Q1 2021 First Horizon Corp (Tennessee) Earnings Call
Good morning, and welcome to the first Horizon Corporation first quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Ellen Taylor head of Investor Relations. Please go ahead.
Thanks, Jason.
Morning, everybody, we really appreciate you joining us for this quarters being quite a while.
Let's start things off on Bryan Jordan.
D J flattish will provide some equity common.
Do you have on resolved and then of course, we'll be happy to take your question on <unk>.
Credit officers for example.
Our remarks will reference the earnings presentation, which is available on IR dot dot.
Dot com.
I also need to remind you that we will make forward looking statements, which are subject to risks and uncertainties and we ask you to review the factors that may cause our results to differ from our expectations. You can find on page two of our presentation and in our SEC filings.
We also will address adjusted results, which exclude the impact from notable items and these are non-GAAP measures. So it's important for you to review the GAAP information on our release on page three of our presentation.
And last but not least our comments reflect our card you should understand that we are obligated to update.
With that I'm going to turn things over to Brian. Thank.
Thank you Ellen good morning, everyone. Thank you for joining our call.
I'm really proud of the great progress weighted.
Over the last nine months integrating our merger of equals a great momentum.
Building on the business raw for a strong start in the first quarter of 2021, we demonstrated solid performance for the quarter would go with BP had on our results reflect the resiliency on a more diversified business model.
Well on loan demand.
The muted as clients are still cautious.
Starting to see growth in the loan pipelines and expect demand to pick up some in the back half for the year.
Our deposit growth remained strong with inflows from governance government stimulus.
Clients continue on to preserve cash.
During the quarter, we generated impressive results on our business.
And are gaining traction by capitalizing on additional revenue synergies.
Through our merger of equals.
I'm also proud on the work we're doing to control the things, we can control, particularly around expenses and deposit pricing.
Despite some seasonal headwinds we reduced our linked quarter adjusted expenses driven by our ongoing cost discipline.
We achieved annualized merger related costs.
$76 million in the quarter.
The improving economic backdrop from January to March and our continued prudent risk management, largely helped drive a $53 million reserve release.
The power of our diversified and countercyclical model.
Our strong risk profile overall.
For a strong risk profile on the benefits from our ammo really helped us deliver a return on tangible common equity of 20%.
Excluding the impact from $53 million reserve release, we generated a return on tangible common equity of over 17, 5%.
We're making great progress for our key merger milestones.
Plated early systems conversions included on our mortgage and retail brokerage conversions.
To address scheduled for the summer.
Our core deposits systems conversion is still on track for the early fall of this year.
We have and will continue to make strategic investments in <unk>.
LNG that optimizes, the client experience and improve productivity.
We continue to leverage.
Relative to enhance our product offerings to drive efficiency and improve the customer experience.
Our capital levels remain healthy one of the common equity tier one ratio of 996%.
Grew our tangible book value per share to $10.30 for the quarter end.
Given the relatively limited loan demand, we chose to Opportunistically deploy capital for share repurchases and bought back about 4 million shares from the first quarter.
Including dividends, we returned a total of $143 million of capital to our common shareholders.
I'm incredibly proud of our efforts to serve our clients communities and associates throughout the pandemic with PPP loans charitable contributions and by offering our associates increased flexibility of assets.
Our team is also intensely focused on capturing revenue synergies across markets.
<unk> launch leveraging our expanded suite of products services and expertise all instrumental in retaining and growing our client relationships.
We are increasingly optimistic about the economic recovery as we've seen improved rollout on the vaccine in our markets, which is helping accelerate rate.
We're also mindful of the fact this past year had a number of unexpected turns and the path forward is unlikely to be a strength.
So while we are prepared for recovery and this year, we also prepared for the unexpected.
We remain confident that the strength of our highly attractive franchise more diversified business model and benefits on a merger of equal position us well to deliver top quartile return over the medium term with that I'll hand, it over Vijay for some comments.
Great. Thanks, Brian Good morning, everybody.
Let's start off on slide six.
Bye bye on some of the key.
Key highlights in the quarter.
As Brian mentioned, we're really pleased with the profitability and returns for generating for shareholders. We delivered GAAP EPS of <unk> 40.
Or 51, six on an adjusted basis highlighted by strong <unk> cannot make sense just to plan and even further improvement in our credit quality.
We've said, we position the company to exceed through various cycles and our diversified business model is working as we expected net fee.
<unk> businesses are performing very well the counter rate pressure, we're controlling what we can control with extensive deposit pricing.
