your comments, Brian and <unk>.
I mean is this more of a kind of flat from here.
Sort of set up into the back half what should still be very very strong or do you think you could actually climate out from from here.
I think my outlook would be that that you sort of if you were going to forecast. It out you wouldn't show a lot of growth and you wouldn't show a decline in a whole lot it'd be sorta in in the area sort of the average where it's been the last couple of quarters.
Okay.
And.
<unk> one of the areas, where the cloud it's kinda remain is.
And then.
I know you've taken a crack at it defining that a bit.
PPP, you've got the branch ill branch purchase coming in.
As you look and I became she of course.
Maybe if you look at year end Q4.
What what kind of.
Core NIM should we be a be looking at.
Yes so.
The way I don't know why Brian gets the good question on strong fixed income and I get the tough question on now.
Right.
So I would expect it to core NIM continues to be pressured.
Through the back half of the year I mean that you know we've got.
Hopefully loan yields are stabilizing a bit.
We are we still have some room as I talked about earlier on.
Deposits and deposit rates paid we still think that we can bring those down.
But the reality is we're going to continue to have.
A high class problem of excess liquidity.
We're gonna have to work through so that's going to be the depression in the margin I wouldn't translate that into.
Material declines.
In overall and I.
Because you know we've got accretion coming through even if the margin is compressed by excess liquidity. It goes into excess balance is that the fat and that's largely awash. So you know it's it's again continued its going to be.
Challenged but we've got opportunities to mitigate it both in the net interest income line as well as what Brian just talked about the counter cyclical businesses that we've got a fixed income lines to mortgage companies and as a combined company the mortgage origination.
Platform that Iberia has which had a record quarter than the first quarter and then soundly beat that record quarter in the second quarter. So you know we we have multiple levers that we think can offset.
Some of these headwinds and we'll work hard to mitigate as much as we can.
Great Thanks for calling.
Thanks, Doug.
Our next question comes from Ebrahim Poonawala of Bank of America Securities. Please go ahead.
Yes.
Want to Florida, or Oh, I guess, just wanted to follow up on the NIM Oh, you. What do you mentioned that X to US we expect the NIM would be relatively stable going down market. So just wanted to put some numbers that I want to make sure you get this could act.
Corn Kuwaiti school, you expect complete teams to clients or let's call it about to 70.
Is that a decent please then be reflects louis lift.
Yeah, Peter Flex keep people now in terms of where the core NIM should be at up to 70, and then maybe it might have some upside as it deployed that liquidity SPP Pete unresolved or is it a more downside to that core NIM, but electrical but to 70 number.
Yes, So I had said need mid teens and our core core NIM is to 80 in the quarter.
And when I've been speaking about what I thought second half a year look like I'm, obviously contemplating not not just standalone I'm contemplating.
The Iberia merger, the truest acquisition and you know the the puts and takes of those so.
Yeah, I think it's I think it's mid teens, primarily from the liquidity.
Excess liquidity would that we'll see from trust.
Sorry, I misspoke tranche of about 65, and the kitchen and what's your view on P. It on the Wall Street, we expect most of this to be so given by the end up here.
Yes.
Yes, yes.
Go ahead.
[laughter] <unk>, what do you have like what the performer, earning assets Orient only actually for the balance sheets, you're saying to get a sense. So what we should expect in terms of the size of their balance sheet looking out into Threeq you with all these things at it.
So pro forma earning assets.
At June Thirtyth yeah.
[noise] pro pro forma alone.
For both first right now bigger together if you look at 630 without P.T. pay Tom is about 55 billion [noise].
And so I know you asked for all earning assets Gotta go to give you the lines obviously, that's without PPP, we had a combined.
Paul TTP portfolio love about for a little over for about 4.1 billion. So if you. If you include TPP total loans on a pro forma basis at the end of gene.
Out 59.
Yeah, I've got Ebrahim I've got to earning asset.
Roughly 74 billion.
That's helpful and just over one separate question.
I guess the Susan.
So you've talked a lot about credit and Oh, what you've done in the uncertainty on the macro at this point like when you looked at the loan books will deal are you still making decisions based on portfolio level details as you mentioned that that's something that's what else or would you say you have a good handled on granularity looking at these loans customer by customer.
And then let's just say they'll get a central.
Just in the border based exercise or do you have a quick sense at all and comfort around customer ability to withstand if things don't get materially worse, which would imply a decent drop off in terms of credit provisioning relative to what you see it into first half.
