Q2 2021 First Horizon Corp (Tennessee) Earnings Call
Good morning, and welcome to the first Horizon Corporation second quarter, 2020.1 earnings release conference call all participants will be in a listen only mode.
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After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then 1 on your Touchtone phone. So let's draw. Your question. Please press Star then 2.
Please note this event is being recorded.
I would now like to turn the conference over to Mr. Bryan Jordan, President and CEO. Please go ahead.
Hi, everyone first as Ellen Taylor and I've got it here and a little housekeeping on.
Thanks, so much for joining us. This morning, we really greatly appreciate your support and interest and start things off our CEO, Bryan Jordan and CFO BJ Losch will provide opening comments and and other deals.
Our results and then of course, we'll be happy to take your questions. We're also pleased to have with US today are our chief operating officer, Anthony risk fell it would be taking on the role of interim CFO and our Chief Credit Officer, Susan Springfield.
Our remarks today are going to reference the earnings presentation, which you may find that IR dot anti itch and C. Dot com as always I need to remind you that we will make forward looking statements that are subject to risk and uncertainty and we ask that you review the factors that may cause our results to differ from our expectations.
And she can find on page 2 of our presentation and in our SEC filings. We also will address adjusted results, which exclude the impact from notable items you should understand that these are non-GAAP measures. So it's really important for you to review the GAAP information on our earnings release and on page 3 of our presentation and and of course last but not least.
First our comments reflect our current views and you should understand that we are obligated to update them and now with that I'll give it to Brian. Thank you al and good morning, everyone and thank you for joining our call.
Proud of first on the first horizon and same as we continue to deliver solid performance.
Tanami continues to strengthen.
Loan demand and activity is continuing to build and our strong credit quality is performing well.
Reported cash levels are strong broadly on the economy, which is leading to higher loan payoffs and more competition for new lending opportunities and compressing loan spreads.
Our diversified business model, including mortgage banking and mortgage warehouse lending and FHA and financial continue to provide effective offset to some of these headwinds.
We delivered adjusted EPS of <unk> 58 sets forth our return on tangible common equity of 22% and our core per.
Capital levels remain healthy with a common equity tier 1 ratio of 10, 3.3% and we grew tangible book value per share by 4% and the war for $10 and 74 sets.
Our revenues this quarter and went down from first strong first quarter levels FHA and for natural and mortgage remains strong, but also an extraordinarily strong first quarter levels.
Our results this quarter and was bolstered by the impact from continued rapid improvement and the overall economy and asset quality, which resulted in a provision credit of $115 million.
We're encouraged by the uptick and activity across the franchise markets and sector 3 of them are.
Our associates are having lots of constructive dialogue with clients and prospects and we feel we are at a relatively strong position and benefit from further economic improvement.
On the pipeline certainly continued to reflect the strengthening economy and May and June.
So near term the industry as confront and continued lower rates and high levels of excess liquidity and very little incremental on demand.
Clients are still cautious about new investments and are still facing supply chain and labor force and strikes that are problematic.
We are also starting to see PPP loan forgiveness pick up.
All of this translates to a fiercely competitive landscape for loan Outstandings.
We're continuing to focus on controlling the things that we can control driving toward completing our merger integration.
Capturing revenue synergies and good risk managers.
And all while focusing on serving our clients and anticipating their needs.
We continue to do a great job of capturing revenue synergies across markets and product lines and leveraging our expanded suite of products services and expertise on.
Esther metal and retaining and growing our client relationships.
Excuse me.
At the same time, we are committed to continuing to drive enhanced efficiency by delivering $200 million and cost savings and controlling cost, while still making prudent investments and technology and products to drive future revenue growth.
We also continue to opportunistically deploy capital through share repurchases.
We bought back 3.1 million shares this quarter.
Including dividends, we returned a total of $141 million and capital to our common shareholders.
We continue to be optimistic about the path of the economic recovery and the increased activity levels, we are seeing across our footprint as our markets continue to reopen.
But like many we are keeping a watchful eye on supply chain and labor constraints as well as signs of insulation.
And I continue to be highly confident that our business model and benefits of the merger of equals position us well.
To deliver top quartile returns over the medium term and.
And now I'll turn it over to BJ for some comments on our results P. J. Thanks, Brian and good morning, everybody, let's start off on slide 6 as Brian mentioned, we're really pleased with the continued execution and the first half of the year. The merger is delivering the enhanced efficiencies that we expected and we are capturing the benefits of the merger savings.
And really starting to see the additional revenue synergies across the platform, which we think will only ramp from here. It's.
As Brian said, we delivered GAAP EPS of <unk> 53, or 58 on an adjusted basis, reflecting the resiliency of our balanced business model and exceptionally strong credit quality performance. Our results. This quarter from a revenue and expense perspective were in line with expectations and as expected net and.
First income headwinds persist and.
And we experienced continued strong fee income, albeit lower than the outsized levels and the first quarter.
And we delivered continued improvement and expenses with an incremental $4 million of merger related cost saves.
From a credit quality perspective, the combination of the improving macro environment.