Merger integration is on track credit trends are excellent and our capital flexibility has allowed us to return capital to shareholders and meaningful way.
Given the overall muted landscape for loan growth, we opportunistically repurchased $3 6 million share second quarter on an average price of 16 12.
And including dividends as Bryan talked about return on a total of 100 $343 million in capital to common shareholders.
Looking at <unk>.
Slide eight.
Adjusted financials.
Let me give you an overview for the quarter, we generated <unk> $343 million up 1% from for <unk> 'twenty.
Revenues were down just slightly as impressive results from fixed income largely offset an expected reduction in NII.
We saw a 2% linked quarter decline in expenses, which reflects ongoing cost discipline.
For the merger sales, despite higher revenue day incentives and seasonal headwinds and personnel.
Given our very low net charge offs of only $8 million or six basis points on a $58 per loan.
Portfolio.
Combined with an overall improvement in the macroeconomic outlook and a reduction on our loan balances, we released $53 million in reserves this quarter, resulting in a provision credit of $45 million.
And as Brian mentioned these strong results helped drive our return on tangible common equity tier above 20%.
Even if you adjust for the reserve release on a return on tangible common equity with over 17, 5%.
Moving on to slide nine talk a little bit about net interest income.
We generated reported and on high on 511 million down 14 million linked quarter, driven largely by a reduction in loan balances and fewer days for the quarter.
On a further decline in the average LIBOR basis.
As mentioned we are focused on controlling what we can control in this environment and we continue to drive down our funding costs somewhat mitigate headwinds we lowered our interest bearing deposit rate paid for another six basis points. This quarter to 20 basis points overall, and we'll continue to look for on.
Opportunities to lower our overall funding costs further while we remain in this low rate environment.
<unk> first quarter of NAV was 263, which decreased eight basis points linked quarter, driven by a 10 basis point impact on continued increasing levels of excess cash which ended the quarter at $10 8 billion.
Moving on to slide 10, and fee income the benefit of our more diversified platform was clearly on display again this quarter with a $10 million on linked quarter increase driven by the great results for fixed income along with nice momentum first bridge as well as well.
First quarter fixed income average daily revenue was up 25% to $1 9 billion, a day driven by favorable conditions banks put increasing levels of excess cash to work in bonds, along with a path to continued volatility in rates.
Particular on our mortgage on our government guaranteed debt for particularly active.
While mortgage banking entitled decreased $4 million linked quarter or results remains relatively strong compared to historical levels. Despite the seasonality.
Seasonality higher interest rate and limited housing inventory.
Moving on to expenses on slide 11.
You'll see that adjusted expenses in the quarter were $464 million down 10 million linked quarter, highlighting our commitment to continued expense discipline, along with the benefit on an incremental $5 million reduction tied to merger cost saves.
Personnel costs overall relatively stable with for Q2 levels with additional benefits from merger cost saves on ongoing tight expense control offset.
Headwinds from FICA tax resets and day $10 million increase in revenue based incentives and commissions.
In our ongoing efforts to control we can control we are intensely focused on not on recapturing merger efficiencies, but continuing to streamline processes across the platform to position us well to continue to drive investments in our future.
Turning to slides 12, and 13, we gave yes, mostly on our loan growth on our funding profile and as expected. We continued to see pressure on loan balances, which were down one six day in the quarter driven by decreases in mortgage related loans.
On the consumer portfolio and in our loans to mortgage companies business.
Andrew Islands for up slightly 1% largely due to a net $1 billion increase in PPP loans.
As we look forward our lending pipelines are showing really nice momentum. So we are optimistic that as the economy continues to improve we will see increased levels of customer activity in the back half of the year and we saw modest debt gsk's commercial utilization rate as well and we're seeing now.
This early signs of revenue synergies across our platform, particularly in the areas of <unk>.
Asset based lending and equipment finance.
On the liability side, we saw continued inflow of deposits from.
Marshall deposit balance growth was driven by TPG and consumer deposit increases reflected.
On the new stimulus checks as I mentioned earlier, we leveraged our excess liquidity position and decreased our interest bearing deposit costs by another six basis points 20 basis points overall, which helped drive a four basis point decrease in our overall funding costs.
Turning to asset quality, starting on slide 14.
Hard to believe how dramatically the landscape change on a year.
We're incredibly pleased for the steps for retailers to re.
Position on our overall risk profile.
Moving on to the great recession over a decade ago are now clearly being illustrated.
Net charge offs to average loans improved six basis points down 14 basis points from last quarter.
Nonperforming loans remained relatively stable.