So we in addition to portfolio level that we're looking at and we're looking at information line by line. They are bankers are updating line by line information based on customer feedback. We're also looking on a lot of market information around.
What's going on with various franchises in the franchise finance say, what's going on with hotel occupancy 90 hours event, but then again looking at that on a customer by customer basis. So we will continue to do that.
Just as a reminder, we talked about this last quarter, but.
Oh, Yeah, we feel very good about the disciplined underwriting that we've had <unk> since the last financial crisis, and I would say this applies to both legacy first arising in legacy Iberia.
As it relates to things like in the commercial real estate ball.
Well tally.
Average equities in that 40% all well so it gives us a lot of fish in our past when there's a lot of fishing when you have something on classes and I'd like it pays in Canada.
Maybe a data point that some customers saw this was when things are starting to open back up violated the that's on the restaurant solve we clearly saw them a restaurant side, but also in the hotel portfolio because our hotel portfolio is.
Candidates, you know smaller dragging difficult I can't tell that cater to family travel some business travel we have very limited exposure to convention large hotel business.
And we have heard from clients that memorial day.
Ended June or July for some of them has fully off.
Fully occupied.
We also saw as well said average rough spot checks went up as more people did take out there we're buying more and I would if they went in because they were thinking about I might want some lighter. So we just we are seeing that both in that market data that we get on all of our industries and study also talking with individual customers about what they're saying.
We will continue to look at ball.
But again I was I was pleased with the resiliency that all fall out of our clients. When you had the complete shut down and then thing open back up we thought or a lotta carefully pretty quickly, but it's probably to be they said, we're all watching.
There. So there's some additional shutdowns that have occurred but again resilient customers prudent underwriting and said we believe we've got a reserve for what our lifetime office will be based on what we know today.
To the to the resiliency customers have been very creative and the way they've adapted to an unusual set of circumstances and you see customers adapting their business our customers adapting their business model to meet changing circumstances and it really is amazing and if nothing else. It is a testament.
And overall testament to the strength in creativity or the economy in the U.S.
Our next question comes from Garrett Holland of Baird. Please go ahead.
Good morning, Thanks for taking the question just have a near term one on expense is what's a good range for core expenses.
As you think about Q3 or the back half for the year.
[noise] standalone or combined or.
Combined is great.
Yeah I think.
I think I'll I'll defer and have our IR folks follow up with you on that because there's so many moving parts to what we've got in terms of merger related one time and.
Those types of things that I think.
It would be better to give you that.
Give you that in a in a different format.
I understand I guess.
Just bigger picture I know that Cosby's, you sound very positive asked potential clearly the buyer. This change though since you know the transaction is how you recounts earnings power or advise thinking about the return potential for the combined company in this type of environment.
Well I think yeah, the way I would characterize it is no short term.
I think we and everybody else are focused on.
Safety and soundness right healthy reserves strong capital levels strong liquidity in funding profiles.
Beyond that is controlling what we we can control.
And what we can't control is.
Particularly in this environment.
Our support of our counter cyclical businesses.
Our our deposit pricing discipline.
And a huge lever of course for US is taking cost out of our combined organization in a very material way over the next several quarters. So I think those.
Things will position us very well.
You know in terms of our ability to maintain profitability over the next several quarters beyond that we are very convicted and optimistic about the opportunity we have long term as a combined organization.
Well, we've got the cost saves that will come and we are in very attractive markets.
We are continuing to build a diversified business mix with counter cyclical businesses. Our enhanced scale will will help so over the medium and long term, we still feel like we can generate top tier profitability over the long term and we're building a.
Company to position us well to do that.
Hi, good that's through that.
This is Brian.
Like I think.
I think this is it's hard to sort of model what was in the numbers in November and whats in the numbers today, because cecil changes everything but as we've talked about today. Both businesses are seeing strong PNR, we're seeing a very good activity and our franchise.
We think that there is a great deal.
Of leverage in fact were seen in the first couple of weeks of well merger post merger timeframe referrals of business that go into though our asset based lending business. So we haven't modeled in any of the synergies, but those synergies will be there on the revenue side.
The one thing I'm certain is we have the ability to hit our commitments of 170 million plus I think we have the opportunity to upsize that overtime and I can't understate, how important a lever that is in an environment. Like this these are cost that we couldn't get at all.
ER individual basis by combining the two organizations and no premium merger of equals we have the ability to create $170 million pretax plus of run rate savings on an annual basis that you're going annuitize and so that's that's a big deal and that that will be a big driver.
Over the next 18 months, so it's BJ said longer term I.
