Q3 2020 First Horizon National Corp Earnings Call
[music].
Good day and welcome to the first Horizon National Corp. third quarter 2020 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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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.
Sarah and good morning, everyone. Thanks, so much for joining us today.
To kick things off our CEO, Bryan Jordan and CFO BJ waste will provide an overview of our results and then we're gonna open things up for questions.
We're really pleased to have Susan Springfield, our chief credit officer with us to help with that effort.
So our remarks today will reference the earnings presentation, which is available at the IR Dot H.M.C. Dot com.
And I should note that we will make forward looking statements that are subject to risks and uncertainties.
And you should review the factors in our filings that may cause our results to differ from our expectations.
All statements reflect our views today, and we are obligated to update them.
We will also address our adjusted results in all remarks, which are non-GAAP measures and you absolutely should review the GAAP information in our supplement and on page two of our presentation with that I'm going to hand it back.
That I'm going to hand, it over to Brian. Thank you Alan Good morning, everybody. Thank you for joining us this morning.
This is a very significant workforce, we closed our merger rickles with robbery buying required to 30 branches from Sean Trust through Oh really excited about that that integration was down in mid July we.
We've made significant progress during the quarter, we were very pleased with the performance of the organization. The great work that our associates did to serve their customers and their community now what has been a challenging and trying to win.
We see good momentum in our business, we proved out again, the counter cyclical benefit of our businesses mortgage mortgage warehouse lending and our fixed income business.
Our balance sheet continues to perform well as we've talked about over the last 10 or 12 years, we have really significantly restructure the balance sheet and to focus more on so you know.
Net charge offs for 44 basis points during the quarter, we saw a slight tick up in nonperforming assets, but we ended the period with about $1.3 billion of capacity for long time, so very strong balance sheet.
We had a good quarter in terms of deposit activity, we've had good customer inflows on the balance sheet feels good and which all.
Progress made in and adjusting our pricing to compensate for the lower interest rate environment.
Also during the quarter, we made good progress on our expenses, we captured another $8 million of run rate excuse me of run rate and our was 470 million plus some expense savings we feel very good about our progress and and controlling costs and are planning for.
For the integration there's a couple of good slides in the Investor deck would you can refer to lay out the expectations around expense efficiencies over the next couple of quarters and year.
Our capital base continues to be strong very very pleased with the positioning we came in with US GE GE one ratio of 9.15 per share our tangible book value dilution was very slight from the acquisition of the branches and the completion of the merger was largely offset by.
Earnings during the quarter.
Our planning around the integration continues to go well.
We expect that the significant integration work will be completed by the fall early fall of 2021, we're on target and on track for completing that integration. We have a lot of work to do between now and then and we have a <unk> associates all over the organization they were working to me.
Make sure that we do it in a seamless fashion and minimize absolutely minimize adverse impact on our customers and our communities.
Finally, before I turn it over to BJ I feel very strongly that we're we're well positioned for this sort of somewhat uncertain environment clearly, though the progress of the PPP programs. The fiscal stimulus has been positive to date on the economy, but there's still uncertainty I feel like.
We're well positioned in terms of a strong balance sheet strong walls, taking capacity strong capital.
And also position with a tailwind in the sense, we have our non.
Or counter cyclical businesses and we also have the ability to realize a significant amount of cost savings over the next 18 to 24 months, so with that I will stop I'll turn it over to BJ and then we'll be happy to take questions. Why did you all right. Thanks, Bryan Good morning, everybody, we could turn to slide five.
Hi.
Our GAAP bps totaled 95 cents and 35 cents on an adjusted basis, which excludes the pre tax net notable items detailed here totaling 239 million [noise] usually.
Give me or 68 cents, which are largely tied to the Iberia merger we.
We think it's important to note that the impact of merger accounting on our financials. Our overall in line with the estimates we provided you during the second quarter call and then the pro Formas released during the quarter. We've provided the detail on the marks and other impacts related to the merger in the appendix for your review.
On slide six we provide a summary of our adjusted financials for the quarter compared with Epogen Standalone adjusted results in the prior quarters. So obviously the trends here largely reflect.
The net impact of the Iberia merger and the branch acquisition moving.
Moving on to slide seven for a look at net interest income and net interest margin we.
We generated net interest income of $532 million in the quarter up 227 million linked quarter driven by the impact of the merger.
Hi remained fairly stable with second quarter combined levels. Despite the impact of the challenging rate environment third call.
Third quarter results included a $44 million benefit from accretion or about 12 basis points on the NIM, which was modestly higher than we originally expected given higher prepayments ripped.
Reported NIM came in at 284 in the quarter down six basis points, reflecting the impact of low rates and continued elevated levels of liquidity somewhat offset by accretion.
We also continue to take action to improve our deposit pricing profile. Our deposit rate paid was down again this quarter with interest bearing deposit costs down to 36 basis points. Our goal is to manage down interest bearing deposit cost towards the levels. We saw in the prior zero interest rate cycle back in 2015.
<unk> of around 24 basis points. This quarter, we plan to align our deposit pricing across the expanded franchise, which should provide additional benefit as we enter 2021.
Our NIM also continues to reflect the impact of much higher levels of liquidity, we estimate excess cash lowered the third quarter margin approximately 12 basis points.
We averaged about 3 billion of excess cash, which grew to four and a half billion at quarter end as you.