And as I previously mentioned the combination of a significant improvement in the overall macroeconomic outlook and a reduction on loan balances.
Drove a provision benefit of $45 million.
On a reserve release of 53 million net.
You can see on slide 15.
<unk> credit losses coverage ratio declined only modestly from for each one to 170 basis points in Q1 and as a reminder, we use the Moody's.
February scenario, and then incorporate other economics and portfolio factors to evaluate our overall reserve coverage, we continue to feel very comfortable with on our risk profile and our reserve levels.
Briefly to capital on Slide 16, as Brian mentioned tangible book value per share was $10 30 up 1%.
Reflecting strong earnings.
In addition to a reduction in our debt helped drive a 20 day 28 basis point improvement in our CET one ratio.
99 six.
Moving on to slide 17, and our merger integration update.
<unk> continued to drive strong progress on the integration front as we conferred platforms and upgrading current systems and we remain on track for the full systems conversion in early fall of 2021.
<unk> achieved 76 million net annualized run rate savings against our debt target of 200 and again, we're still on track for an annualized $115 million by the end of the year as a reminder, our gross savings are higher and.
And is providing the flexibility to continue to make technology and other investments to drive continued improvement in processes and the overall customer experience.
Additionally, we are making solid traction on revenue synergies.
Thus far experienced roughly $10 million of annualized revenue synergies that are tied to about $400 million of commercial loans.
We see significant additional opportunities with revenue synergies across markets and product lines.
As economic activity continues to pick up.
On slide 18.
Really pleased with our performance jobs for through the first quarter of the year weighted all line items in line or better than the outlook. We provided on our first quarter earnings call on January <unk>.
Therefore updated our expectations for above the second quarter and our full year outlook based on the strength, we're seeing in our business and the economy for.
For the second quarter in particular for <unk>.
We expect our low single digit decrease with average loans down modestly given the outlook.
And while we anticipate a continued relatively strong environment near term for our core fixed income business were.
It reflects a high single digit for low double digit decrease on the first quarter.
On the expense rate, we would expect non interest expense to be relatively stable as we continue to focus on overall expense discipline and capture on larger efficiency, we expect charge offs to convey.
We need to be very low in the range of five to 15 basis points and that we're likely to see continued reserve releases.
We expect to see our CET one ratio to remain in the 10% range for the second quarter.
And in terms of full year, given our strong fee income performance from the first quarter.
Improvement in credit quality, we provided an update for the full year, where we now expect only a mid to high single digit decreased non interest income lower net charge offs in the 10 to 20 basis points.
For the year.
The key target non 510% range our business model is working.
Wrapping up on slide 19, we're capitalizing on the opportunities of our more diversified business model.
Attractive franchise, we've demonstrated solid revenue trends through strength in our fee businesses. Despite interest rate headwinds, we're controlling what we can control as evidenced by deposit cost expense reductions for <unk>.
Benefits from merger cost saves revenue synergies our credit quality is excellent and we are delivering enhanced returns for shareholders for.
I'll hand, it back over to Brian.
I just wanted to acknowledge R&D development.
All of you certainly know this happens to be by <unk> 50 of earnings call with first Raj and she has been their average settled on the way with all of us and she will be moving on to pursue a passion being head of development for Exelon non-profit here in town.
And she's very excited about that we're very excited for her about that and.
Deeply thankful for everything that she has done for US. She has made us a better placement and better Investor Relations group, and we wont necessary, so with that out of Anadarko for Brian.
Thank you BJ.
Thanks, and appreciation for their great efforts are already over the last 10 or 12 years on certainly will be best.
I am exceptionally proud of our continued execution and the results that we're delivering.
So good about the strength of our balance sheet capital and liquidity positions as the economy starts to improve.
We've maintained underwriting standards and built a diversified.
Folio are focused on profitability and stability.
We are positioned to capture merger opportunities with enhanced scale better efficiency improved earning power.
We will create significant shareholder value growth.
Thank you to all of our associates for their hard work, serving our customers communities and helping deliver for our shareholders.
With that Jason we will now take questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit yourself to one question and one follow up.
Our first question is from Brady Gailey from <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Great.
I wanted to first ask about loan growth I think if you look at period end loans ex PPP and warehouse they were down.
About 10% annualized now which is not really a big surprise I think the industry is seeing that as a whole this quarter, but how do you think about.
What gets loan growth headed on the right direction and it seems like first of your clients are flush with cash when do you think you really start to see some decent loan growth is it. This year do we have to wait for next year what are your thoughts on the timing there.
Hey, Brady it's BJ.
I'll start.