I think we're going to be in a position with the markets that were in with the bankers that we have on the playing field. The team that's out there covered our customer base and then our strength of balance sheet. We're gonna have superior growth opportunities in the short run we're gonna have levers to pull with our counter cyclical.
Businesses, and our cost savings that are going to be meaningful in terms of creating shareholder value.
Our next question comes from Jennifer Demba of Suntrust. Please go ahead.
Jennifer for engine.
Good morning [noise].
Talk about your criticized loans trend from.
Uh huh.
In Chile, and where you're seeing a the most increase and then can you also talk about what you're expecting in terms of near term.
Net charge off levels over the next six months I know that they stayed quite low in the second quarter. Thank you.
Yeah for as it relates to criticize line when we talk about first or I can stay in the line then I've got some information on a combined basis as well.
If you look at.
[noise] operator, you may not only.
I apologize I had a first seem to have placed us on hold would you like to move to the next questioner.
Why don't you Guy I got it okay, I'm going to answer the classic yeah. So Jennifer ask about criticized.
I'm lying changes and so first to ride and handling we saw about that $100 million added to criticize one quarter over quarter.
Oh. The are you added just under 200 tell me about pair 90 million added quarter I've read or in the criticized flying.
Which about 190 million with energy related across the two portfolios.
I would say that both company took a very conservative approach as we look through our energy portfolio.
Check the appropriate action they needed to grading, though so all that percentage basis criticized line first horizon Standalone went from about 2.8% of the portfolio to three and a half by the way. These numbers exclude Pee paid all I'm on the percentage of line.
And then on a combined basis again pro forma ended the quarter criticized one answer about 3.2% of the portfolio.
Outside of about 2.4% if you looked at it at the end of the first quarter. So we did see some increasing criticize line.
Well I don't have a specific forecast for net charge off we are obviously looking at.
This in some increasing the criticized line.
Based on what we know today in the economy I would expect it we would have to net charge offs in the third and fourth quarter at this point, though I don't really have a forecast because there's a good set of uncertainty.
But as we as I mentioned earlier.
Because of healthy for works, we believe we've got well well reserved for.
Well lifetime office in the portfolio based on what we know today and the complete really the date jobs that we get on.
The portfolio and specifically the Bahar Oh rest part.
Yeah, and I would I would say just to add yeah, Susan talked about that the majority of the increase being energy and energy being one of the near term portfolios that we would obviously be most focused on.
Our coverage of the combined energy portfolio.
We will be around 8%.
So we significantly increased the reserves on those portfolios through both the marks in the on the Standalone side. So you know that's that's one of the places that we lean then along with the other sectors that Susan talked about earlier.
Our next question will come from Casey Haire of Jefferies. Please go ahead.
Yes, thanks, good morning, guys.
So.
The you got you guys give us an update on the fixed income business, but the mortgage warehouse unless I missed it <unk>, what's the [noise].
How how what's the outlook there it seems like it could have legs, given where you know mortgage rates are going and any color on the split between Wi Fi and purchase a as well as where where yields are today.
So mortgage warehouse, we thought purchase is about 65% lead by analysts in the second quarter, which is kinda like you would expect with right well keep thinking they set their local [laughter] go down again, so there's been.
I'm good activity there yields in the second quarter were about 361.
For that mortgage warehouse portfolio so athletes.
We have over the last three years added.
Customers to the customer count the mortgage warehouse.
But I'll, let me talk maybe about the outlook for.
Well, yes, Casey I would you know I I think if you remember in the first quarter, we had a very significant run up in the last five weeks for the quarter and period end balances topic at around 5.8 billion, a they stayed pretty elevated because of strong activity.
Through the quarter and you'll see that you saw average balance is actually up pretty materially in loans to mortgage companies first to second the period end balances were down more in the 4 billion dollar range right. So the business.
Does ebb and flow based on the flow of mortgage originations in the next Oh purchase and refinance going into the third quarter. We see continued strength in the business and so you know.
We expected to grow from that period end balances of $4 billion and and likely be in the range of the average balances that we saw.
In the second quarter.
Great. Thank you, Brian just just big picture question for you.
You know.
When you guys announced this deal in early November obviously was a much much different world things seem to be tracking you know at least from a capital perspective and cost save perspective <unk> plans.
But is there anything strategically you know either on the first horizon or the Iberia side of the house, you know a loan vertical or.
So he's portfolio.
Strategy change that you guys are thinking about just given how.
How different the world is today versus November.
Well, there's not any significant changes no we're still equally convicted about merits of of the transaction.