As you know all this excess cash position lowers the margin it does not impact our net interest income we continue to look opportunistically for more attractive reinvestment alternatives going forward and expected put more of that money to work overtime.
In the fourth quarter, we expect to see additional margin pressure likely in the high single digit to low double digit range, but expect that level to represent the bottom for NIM going forward.
Moving on to slide eight nine I would note that here, we have provided our results versus prior period combined results for Epay Jan and Iberia.
We delivered solid performance in fee income again in the third quarter with relatively stable results on a linked quarter basis, and a 23% year over year increase as the benefit of our counter cyclical businesses in fixed income and mortgage banking helped to mitigate covered related pressure in some.
Some of our more traditional banking fee income streams fixed.
Fixed income results came in as expected with relatively stable results linked quarter.
And 33 million dollar increase year over year, given given average daily revenues of 1.5 million.
Mortgage banking again delivered standout results with a $13 million increase linked quarter, and almost 40 million year over year.
Secondary originations of a day in June were up 3% from strong second quarter levels by gain on sale margins expanded over 100 basis points to 393.
As we look into the fourth quarter, while we expected seasonal slowdown in volumes for both of these businesses. We do expect overall market conditions to remain favorable for both for the foreseeable future.
As you can see on slide nine we continue on our commitment to expense discipline linked quarter expenses were down 15 million as a reduction in personnel expense and other non interest expense was partially offset by an expected increase in intangibles amortization and the merger and branch acquisition.
Salaries and benefits increased 7 million driven by the alignment of benefits across the combined platform. The addition of personnel from the 30 acquired branches and an increase in health care costs. Following the pandemic driven slowdown there. Thanks.
This increase was more than offset by a reduction in revenue based incentives and commissions as well as lower deferred comp costs.
Our results. This quarter also reflects the benefit of $8 million in net merger cost saves, giving us a year to date total of 18 million.
We understand the importance of remaining incredibly focused on utilizing cost control at the lever in this environment.
We have unique advantages to be able to do so given our merger and won't continue to look for further expense reductions beyond our targeted merger savings.
Turning to slide 13 and 14.
You see a review of our loan growth and funding profiles relative to combine first rise in Iberia results.
As expected period end loan growth was modest as customer demand remained muted payoffs continue and utilization rates have returned to more normal levels.
Bright spot in the quarter with continued strong mortgage warehouse demand, which drove loans to mortgage companies up 1.6 billion on a spot basis and approximately $430 million on average.
Similar to fixed income and mortgage banking originations the loans to mortgage companies function as a counter cyclical high return specialty business for us and we expect continued strong performance on.
On the liability side period end deposits were up 2.3 billion driven by the branch acquisition primarily.
As well as continued strong customer inflows, which enabled us to run off higher cost non customer balances.
Given current levels of excess liquidity and our enhanced market presence, we expect to continue to move our interest bearing deposit costs, lower particularly as we move to align our pricing strategies across the footprint we.
We also further improved our funding profile with a billion to reduction in borrowings from Twoq combined levels as we leveraged our excess liquidity to pay down legacy Iberia Federal home loan bank advances.
Starting on slide 12, we will cover asset quality over the next few slides clearly our results this quarter reflect the impact of the merger with a lot of moving parts, but if we step back broadly speaking overall asset quality continues to remain fairly benign so far outside of energy.
Despite the impacts of COVID-19.
Net charge offs came in at 44 basis points up from 20 basis points for legacy Epogen, driven by energy related losses.
And we saw relatively modest six basis point increase in Npls to 75 basis points of total loans, despite the impact of the merger.
On slide 13, we see we continue to add reserves this quarter as the impact of the merger and branch acquisition added 475 million to be allowance for credit losses out.
Outside of merger map, we also built reserves by a modest 13 million. Therefore, we ended the quarter with reserves of 1.1 billion, which is equivalent to 2.15% of the loan portfolio, excluding the low risk PPP and loans to mortgage companies portfolios.
And about four times annualized net charge offs.
When you also factor in the unrecognized discount on acquired loans, we have total loss absorbing capacity of 1.3 billion or over 2% of total loans.
On slide 14, we provided an update of our view around the portfolios that investors have been most focused on in terms of impacts from the pandemic.
We continue to do very detailed portfolio reviews of industries currently affected and in the quarter. We reviewed in detail 9 billion of loans in the commercial portfolio across the various sectors as there.
As a result of that as well as other broader portfolio reviews, we believe that just under 11% of our total loans should be and are subject to a heightened level of monitored.
We've shown a sub sectors of the portfolio that may be more stressed.
It is real estate lending energy retail trade and the non fast food portion of our accommodation foodservice portfolio.
Important to note that other sectors, such as essential services recreational goods manufacturing and home improvement are continuing to perform well and additionally, our higher quality consumer portfolio is performing well as well.
With a weighted average FICO score of 750 on a refresh basis.
As we've mentioned today customers are proving to be more resilient than originally feared and overall stress appears to be declining we.
We provided data in the appendix on the reserve coverage across our portfolio as well as on deferrals, which have now decline meaningfully to around 2.4% of total loan balances from a peak of almost 13%.
Overall, we continue to feel very comfortable with our risk profile and reserve levels, particularly after going through the very detailed process of marking the ability loan book, which represents about 45% of the portfolio.