And we talked in our in our equity comments about <unk>.
Secondly increased activity just to give you a little bit more color on that on the commercial side our pipelines.
Rich.
We have a high confidence for closing are up 60%, 70% from the beginning of the year. So we are starting to see.
Really really nice trends there.
Utilization rate ticked up slightly for that is.
We're getting a little bit more activity as well and for you.
We started to see a little bit of return in some of our markets, particularly in places like North Carolina, or Middle, Tennessee, Alabama on the specialty side asset based lending.
Equipment for pads are starting to see pretty good upticks, we expect loans to mortgage companies do.
Strength in the spring and summer buying season. So on the commercial side. We are certainly seeing a lot for activity and are optimistic about what that means for balance sheet.
For the year I would also say on the consumer side. If you look at our consumer portfolios, we have seen a fairly meaningful decline on those portfolios as.
People have re Fi.
And a lot of that add on to secondary production, we did make some changes in our product set on the.
The affluent side and then in certain areas around seven.
Seven and 10 year arms, and 15 year fix where we believe that's going to change the trajectory of our portfolio of growth on the consumer side and as a matter of fact, we.
<unk> seen a blocked pipelines increased significantly.
Last 45 days as we made those changes so all of that to say as we we see a lot of activity starting to come on and we're optimistic on the back half for the year.
Great.
Good to hear.
Follow up is just on that.
On the buyback from here if you look at your common equity tier one tier one it's now 10%.
You were active on the buyback you have you have a $500 million buyback out there. That's a big number I think you could repurchase about 5% of the company over the next couple of years is the right way to think about it that you guys will utilize the for $500 million over the next couple of years or do you think that's too big of an assumption.
Yes.
Yes.
As we've talked about for a variety of Covid is going to be opportunistic repurchases. We did $56 million. This quarter at an average price of 612. So we felt pretty good about that we wanted to put our capital range of loan growth. We would have thought debt CET one would it be.
Ben.
More towards that arent on the App range, obviously floated up on lower margin way, we just talked about the fact that we think organic loan growth come back all of that say is.
We are we are bullish on ourselves.
We do expect to continue to opportunistically repurchase shares and whether it's over the next couple of quarters or for next year.
Using most or all of that authorization is on our expectation.
Great.
I didn't know about Rd Rd, you'll be missed.
Congrats on the day spot it was great working with you over the years good luck.
Thanks, Greg.
Next question is from Michael Rose from Raymond James. Please go ahead.
Yeah.
Hey, good morning, Thanks for taking my questions just trying to get a sense for.
The margin trajectory here I appreciate the disclosure on.
The the.
Purchase accounting accretion and things like that how does the PPP fees kind of look like and then on a core basis, if you strip out <unk>.
Pvp and PAA, what would be kind of a near term expectation. Thanks.
Hey, Michael Good morning, it's BJ so.
I'll give you a kind of an overall yields on our PGP trajectory.
So it turns around what we expect.
90% of those will be forgiven by sometime in the third quarter of this year.
We originated something on the lines of $4 billion to 90% of that gone by.
Third quarter, and therefore, all of the all the fees associated with that.
Accelerated day collected by that on round two.
We're at about a big three or so.
And we will probably decline a little bit more that we assume that those fees will be accretive over the next year on a half or so.
<unk>.
So hopefully that gives you a little bit of color on PPP.
Arms.
Net interest income on the trajectory there.
Based on my commentary earlier around.
Bit more optimism on loan growth in the back half of the year, our continued focus on D.
Driving down deposit costs, where we can where we have a little bit more opportunity.
And for the LIBOR basis hopefully.
Flattening out here.
Knocking on wood.
We expect that our NII as as we said on slide 18 might be down modestly, but but generally around this area and hopefully can see a little bit of uptick towards towards back half of the year in terms of margin.
We estimate.
Anywhere between 30, and 40 basis points of drag on the margin today is coming from the excess cash.
We certainly want to put them back to working on loan growth. We do expect that deposit growth will continue to remain elevated but over time.
To come back out.
But it's going to be here for a while so we're focused less on a margin and polar on stabilizing and.
Starting to improve the cash.
Hector.
That's great color very helpful and maybe just as my follow up.
We've seen a bunch of deals announced here lately in the industry.
You guys are well on your way with with Iberia.
What's the what's the appetite as we move forward for additional deals. If you can update us have those priorities may be changed just given the recent activity. Thanks.
Hi, Michael This is Brian.
Our focus really Hasnt changed as you point out we're making good progress on the integration.
Our merger vehicles on very bad debt first horizon, we feel.