And I I'm extraordinarily pleased with the way the team has come together. It is it's been remarkable and while we had the first four months to bring people together in a face to face environment. Since March we've been doing it by Webex and and zoom and all.
The other electronic virtual means that you can come up with but the team has come together and doing very very well.
As I mentioned.
No, we're seeing some opportunities to leverage portfolios or businesses across both organizations I mentioned ideal BJ mentioned, the mortgage business and the title business that that Iberiabank brings to the table. So we still see a lot of that well well fine tune some things one of the if you.
Look closely at the numbers, you'll see for example, the commitments in energy were down a little bit this quarter. It represents on a combined basis about 4% of the portfolio. So we're willing to trim. Our sales is is the economy continues to do adjust to the grey endemic and then the post fan Dan.
Quick world thrown off on a macro basis, we're still equally convicted about the opportunities of bringing these two organizations together.
And I'm glad we're beyond the starting line in the hard work is in place. So it's it's a very exciting time to get that done and I think gives US said earlier, we're gonna see a lot of shareholder value created when we find these two companies over the next 18 months.
Thank you.
You're welcome thank you.
Our next question will come from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Thanks. Good morning, how are you just wanted to focus on the the branch acquisition and sort of strategically brine does that do you look at any differently than you did last fall I, just given where we are in this and also the high liquidity that does BJ had addressed earlier.
Well I think you know you you raise an accounting and an economic points that you know excess deposits today, or <unk> or <unk> sort of different in a zero rate environment, but from a strategic standpoint, I think it is is a home run transaction for us and were.
We're very pleased with that transaction.
Is BJ mentioned earlier that conversion and acquisition is going on this week in sort of those customers and those branches will be converted over the weekend and what it will do is overnight. We'll we'll do 30 years of branch building in the Carolinas in terms of.
You know average branches with call it $80 million in deposits and give us meaningful share in the middle part in North Carolina and back to what we said in 2017, when we merged with capital Bank. It was we wanted to have a meaningful presence in the Carolinas into pick up a top.
Five president and.
And the in the triangle. She is she me in the Tri Ed or Greensboro, Winston Salem High point and to pick up meaningful share in Durham, and Chapel Hill, the triangle area, North Carolina is significant and so and from a strategic standpoint, if we started building. These 30 branches we couldn't create.
Branches of this quality and 2025 years <unk>. This is just a quality franchise and we were lucky to partner with Suntrust Baby entity now true is that require these branches. So we're proud of what we're building in Virginia Carolinas in Georgia with this transaction.
Okay, great. Thanks, Thanks for that and I guess when you have to the systems fully converted that you can do more with those branches to right. So we could still thinking that it in that context, Oh, yeah, absolutely, but the systems will be converted Sunday morning, So everything will be done. This weekend. So it's it's soup to nuts. This weekend on a branch acquisition.
<unk>.
So we'll hit the ground run and Weve people have worked really really hard over the last few months and it's one of the reasons, we deferred we wanted to be in a position to do adequate customer communication.
Adequate training, we've got ambassadors and and all of these banking centers.
From the first horizon perspective, who will be helping with systems and technology and things like that over the next couple of weeks, but we're going to hit the ground running and these these branches financial centers banking centers will be part of the first rise in franchise. This weekend and will hit the ground running Monday morning, It really.
Does help I mean, obviously, having additional banking centers.
Please our ability not only to reach additional containers, but small business in the middle market company.
Ill like to see it [laughter] branch presence in 10 minutes it enhances well work that our bankers have already done.
And calling on and bringing in a business from all the areas will have expanded problem. He situation present, but we didn't have before so we look forward to that in addition to serving containers, but also the vehicle side.
Great. Thank you for additional feedback I appreciate it from both you.
Alright, Thanks, Chris every weekend.
This concludes our question and answer session I would like to turn the conference back over to Brian Jordan for any closing remarks.
Thank you Andrew I appreciate all the hard work that our associates are doing and as I mentioned the branch conversion, but there's an awful lot of merger playing integration and most importantly, taking care of our clients in our community. So thank you for your hard work. Thanks, everybody for joining us on the call. This morning, we appreciate your interest in.
Our company, we're very well positioned and we're going to create a tremendous amount of shareholder value with the consummation of the branch transaction and our merger of equals.
If you need additional information or have any further questions. The please feel free to reach out to any of us.
Ellen Taylor already Bowman, and then let US know we'll be happy to help you hope you all have a great wonderful safe weekend. Thank you.
Hi.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.