Moving on to capital and tangible book value per share on slide 15, as we mentioned TBV per share of 92 remained relatively stable the second quarter as strong earnings were offset by the impact of the Iberia merger and the Truest branch acquisition and the C. T. One ratio ended the quarter.
915 near term, we expect to continue targeting at C.T., one ratio into nine to nine in a quarter range.
Turning to slide 16 for merger integration update we continue to be very energized as Brian said by the opportunities ahead of us in connection with our merger of equals.
In the years since we announced the deal we've established a strong merger integration framework to help ensure that we capitalize on the opportunities in a highly efficient manner, even in the face of the pandemic.
We've already done a great deal to align our cultures processes and systems to ensure a successful integration. We've completed much of HR related integration by identifying leadership and converting payroll system and.
On the customer side, we built out our go to market and organizational models as well as finalizing our customer experience dashboard.
We're on track to convert various other platforms that are currently planning for the full systems conversion to occur will occur in the fall of 2021.
Dan as Brian said in the third quarter, we delivered 8 million of cost savings, bringing the year to date total to 18 million.
And in the table on the right. We provided a modestly updated view of our expected saves over time, we can.
We continue to be highly confident in our ability to deliver at least 170 million of annualized savings in 2022, but the path of the save that shifted by a quarter or so.
It's largely reflects the fact that we now believe it's prudent to target a September October system conversion versus the previous view of a late second quarter conversion.
In the table on the right as well we provided the estimated timing of our merger savings on an analyst annualized basis in third quarter 2020, our annualized expense base, excluding incentives and commissions totaled about $1.52 billion and based on our expectations for the timing of the merger saves we.
Believed that our 2021 expenses, excluding incentives and commissions should reflect a low single digit decrease.
Wrapping up on slide 17, we believe were well positioned to capitalize on the benefits of our more diversified business model over time and through our barium merger and the branch acquisition. We now have an expanded franchise across some of the most attractive markets in the south.
As we have demonstrated this quarter, we have a revenue mix that helped us offset an eye pressure from the low rate environment.
We also have the advantage of merger cost saves and through prior acquisitions and efficiency initiatives Weve proven our commitment to expense controls.
Our prudent approach to risk management should help us mitigate credit losses going forward and we have the benefit of the marked loan book and significant loss absorption capacity, while the economic environment remains challenging in loan demand needed gives us the ability to focus on merger integration for the next year we.
I believe our business model will result in outperformance and shareholder value creation in the quarters and years ahead.
Since I know, they're listening I want to give a quick shout out to all those on our various teams across IR accounting finance credit and technology in particular that have done extraordinary work in expense long hours getting us to this point. This is my 47th quarterly earnings call with first horizon now I've seen a lot over the.
The years put the complexity and uniqueness of this quarter and the year take the cake. Thanks to all of you for your efforts so with that I will turn it back over to Brian. Thank you.
Thank you BJ we.
We believe our strong balance sheet capital and liquidity will serve us well in this difficult operating environment we've made.
We've maintained strong underwriting standards and build a diversified portfolio focused on profitability and performance in the downturn.
Despite the economic headwinds, we are uniquely positioned to capture merger opportunities with enhanced scale better efficiency and improved earnings power to create significant shareholder value.
We are incredibly committed to continuing to assist our associates communities and customers in efforts to overcome the impact of COVID-19, and revitalize the economy.
Thank you to all of our associates for their outstanding commitment in helping us.
And helping our company and our communities navigate this unprecedented landscape.
Again, we're very well positioned I'm very very excited about the combination of barrier bank and first draws and we think we have unprecedented opportunities ahead of us.
With that operator, we'll be happy to take any questions.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jared Shaw with Wells Fargo. Please go ahead.
Hey, good morning, everybody.
Hi, Jared.
Hey, Dan maybe just starting on the on credit I guess first what's the credit Mark specifically on the energy portfolio.
Just the provision.
Yes, if you if you we've got about.
One point almost 7.5% coverage.
Allowance coverage for the energy portfolio, that's detailed on page 19.
Good.
In addition to the to the allowance what's the what's the 141 hour Mark on the acquired.
On the acquired portfolio.
Yeah.
The Mark on the energy portfolio I'm not sure I have that.
In front of me in detail, but like but like Susan said, yes, we had energy charge offs in the quarter.
We replenish the reserve on a combined basis and that the reserve on the energy portfolio remains at about 7.5%.
So still very healthy reserves.
Yes for sure Okay, great. Thanks, and then it looks like you see the August economic baseline.
In calculating the provision and allowance this quarter given that September October of improved could we view this as a high watermark for the allowance ratio assuming all else equal.
Yes, it's a good it's great question.
I would hope so, but we're we're hoping for the best but but still pretty cautious about what what could occur, particularly around the election and entering the fall and and.
What could happen with COVID-19 et cetera, so yes.
Obviously, we feel very comfortable with our reserve levels, we feel very comfortable with the marks that we've made we can.
We continue to take a cautious approach to particularly releasing reserves you will see.
You will see we had just a very modest build on our reserves. Despite the fact that like you said the outlook has certainly gotten better from second quarter and even from the August.
Scenarios that we use so yes, we're going to continue to be cautious about holding onto reserves for a while but at some point clearly you're going to see.