Outstanding opportunity exists on our existing franchise, we see great great.
Great demographics in our southern footprint great growth opportunities.
So our focus is clearly on getting the merger integrated and then as we come out of the integration in the fall really start to build momentum and capitalize on these growth markets that we see out there so.
Priorities haven't changed it really is trying to.
Capitalize and deliver the benefits we believe.
And the work we're doing today with our merger vehicles.
Alright, great. Thanks for taking my questions and congrats on the neuro already.
Thank you.
The next question is from Steven Alexopoulos from Jpmorgan. Please go ahead.
Good morning, everyone.
Sure.
I wanted to start so nice start.
Out of the gate on revenue synergies could you give more color on the $400 million of commercial loans, you are calling out from the synergies and how are you seeing the bigger picture now for revenue synergies.
Okay.
Alright.
Yes.
As it relates to revenue synergies from DJ Ali.
Thanks.
Typically early on really benefiting from.
Merger D.
One is a legacy area specialty businesses.
On an hour.
We're seeing great opportunity for us.
All of our market on anything.
Some of our other specialty line.
So that's going to continue to build.
Dot net.
A hearing on the environment.
$400 million.
And that net related revenue synergies.
Great.
Also asset based lending, which as you know the first horizon has been in that day.
Sure.
And we're seeing great referrals from.
Our net.
I think the Iberian market.
We also believe there is an opportunity to continue to expand.
Good day, thank you.
<unk>.
Also with the card that's about it you mentioned youre working on.
Opportunities.
Yes.
We are seeing.
Mortgage secondary portfolio on mortgage.
Thank you for.
Together.
We're very very pleased with bankers.
The great thing on our bankers are so excited to have additional.
Thanks for thank you talk to clients about.
Not cash.
Another indication to us.
We're very confident that we'll continue to see that now.
As the economy.
King.
Hey, Steve This is Bryan I'll add to that I think this is one of the more underappreciated opportunities on our merger and I think there is a lot of revenue synergies that we will generate some of it is the obvious stuff.
Bigger balance sheets. Some of it is the product set that Susan just described.
Take for example, the private client and wealth business, that's an area of the Iberiabank and not focused on as much. We're having really good success hiring private bankers and wealth managers in our Florida footprint. For example, so we look at this area from a.
Big picture perspective.
We captured.
Our track $30 million, and then sort of stopped on.
The capital Bank.
Merger several years ago, we think this opportunity of combining these two organizations that are bringing this combined products a bigger balance sheet the opportunity to do more for our customers. We think we're going to well exceed the $30 million of revenue synergies over the next couple of years per day.
And our capital Bank merger.
Hey.
That's helpful Brian.
Brian a big picture question for you. So you guys are delivering on the cost saves from Iberia. The revenue synergies are starting to come through countercyclical businesses are doing their job.
No 2021 is a bit of an odd year, given the pandemic and you're a PPP program stimulus et cetera, all impacting loan demand, but from a big picture view can you talk about how do you see growth potential of this new company over the longer term is this a mid single digit grow or is this a high single digit growth what do you see for us.
Thanks.
Yeah.
It's a good question you didn't stipulate what you think the economy is going to do when we come out of all of the stimulus.
I'd say I think we're going to have.
A footprint and a demographic that is going to growth.
At or above.
What you see in it appears and others.
As I look at our footprint do you think about the markets we're in and we're in.
Atlanta, Houston, Dallas, Miami, We're in 15 of the top 20 Msas in the south pre pandemic.
<unk> was grower growing faster than the U S. As a whole post pandemic I think that is probably accelerated.
And if you look at those markets.
D cases, we'd have.
A very focused and.
In some ways smaller presence, but we see a tremendous opportunity to take that focus and expand the presence of the work that Michael Brown and our bankers are doing today to position us through hiring etcetera, I think we're going to be in a position that we will clearly grow better than average.
And then the camp and I think over time.
Growth in the U S economy is going to return back to that two to two 5% area. So I think that would dictate that we'd probably be in more in the mid single digits, but I think the easier way to describe it is I think we will do better than most in terms of being able to deliver growth given where we're positioned for focus of ours.
Our acreage in the product set that we offer.
Okay.
Very helpful color and best of luck to Arthur as well thanks, guys. Thanks, Dave.
The next question is from Jonathan <unk> from Evercore ISI. Please go ahead.
Good morning, Hey.
Hey, Jonathan.
And first off best of luck to already as well in your new gig.
On the excess cash side I believe you're sitting on about $10 8 billion in excess and.