See that if the economy continues to improve which we sure hope it does.
Hey, Jerry This is Brian you if you were to ask us.
Six eight months ago, and sort of how would you feel going into the second six months and maybe to the next 12 months of pandemic. How would you feel about things I don't think we would have said things would look as good as they do right now and so we're we're pleased with the progress up pointed out earlier the.
The significant impact of the fiscal programs that Congress has put in place BJ mentioned some of the uncertainty that still exists in the environment and we still believe I believe very strongly personally that in certain sectors of our economy consumers in some of the more severely impact.
Acted industries associated with social distancing and then the.
The ball out of the pandemic needs some targeted fiscal support so I believe strongly that the the next several weeks they may be but weeks months of of how Congress deals with additional fiscal support is going to set the direction for the next several quarters Im optum.
Mystic today, I think they're making progress, but as BJ said with the uncertainty we think it was appropriate to maintain strong reserves going into the fourth quarter in the turn of 2021.
Okay. That's great color. Thanks, and then I guess, maybe just a bigger picture question do you feel like you're able to.
Maybe more immediately go on the offense can take advantage of some of the market disruption in your markets from either larger competitors or larger deals that have happened are you still more focused on integration first and that is more of an offensive stance would be.
End of the year I'm, sorry end of next year.
Well, depending on how you define alfin's Jared I would say.
I think we are very front footed in terms of taking an opportunity in the market to pick up new relationships and while it didn't mentioned it earlier, we're seeing the beginnings of very nice revenue synergies between the two organizations Iberia Bank in first horizon.
Is.
Very well.
It's a it's an environment that is somewhat unique in that you've got to be cautious as you look at would you put on the balance sheet. How you use the balance sheet, but we're looking for opportunities to take advantage of this dislocation and we're seeing benefits from the PPP program and and we think there will be a dish.
No opportunities down the road.
If it relates to doing further M&A, that's not really in our frame of reference today, we're focused on the merger and the integration that we have in front of us.
Said earlier I'll repeat it's a tremendous amount of work between now and early September of next year.
Jay said, our teams are working really really hard and doing a great job and I'm excited about what our associates are going to get accomplished but that's most important and then we'll figure out whats next after that.
One thing I would add to the question about opportunities for the offshore we are saying what I'll call from generational opportunities with.
On prospects that our bankers have been calling on in various markets where in some cases years.
That are really great opportunity to bring those into the fold to become clients. So these are businesses that have.
Survive through many cycles that we know well.
And opportunities to bring us over but we are being selective as you can imagine at this time, but we do.
But we do remain open for business for the right profile, the REIT industry and the right client selection, which has been important really to both legacy bank for many many years.
Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Hey, good morning, guys.
Good morning.
It's BJ I guess, if you're going to start with Sunoco, making call you gave though and the margin. One does your margin guidance for I guess down 10 basis points, plus or minus is that outlook do you expect that decline in the core margin and then maybe just get the $454 million in core and I.
Do you expect that number to go higher or lower in fourth quarter and beyond.
Yes, so let's see let's start with when I said high single digit low double digit that was more on the.
Reported NIM side, I think we can be a little bit better on the core NIM.
Due to no opportune.
Opportunities around further deposit rate paid reductions some of the opportunities that we're seeing and higher yield portfolios like loans to mortgage companies, putting excess cash to work and those types of things. So I feel feel pretty good about that clearly as you know and.
Merger accounting, we had a higher level of accretion this quarter, which we expect to be modestly lower in the fourth which is driving a lot of the the decline in the reported NIM, but as I've said, we expect the NIM to bottom out.
In the fourth quarter and then.
Into next year be relatively stable to hopefully modestly improving as we do some of the things that I that I just mentioned.
And the core.
54 million do you think that goes higher from here.
Yes, so like I said, if the margin is if the core margin I think is relatively stable maybe down a little bit into the.
Into the fourth but bottoming out that it's going to be a question of how do we.
But the excess cash to work.
Improved the deposit rate paid and see what kind of.
Loan growth that we can have in terms of opportunities into 2021. So.
Go I guess to your question I see it kind of bottoming out and then being able to hopefully improve into 2021, if the economy gets better.
Got it so we should expect some decline in fourth quarter in line with your sort of scored and I core NIM decline, let's say.
Dan on it should stabilize as we look into the first half of next year is that reasonable.
Yeah, Yeah, no I'd I'd say the core NII, we think could be flattish going into the fourth quarter and then hopefully improving.
With opportunities going into next year.
That's helpful. Then sorry to ask so many questions on that I think there is just a big divergence in terms of expectations on Eni next year.
Helpful. In terms of the color you provided.
And just in terms of expenses.
So potentially you update on what the cost savings tied to the integration.
First horizon and I have a pretty.
I had a pretty strong track record in terms of expense management.
We are seeing banks kind of.
Take another look at here in the state costs other expenses coming autos.
The love dollars just talk to us in terms of what's the opportunity like in terms of expense savings meaningfully exceeding the $170 million that you laid out.
Yes, So I think you've heard you heard Brian use that term 170 million plus I I used the term at least a 170 million. So clearly we are very confident in our ability to get the 170 and that's you know that's that.
That's that's not even an issue for us we are looking beyond that too.
To find further cost reduction, which we're highly confident that we can capture we want to.
We want to make sure that we get all the white and 70.
In the numbers, but we are working on things like.
Customer behavior changes and the impact on on branches and how customers want to do business with us we have five and a half million square feet of.
Office space and branch space that we certainly think that we can optimize further over time given changes due to the pandemic and we're working very hard as we put our our systems and processes together to find opportunities to use.
Systems upgrades and new systems that we're putting in place to find Prost further process improvements.
And do a lot of work around our PPA phase and so on which.
Anthony and Randy and their teams have have great expertise that so we are confident that the 170 is going to happen. It's a question of how much higher and so we'll we'll come out further in the fourth quarter and into 2021 talking about further plans.
We have to continue to get cost saves, but this is.
This is a journey not a destination, particularly given this environment, we're highly confident we'll be able to deliver as we have before.
Hey, Brian This is Brian.
Add to be Judy's comment I think he is exactly right you have to keep in mind that.
We have a lot of moving parts right now with the integration and we want to be thoughtful about how.
How we put the two organizations together and not do things that damaged the the customer franchise, while we integrate so we're being thoughtful about expenses.
It's BJ is absolutely right. We think we can do and will do more than $170 million and we don't think we should try to pin the tail on that number today, but we will sometime in the not too distant future. It is.
It is clear to us that the effect of the Cove at night gain experience in the pandemic is change customer behavior is probably for the long term. It has changed our work has changed a lot of things and we believe very firmly that we need to factor all of that into how we put these two organizations together.
We look at expenses, what our branch or.
Our banking center coverage looks like and they do went through a lot of the important details that were looking at so it's a work in progress we're committing to doing more than $170 million will be back to you with how much down the road.
Got it thanks for taking the questions yes.
Our next question comes from Steven Alexopoulos with JP Morgan. Please go ahead.
Hey, good morning, everyone as Steve Martin Please do so.
So first just a follow up on the beach.
And your comments for the core NIM to hold stable in the fourth quarter. It seems that excess cash is going to build right. So you're going to have even more weight on the NIM in fourq. So what's the thought that.
At least in the short run you realign deposit costs I don't know if it's a fourq event that you get to the mid Twentys and that's the near term support and then from there you deploy excess cash and that's what provides further support to them because it would appear core NIM would go down in the fourth quarter based on just the cash phenomenon.
Yes, so Steve good question. Our current expectation is that we are able to put more of the excess cash to work in the fourth quarter. So we did see an increase in TV ended the period from.
From some of the averages, but the strategies that we're contemplating now including.
Including letting.
Contracts expire on market index deposits some of the things were thinking about to soak up the excess cash around.
Either loan portfolio, our securities portfolio and other things, we we think that we can move the excess cash position down. The other is we still think that there is opportunity.
In loans to mortgage companies as well, which is a very efficient.
Efficient use of our excess cash and so usually seasonally that business can be down but given.
The very strong environment that we're seeing today in the mortgage space, we think that that it could hold up in terms of balances in the fourth quarter.
Okay.
It's actually very helpful.
Then on the reserve I hear the comments right you are still cautious given we are still in the middle of a pandemic, though when we look at the reserve right its $1 billion to 1.8% ex BPP and that's on top of the credit Mark.
And if you have strong loan growth in mortgage warehouse, you don't really need reserves for those so if the rest of loan demand is somewhat muted why would you need to provide any additional provision over the next few quarters.
I hope you're right.
I think as I've said in the beginning.
We're taking a pretty cautious stance at this point right. It it's a lot easier to be conservative at this point and hold reserves and then release them as opposed to be too quick to lap reserved go and then see.
No a reversal of the improvement in the economy and have to build reserves again so.
I'd highlight.
Highly confident again in where our reserves are.
And our loss absorption capacity and I do think that eventually we will release reserves, but we think it's a little too early to to make that call at this point.
Thanks, and then finally, you guys are pointing out that the three year plan is finalized forgetting finalized in the fourth quarter.
And should we expect anything material from that in terms of revenue or additional expense initiatives.
What should we get out of that.
Thanks, well, yes, I don't think that in the short run you should expect any significant shift in our business. This is really bringing together the combined organization the team.
The team has done and you were still has done a good job leading but the team has done a great job pulling the strategy together and in what I think you will see a lot of it is where we're going to focus and markets and product set as it's.
About how we have combined focus as an organization.
And then.
And as we said a couple of different ways clearly expense control will be an element of that but what we're really tried to trying to focus on is beyond the integration. What is it that we need to be executing known to be on the ground running through the integration and the most particularly to really pick up mode.
On on when we get that completed in September of next year. So it's got to be a strong focus on mortgage and where we invest where we put people in and and product. How we work on our cross sell opportunities the revenue synergies that exist by bringing the combined product set together.
And we will.
We believe given what we've seen on a macro basis in the us that the states that we do business in the markets that we do business and are going to be very positively impacted by the migration of people and businesses and opportunity and we just want to be too.
In addition to make sure that we take full advantage of that.
Great. Thanks for all the color.
Sure thing thank you.
Our next question comes from Brock Vandervliet with Utopia. Please go ahead.
Hi, Thank you just.
Piling on to Steve's question on the reserve PJ.
Yes.
Well, what do you need to see to tap that reserve because I think the point here is that relative to peers year.
Sure very well set up for this.
Something that did a moody's outlook would.