Just wanted to see if you can give us a little more color on how youre thinking about the deployment. There I know you indicated into and the loan growth opportunities, but outside of that.
Where do you see opportunities are you looking at the bond portfolio any differently. These days or do you see any non portfolio purchases or areas like that.
Hey, Scott.
Yes.
See you in a couple of different ways. One is we are optimistic that non growth.
On a comeback.
GAAP.
Yes, some of this excess cash.
That is priority number one.
Number two I think over time, there is kind of be a reduction in deposits.
Balance is.
As for stimulus rolls off as economic activity picks up.
From clients will go to cash holdings first net lending second right.
So I think there is enough activity to see a little bit above the debt, but I think.
Deposit levels will will come down.
Because of that as well on this.
Securities portfolio, we did modestly decreased at this.
This quarter.
And look for opportunities to deploy that.
But I would expect.
We're going to significantly increase the securities portfolio really looking more at deploying it on the on.
The loan growth side, so yes, as I've said before yes of course, we'd like to put on excess cash to work but.
This is a high class problem to have it's really just yesterday that NAV.
Absolutely hurt on our on NII. So to me deploying here. This is all upside.
Great. Thanks, Hey, Jay that's helpful and then separately on the.
On a lot of focus around the counter cyclical businesses here certainly doing their job I agree.
Yes, if you could just talk about the outlook for each in terms of the capital markets business here.
Total $1 9 million ADR.
Quarter is certainly a high level, where do you see that going just given the backdrop here on the rate side and then separately I guess also on the mortgage.
Warehouse business, if you can give us an outlook there as well and given the.
The rate dynamics. Thanks.
Sure so start on fixed income $1 nine day.
One on.
On any it was very very strong quarter.
We expect continued strength.
<unk>.
Maybe not there, but maybe more on the.
David half, yes somewhere between debated.
Good time, where we're at.
This this quarter.
90 plus percent.
As days last quarter.
Ed.
Dollar base.
Across the desks that is very very strong so all add value, we said in our and our outlook on slide 18, we expect that strength to continue but maybe not quite at the one nine level that we saw.
If this quarter on <unk>.
First mortgage companies.
As you would know.
Do you see seasonal declines in the first quarter.
We do expect some.
Pick up in <unk>.
Second spring volume.
It can happen.
Third as well.
So we index.
Back a little bit on tape out from first quarter levels.
So that will help drive some of the loan growth that we see in net.
The back half for here.
Yes.
Mortgage warehouse.
Thanks for extending credit.
Brian.
In the last two years decline.
Alright.
We've got an offering at work.
Great.
For.
Non-GAAP.
On the data.
Based on Q&A.
Farmers for Ed.
For mortgage lending.
We thank rob for patients because of that.
Accounts.
Yeah.
Great. Thank you.
Yeah.
The next question is from Brock Vandervliet from UBS. Please go ahead.
Thank you.
Just following up on on John's question P. J.
It sounds like you're relatively cautious given the rate environment on securities, which I I understand.
We are seeing.
Some of your peers, particularly those with mortgage banking operations simply.
And retain more on the residential side in this environment, especially if they can avail themselves to jumbo or non QM something with a stepped up rate.
Is that.
Part of the part of your strategy here.
Hey, Ross.
Yes so.
I'd go back to a couple of questions ago, where I was kind of talking about.
Loan growth outlook.
Tumor size.
Exactly right, we did make some changes.
Some of the.
Portfolio of products.
To try to position debt more attractively.
For our affluent clients, but then also our retail clients in general and like I said the locked pipeline in the last 45 days for.
For our portfolio of production is up pretty pretty significantly.
So yes, we are looking to put a little bit more on the other portfolio on.
Net security side, just to give you a little bit more color.
The yields.
Yields that we're seeing right now coming on the portfolio would be in the 125 range with a five year duration. So.
We're trying to pick our spots there, but we'd rather do what we just talked about which is increased portfolio production to serve our clients.
Particularly on the fluid side.
Our bankers more too.
Moving to our clients about and that's exactly what we're going on there.
Yes.
Brian Brock.
And then.
You'd think about the alternatives for investing this excess cash.
If you're doing anything.
Our securities portfolio of mortgages that are adding duration and so our preference is always to use our balance sheet for building customer relationship and at least as a mortgage products.
The the relationship opportunity either to expand it or solidify you don't get debt securities portfolio. So we will always look for opportunities if we're going to add duration added through our loan book.
Got it.
Just as a follow up I think the only thing that's rebounded more than bank stocks in the last year has been than oil prices.