Reveal.
The confidence or is it.
Doubled the size of the bank and give us a couple of quarters, but we get it it's coming down.
Further color there.
Yes so.
Yes, the way the way. These models are built as you know is that the quantitative.
Part of the models are driven largely by.
Our historical loss.
History as well as what the forward view is as informed by the Navy scenarios. We then create quite.
Qualitative overlays, particularly in stress portfolios in sectors, where we have a little bit more concern or uncertainty around it and as.
And as you might imagine that.
If the.
Our outlook continues to get better, which we certainly hope it does the quantitative models are going to tell us to release reserves and at some point, we're going to be comfortable that the qualitatives that we have.
Aren't aren't needed. So you know again.
Again, I think I'd I think we're well reserved I do think reserves will come.
Come down.
Into next year, it's a question of timing and we just think at this point.
Given given continued uncertainty that it's better to hold it as opposed to to release it but we are confident that that we are well reserved and and we will be able to do so.
Thank you and good.
Morning.
I believe it's 2.4% deferrals.
She is the the end game. There are most of these are going to return to normal.
Payments and a chunk research.
Restructuring with very little real breakage or for something different how does that how do you think that plays.
Okay. Thanks.
Based on even what we've seen of when it was at a higher level a couple of quarters ago on many are returning to turning to making a payment from.
Some of them were cautious in the beginning and just said if I can take a deferral I will.
I will be there will be some clearly that we will work with two.
We structure, but at this point, where we're seeing very very few clients.
I asked for that well.
Call a third round of deferral, which I think is very good which is why the active deferrals have come down so dramatically.
But we are as you saw on one of the pages, where we talk about our perceived update on areas of perceived risk I think that was page 14.
In addition to overlay Bob portfolios as a whole we continue we did it.
Second quarter third quarter, well do it in this quarter and as long as we need to with any sort of uncertainty around how that we're also doing the jobs with individual clients. So weve got really good insight and what are the things that I that I continue to feel very good about it.
The fact that our prudent underwriting in the beginning the client selection and saying our business owners guarantor sponsors working with us during this time we've.
We've seen a lot of possible.
Possible surround Laura So you will see your question was what are you going to see I think you'll see some of all of that you'll see some middle just returned to normal on you'll see some that will have to work with us on a longer term basis, and so we stand ready client by client to make that happen.
Okay, great. Thanks for the color.
Our next question comes from John Pancari with Evercore ISI. Please go ahead.
Good morning.
When John John.
If I could just kind of beat the dead horse a little more here on the reserve side good.
How to go about it this way.
Can you just maybe give us a little bit of the granularity of your credit details behind what May have influenced your thoughts on reserve, particularly do you have your criticized and classified asset trends for the third quarter.
Yeah, we do have guidance stable now so overall our criticized went from 2.7 to 3.3 Thats on a combined basis for second quarter to third quarter.
With both thanks.
So you did see some increase Abba.
I have about 400 million.
That moved into the criticized category.
We are.
In terms of the portfolios where we.
Looked at doing a qualitative overlay there the portfolios you would I would imagine that we would and if you look at the areas of perceived risk.
[music].
We have an additional overlay for energy.
Additional overlays for hotel.
For retail and.
And for some of the non profit and also the the casual dining full service. So those are areas, where I think Brian and B. They have said that on any of these questions.
We do we are seeing some thing.
Thanks, a lot for saying some trends that we like but we just think it's too early to be thinking about releasing reserves, but based on what we know now we should be able to do that.
No and a quarter or two if we continue to see good trend.
Hey, John This is right right. This is Brian to use your frozen yogurt.
There are a lot of ways to come at beating this dead horse and then.
At the end of the day Cecil implies a heck of a lot more precision than actually exists in reality in and we sort of look at this is a bit of an art and then we apply these overlays mainly because it is too early is the degree of uncertainty about what will.
Happened in terms of fiscal stimulus and how the pandemic lays out how far away are we from therapeutics fell far away away from.
A vaccination.
There is no intended signaling whatsoever that we see something about the portfolio that causes us to just keep 'em up other than we believed that we would lean into the art. We remain conservative as has been our practice over many years and we will continue to evaluate it. We're we're as I said optimistic.
About how things are positioned today on October the 22nd or 23 or whatever to the ideas and and we think this can play out very very well and when it does we'll we'll release these reserves and they'll come back.
Okay got it thanks, Brian and then just separately on the on the expense side.
BJ or you could you just repeat the.
The expense guidance for 2021, if you could indicate you did you say a low single digit did you.
Did you say decrease including two centers and commissions.
Yeah, John Thanks, So what I said was.
That.
Our expense base, excluding incentives and commissions, which as you obviously know are going to rise and fall with revenue.
Related fee income.
We expect that expense base ex incentives and commissions to be down low single digits.
Okay got it got it and and.
And that is on a full year 2021 versus full year 2020 basis.
Yes.
Yeah, and we never did I'm sorry go ahead. John go ahead no go ahead.
Scott.
I was just going to add quickly if you look at our press release in the supplement we did reorganize those the expense line items to little bit to make it easier for you all to explicitly CV incentives then commissions broken out from the rest of the expense base such that.
Yes, it's easier for you to.
Visibly see the expense discipline and the merger cost saves as they come through.
Hey, John.
Hey, John its Alan just one thing I want to.
So so if you we gave you our third quarter.
<unk> expense base, excluding commissions at the 1.5 to two because remember the first half of 2020 excluded adding Casey said.
You got to utilize third quarter annualized.
Right right, Okay and does the base.
Does the base also exclude the charitable contribution and merger charges as well, yes that or adjusted basis number that we just.
That would just reference.
Yep, Okay, alright, that's it thank you.
Thanks, John Thank you.
Our next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks.
So thanks for pointing out hey, so thanks for pointing out all the the onetime items, but aside from the four three or four notable items you guys called out were there any other line items in the income statement that were impacted.
By just can say volatility that might not recur in future quarters.
Well I think we mentioned the true up of the Abbey casing.
Sorry about that so from a quarter perspective.
An initial step up there that will persist, but you shouldn't see a repeat of the step up that's right. Yes can I can't I can't think of anything that we would specifically call out for all of you that bank.
Broadly speaking what what John just asked about our expense base from Threeq, you 20 annualized versus 2021, it would all be captured in there we wouldn't call anything else out other than the notable items.
Got it okay perfect.
Good.
Oh, that's good insight and you'll.
You will see.
In the course of coming quarters, you will see normal seasonal.
Ability in certain line items.
Right.
Got of course, no no I understood I guess.
I guess I was just looking at sort of the next question as far as looking at the mortgage banking line, which is obviously very strong this quarter is certainly well above sort of liberia's run rate basis.
Just with mortgage banking like how do you see that playing out I mean, obviously sounds like fourth quarter is going to remain strong, but where where does that sort of normalized when we think about 2021.
Yeah, you know, we can we still think that for the foreseeable future and I can't exactly put.
A fine point on foreseeable future, but yeah, we think that the counter cyclical businesses are going to remain strong I mean, if you look at.
Mortgage origination volumes and home price demand.
It is still very very.
Very strong and so we're benefiting from that and so we expect.
That that's going to continue for both the mortgage origination side as well as the loans to mortgage company side I would say that we had if you look in our information very strong gain on sale.
Percentage this quarter.
We still think that volumes are going to be high gain.
Gain on sale was probably higher than while there would would normally be going forward, we expect that to moderate a little bit but in aggregate. We expect that these businesses will continue to drive.
Outperformance and help us offset some of the headwinds that we say.
All right great. Thank you sure.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, Thanks, Good morning, guys, Hey, Brady good morning.
I wanted to start with loan growth I know when we talked about it last quarter. You said, you expect kind of modest loan growth.
Seems like loan balances back out.
Acquisition noise were up a little bit.
In the third quarter from the mortgage warehouse, but as you as you look forward.
About loan growth you a lot of times when you do a big acquisitions like this there is some loans that tend to run off so.
You expect to see kind of some near term loan shrinkage.
Mark.
And just how do you think about loan growth as we look into 2021.
Yes, so I'll start and Brian and Susan can jump in but.
There are there are few areas of growth that we think can certainly help us going into 2021 loans to mortgage companies of course, we continue to think could be strong their specialty businesses.
Beyond the loans to mortgage companies like asset based lending like equipment finance that are very strong today and we expect those to continue going into next year.
We don't have any portfolios.
Aside from what we're doing to manage.
Our exposure to energy of course, but but more broadly speaking we don't have any other portfolios that we are actively managing down or managing off so.
You know I don't I don't expect any material step downs in terms of other areas the portfolio.
But you know traditional loan demand.
Broadly across consumer and commercial portfolios is like we've said pretty muted at this point. So we do have pockets of opportunity that can offset some declines. So we don't have very high expectations for loan growth going into 2021, that's not because we don't want to look for new opportunity.
These as Susan said earlier, we are and we will but it's just the nature of the environment right now that that Weve got to pick our spots.
Okay. So.
Not a lot of growth next year, if you look at Uh huh.
I heard you guys say that common equity tier one the targeted range is nine to nine in the quarter.
You're at 915, now with with decent profitability and not a lot of that ratio I'm guessing is going to.
Move higher pretty rapidly so.
So how how do you think about buybacks seem off the table this year, but as we look into next year or 2021, how do you think about share buybacks as your common equity tier one news over the top end of that targeted range.
Brady. This is this is Brian.
That it's.
Clearly our desire to put capital to work in or great organic growth opportunities and so we're always looking for that is the first way to leverage our balance sheet and.
We'll know a whole lot more about what 2021 loan growth looks like when we get past the turn of the year.
We are very conscious of maintaining a strong capital base.
The dividend and the buyback or grew nearly vehicles for repatriating capital to shareholders that we can't put to use in the balance sheet. So I don't want to get out in front of our board and the discussions there I feel very very good about where our dividend is I think it's unlikely in the near term that we start the repurchase program.
But we're constantly looking at how.
How that capital ratio builds and how it fits into our expected usage in the <unk> and the balance sheet. There. This problem that we all sit here with the day an inch is universally true the financial services industry. There are more known unknowns than than we've ever experienced and we'll all be smarter in.
90 days and so we'll have a more.
A more clear view of where we think that capital goes but but to your basic point, we think that capital will accumulate that we will see growth in not only our tier one C.D. one, but we'll also see growth and our tangible book value.
Okay, great. Thanks, guys sure.
Our next question comes from Christopher Marinac with Janney. Please go ahead.