I Didnt hear you mentioned that is <unk>.
Source of incremental growth.
Could you talk about that.
That area.
Really a focal point in the past for the bank is it a question of.
Seeing a different risk reward here or other concerns or.
How would you how are you thinking about energy.
This is Brian.
Oh and important business I mentioned and the growth markets that we're in I mentioned, Dallas Houston clearly in Texas.
It is an important product set and we are all likelihood going to have continued presence in energy lending all likelihood that exposure will be flat to down as we expected.
That those portfolios will come down some and that we will reduce our exposure a little bit over time, we think it's important to be in those markets and to facilitate lending.
In oilfield services.
And so on and so forth, but we also think it's a very volatile volatile place to land on that so we're not going to a free.
Based on our exposures in all likelihood we're going to focus much more on how do we support for commercial businesses in both of those markets.
Got it okay. Thank you.
The next question is from Jennifer <unk> from true Securities. Please go ahead.
Thank you.
Most of it than assets.
Brian two questions I have.
Assume that when loans.
Man does return more that the competition is going to be.
Right challenging.
Given all of the excess liquidity in the system.
I'm wondering how you guys are thinking about that and then my second question is.
<unk>.
When do you think we'll know what the real estate implications are going to be from.
The shift to more working from home.
For the bank.
Yes, Thanks, Jennifer.
First on on.
Loan demand Youre, absolutely right. It is a very competitive environment, it probably becomes more competitive every day.
I would argue that that you've got that on a comp.
Competition around pricing obviously.
The duration of our term, but you're also starting to see more competition around structure.
We are being mindful of how and where we compete we're focused as we've pointed out a couple of times in the prepared comments on the strength and stability of our balance sheet, but we're also mindful that growing with our customers.
Protecting our customer base is important so we're being very thoughtful.
Transaction by transaction basis.
Try not to draw a whole bunch of bright lines other than let's make sure that we're booking assets and serving our customers in a way that will be good for our customers through the long term it will be good for our balance sheet.
Long term.
With respect to real estate.
Susan will.
Probably some additional comments.
That scenario is going to take a little while to unfold if you'd take us as an example, we're working through now.
How and when we return to the office over the next three or four months.
We expect that we will be bringing the vast majority of those that are working from home buyer you have to keep in mind on about half of our people or more are in the office today, whether it's on our banking center or whether it's at an operations center technology et cetera et cetera.
We're looking at return to work, we think that theres going to be some short term impact.
On.
Commercial real estate.
It is on.
Focus on it that day.
I'm more focused on you know Tien tsin.
See the return to opening and some of the businesses the hospitality and restaurant services.
Where we need to get workers back to come back to full capacity. So I think more of a short term stress in commercial real estate is are we going to be able to get properties open because we can get.
<unk> been in foodservice and so on and so forth back to work.
I think for the commercial real estate sector will probably level out over time as more people come back for the office I think for a tremendous amount of benefit for people being together at least.
With more flexibility more together, so that you get the communication.
Collaboration culture, all of the things that go along with with interacting with one another seasonality for you.
Yes.
Good day.
Office in general.
Hey, Brian.
Debt earlier, we are very.
Very attractive market.
Now, let me guess being even share.
Turning to sales.
Looking out on the interest and.
From company debt.
Operating relocating.
Brand.
Places like Raleigh, South, Florida Atlanta.
On the campaign now.
Whether it's tier.
Even if all of it.
Sure.
Yes.
Thank you Sir.
The market.
The other thing.
Great.
We remain very crazy.
And our underwriting across.
The average.
Right.
Equity in our operations.
Our colleague net.
35 for seven 838%.
Don't have.
Yes.
On one of our average rate.
Excellent.
<unk> million dollars, and then were diversified across our.
Yeah.
Florida, North Carolina, Tennessee, Texas, Georgia.
The answer would be on time every day.
If markets based on.
On our footprint.
Based on our interest.
The potential for <unk>.
Good day scenario, probably I think greater than others because of the market. We're in in a way that we underwrite baseline prior.
Prior to Covid.
Thank you.
The next question is from Christopher Merrimack from Janney Montgomery Scott. Please go ahead.
Thanks, you May have mentioned this earlier this morning I just wanted to go back to the loan yields and comparing kind of new business going forward compared to what the core yield was I'm just looking at the details on slide 12.
Yes.
Yes.
It's D J, Chris so.
On new production.
On the commercial side.
We're seeing it in high twos.
Let's say.
Blended.
Across variable and fixed.
On the consumer side, it's kind of be a little bit.