Hey, Thanks, Susan Lee.
Talked about the criticized assets being at 3.3 is does that include the the higher risk items that on on slide 14.
Yes, that's the total that's total criticized.
Okay, Hello to all those guys in class.
It's 3.3%.
Not everything in the higher risk category as a criticized asset yes, yes. It is a subset of the 3.3.
Okay. That's what I want to have it appeared that the why we highlighted for you on page 14, our guest wants it areas that were paying very very close attention to and are a big part of the portfolio reviews that were doing a lot I'm glad to say that there are things on this page is nothing.
We're even being conservative calling it the higher risk because of.
How weve underwritten them things, we're hearing about from our client so we will.
We wanted to kind of give you the full list, but I would say within some of these things I'll give an example, our Cree retail is very much a value oriented linear grocery anchored early thing we've seen very little issues there with the luxury.
Recent court.
Portfolio review, we did.
Finally, we saw very few deep problems in that portfolio. So I just want to tell you I think even this list is perceived risk as it were on the conservative side, but I believe that's how we want to be you've heard Bryan and BJ say that on the other question on this call.
We just want to be prudent.
Great and then cautious during this term until we kind of get through things like the election.
Potential vaccines, etcetera and see how.
The economy as it continues to open up but we are pleased with what we're seeing even in some of these areas of perceived risk.
No thats helpful background. Thank you goes to that I. Just I was just curious if the trend would be to see more migrates onto criticized or could it possibly go the other way or perhaps it's too soon to tell.
Yeah, I think I mean again we.
We are again touching me every quarter could you see.
A few of them go criticize you could but based on what we know now we've got downgraded the way we believe they need to be graded.
The other thing is we are actually seeing some upgrades to so there are there are pockets of.
Industry here and doing extremely well and there are players even within the higher.
Higher risk industries that are better performing performing very very well, let me point out an example of that.
Within the hotel common where in some of these markets. We've been in this market for a long time that are doing really really well with the mountain areas.
Each areas, where people can drive we've talked to clients that were having even.
Even within hotel portfolios their best year ever and it's a combination of people wanting to be as good a way. They can still work from there and these hotel operators are able to do it with a lower expense base same.
Same thing with quick.
A quick serve restaurant, how many of them still are just drive through only entered that space is balance of what's dropping to the bottom line is.
And is even better than 2019 so.
So.
It is.
That's what I think is so important in effect that we've gone and done this portfolio review, we're talking to individual clients, but again still being cautious and wanting to highlight for all of you. The areas that we continue to look at quarter over quarter. During this call that situation.
Great. Thanks, again I appreciate it.
Thank you thanks, Chris.
Our next question comes from Jennifer Demba with Truth Securities. Please go ahead.
Thank you good morning.
Hi, Good morning is there.
Is there any consideration to.
A bulk loan sale of any ideas more at risk loans, particularly hotels.
Thanks.
Jennifer This is Bryan in a word no we feel good about the quality of the portfolio. We were very confident in what we know about it and it doesn't seem to make any sense to me or to us too so that a significant discounts with somebody else can profitably.
In the performance of that portfolio. So it will have a few problems here and there but overall, we feel good about it we feel good about our reserve levels and we don't have any interest in selling any of it.
Okay. Thank you I'm sure Brian question.
This is a more longer term question.
And your thoughts about.
Remote working for your employee base going forward is is the new normal going to be some combination of of in office and remote working for almost everyone.
And how do you maintain you know corporate culture with a with more remote working thank you.
Yeah, that's a well think of fantastic topic and.
I think it through you framed it very well we spent a lot of time talking about that very thing and BJ mentioned, the five plus million square feet of space that we have we.
We think people are going to work differently. There's no doubt about that our customers are going to perform differently and it is going to be different I'll I'll worry more about the downsides of managing Colbert corporate culture. The conversations that don't happen because you don't get an elevator ride with somebody you felt about I need to know.
I must say am I need to say this or have this conversation I think.
I think it's really a a big downside in the sense that if you own board new people when you bring in new bankers, how do you bring them into the culture. How do you mentor people. How do you develop people. So I think we've got to find sort of a balance and I think we'll end up as you suggested in a bit of a hybrid environment where.
People weren't more remotely.
To pause for a portion of their time and we figure out how we spend the time, we have together in a more quality fashion. So that we we don't just assume everybody is going to see everybody. Every day. So I don't think anybody on Irish I believe we've got it figured out that they were paying a lot of attention to it and I think.
While we could go cut out a a lot of office space and do things remotely because we've proven with technology that it works you really have a hard time as you said maintaining corporate culture in a in a two dimensional a framework of a webex for resumed conference call. So it's something that we're clearly.
Paying attention to.
This concludes our question and answer session.
I would like to turn the conference back over to Brian Jordan CEO for any closing remarks.
Thank you operator, thank you everyone for joining us. This morning, as we said a number of different times. This morning, we're optimistic about how we're positioned we're optimistic about what our combined organization is capable of doing we're optimistic about the opportunities we see in our markets with it.
Sandy customer product set as well as the ability to bring the full suite of products of the combined organization to bear on existing relationships.
Do you have any questions or any additional follow up please let any of US know we're more than happy to provide you additional information. Thank you again for interest in our company and I Hope everybody has a great weekend take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.