Little bit higher than that in the low <unk>, but that's what we're seeing today. So repositioning of the book in terms of new production is going to be a little bit less.
We see which obviously is going to kind of put pressure on.
On the on.
On margin.
Again, I think as volume starts to pick up in the back half of the year. So hopefully we can we can mitigate some of that but hopefully that gave them in value.
Chris This is Brian with respect to coming out of a pandemic and all of the uncertainty that debt created you wouldn't expect to see spreads compressing paces.
So they are and as I suggested in my response to Jennifer's question a minute ago.
There is a lot of competition on a lot of competition from manifesting itself in spreads.
And Unfortunately, we think that we and the industry are looking at tighter spreads for salt.
A top tier is there's so much excess liquidity out there trying to deploy.
Deployed in loan growth.
No I appreciate that thank you for the additional color and then just P. J just to follow up on the gain on sales spread on the mortgage business are there any technology improvements that essentially help too on the cost side that as time evolves that the gain on sales spread may not come back as much as it historically did.
Chris when you say come back as much.
Well I mean, I'm, just comparing where we are today at $3 70 compared to being in the threes or twos a.
A year ago.
Yeah, I mean, I think there is.
There are significant process improvements that we're working on is on.
Mortgage business.
It's kind of hard to zero.
So much so much volume, but we have a lot of things that we're trying to do that.
It does.
On a par, but I do think there is.
But our expectation is still continued to moderate.
For towards maybe the three 5% range this year.
But.
It remains to be seen.
There's a lot of moving parts, but your range.
Gain on sales rate, but they've been pretty healthy over the last three quarters at least and so we expect thanks for that.
For the day above.
On a historical levels for them.
On a couple of quarters.
Great. Thanks, Jason Thanks again.
Thank you.
The next question is from Jared Shaw from Wells Fargo. Please go ahead.
Hi, Good morning, this is actually TMR, Brazil or filling in for Jared.
My first.
My first question is a follow up tier response to John's question on excess liquidity.
Just looking at the deposit book is there a way to gauge how much of that could potentially come out as borrowers started to engage in.
Capex activity on using their own balance sheet to do that and is it going to take years for the excess liquidity to get back towards normalized level or do you foresee that being a quicker process.
Yeah. So.
Yes.
We try to do that analysis in terms of how much of it could come out over time, just to give you maybe a little bit of context of how I think about it our excess cash position for a company our size.
Good day more than 702 billion range.
Good quarter for an 11 day right.
So I don't think that.
$10 million of excess.
Cash comes out.
Over the next couple of quarters, I think it's going to take.
Some period of time for.
To be to be soaked up so I think excess cash positions are kind of per year for a while with that said.
Don't expect it.
$10 million level I expect it to continue to fall based on increased volume growth increased usage on those excess cash balances, particularly on our commercial clients. The burn off of stimulus checks on the consumer side et cetera. So on.
I think it's I think it's going to be here to stay for a while.
Okay.
Okay, and then as a follow up maybe switching gears and looking at credit and the reserve position. So credit obviously was very clean this quarter.
To what extent or qualitative overlays still being applied to maybe slow down what otherwise would have been a larger reduction in the reserve and as we look ahead barring any changes on the credit picture should we expect to see accelerating declines in the allowance level.
Yeah.
We are feeling very good about the credit outlook.
Coming out of it.
Talking with clients and with bankers.
Starting with D. A.
<unk>.
A lot of renewed activity back.
Great.
And we're optimistic.
Again.
Yes.
Exploration et cetera.
From state.
You'll have an answer yet.
Great great.
But we do based on monthly net now.
But I've seen that portfolio.
Exactly.
On the reserve release.
For the remainder.
Yes, I agree.
I said in my earlier comments debt based on what we're seeing in the economic outlook.
Yes.
We have said for quite some time that.
Significantly repositioned as credit portfolio.
<unk> prices.
It is.
Going up.
Very low levels of charge offs so on.
All of that to say, we're at one <unk> coverage ratios at pre pandemic.
On a combined basis, we would have been at 110 net.
Clive.
Excuse me that we've got pretty significant reserve releases, assuming that the economy continues to improve so.
Do we get back there by the end of this year.
<unk>.
But you would get back closer to maybe first or second quarter levels.
By the end of this year, yes.
Okay, that's great color. Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Bryan Jordan, President and CEO for closing remarks.
Thank you Jason and thank you all for joining our call. This morning. We appreciate your time and interest we're excited about the momentum we're seeing in our company. Please feel free to reach out to us. If you have any further questions or need additional information or if you all have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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