And our on asset quality, including the benefit and upward great migration and 11 portfolio exceeded expectations and drove a provision credit of 115 million and and the quarter with net recoveries.
Our repeat net recoveries of $10 million and facts for the first half of the year, we have and aggregate net recovery of $2 million on a $57 billion loan portfolio.
Outstanding performance, we remain on track for our final systems conversion and the fall and continue to make progress towards our $200 million net savings target with 92 million of those annualized savings in the quarter at the same time, we're making nice progress on those revenue synergies I talked about briefly.
Via cross sale and leveraging our balance sheet to serve the broader customer base. We currently estimate that we are on track for roughly $20 million of annualized revenue synergies across various commercial and consumer businesses with more to come across all of those platforms.
Turning to slide 7 and I'll quickly review, the notable and merger related items in the quarter.
As you can see we had 26 million after tax or <unk> a share of merger related notable items and as you know in January.
Raised our expected net merger cost saves from 170 million to 200 million consisting of gross cost saves of $250 million and reinvestment of $50 million. We continue to be confident in achieving these savings. In addition, we're now expecting our pre tax merger cost to total about.
$500 million and this increase is largely driven by 3 components first.
First is tied to more recent developments related to product and capability enhancements, we've elected to make in connection with the integration. So think of it as making the engine more durable and powerful while the cars on the lift so to speak as we prepare for our systems conversion and secondly, we are seeing post pandemic vendor and staffing can.
Strengths that have caused an increase in both the level and the cost of estimated man hours required to complete our technology integration and.
And third as we finalized our decisions around accelerating our branch closures given the shift towards digital adoption.
We still have plans to close a total of 50 branches, but now expect to see a higher level of impairment costs, given the ultimate mix of those branch closures that we've decided upon.
So we believe spending an incremental 3 basis points of capital to position us for better for the future makes good long term business sense and it's important to note that the payback period on the increased cost saves and the addition of the revenue synergies we're already seeing it's still well in line with our original estimate of about 2 years.
Slide 8 provides an overview of our adjusted financials for the quarter.
We generated <unk> of $321 million as expected revenues decreased 3% from strong <unk> 21 levels, given expected reductions fixed income and mortgage banking fees, along with continued NII pressure adjusted expenses of $465 million remain.
Relatively stable linked quarter as the benefit of our incremental merger cost saves was muted by some higher long term incentive costs.
And this quarter, the provision credit, which we talked about at $115 million as compared to 45 million and the first and as we sit here today, we see opportunity for more reserve releases and the future dependent of course upon several factors, including further macroeconomic improvement low levels of net charge off.
Offs and positive grade migration and the pace of macroeconomic improvement is likely to be less pronounced than it was in Q2, but there is opportunity for further positive grade migration is updated financial statements will be received from borrowers over the next few quarters.
Bottom line, though we expect the net impact of all those factors to be positive with further reserve releases quite likely and as Brian mentioned, we grew tangible book value per share by a strong 4% and generated and adjusted ROTC of 22% or 16% before the impact of that provision credit very very.
Strong performance.
Moving to slide 9.
NII performed in line with expectations declining 11 million linked quarter on an FTE basis.
Both reported and core NIM, we're down 16 basis points linked quarter, driven by about 12 basis points of impact tied to higher excess cash.
We ended the quarter with increasing levels of cash.
And at about $12.7 billion up from $10.8 billion and the first quarter. We did also see pressure from lower loan balances and given the competitive landscape experienced spread tightening on new originations compared to the run off.
Which collectively translated to about 2 basis points on the NIM.
The change in rates and housing supply constraints on our mortgage warehouse outstandings decreased and we saw increased pressure from premium amortization and lower LIBOR.
And the face of these environmental pressures, we are very very focused on controlling what we can control and our continued deposit pricing discipline and is helping to mitigate the impact of those lower rates and overall muted loan demand and.
First bearing deposit cost of 20 basis points and the quarter remained stable and were down 2 basis points, excluding purchase accounting.
And as we look forward, we continue to believe we're well positioned to benefit from an improving economy at quarter and our interest rate sensitivity of your NII sensitivity to and up 100 shock was about 10% and.
About 6% on a gradual basis.
Moving to slide 10.
Taking a look at fee income dynamics.
First income ADR came in at $1 million 4 compared to the very strong first quarter of a million 9 reflecting continued favorable operating environment for the business given high levels of cash and the banking system and immediate loan demand.
Mortgage banking and title fees came in at $38 million compared with.
Higher first quarter levels, while fee income was lower and our mortgage banking business overall mortgage originations across our platform were very strong up 21% quarter over quarter with an intentional shift to on balance sheet mortgages.
Lower mortgage fee income reflects the impact of housing supply constraints.
Lower gain on sales spreads and that intentional shift and origination mix towards portfolio.
Our focus here is on customer oriented relationships, which we believe is a better alternative for adding interest earning assets as compared to securities purchases.
Importantly, given the overall economic momentum across our footprint, we saw $4 million left and card and digital banking fees with the benefit of and increase in transaction volumes and finally I would note that youll see a $15 million increase and other income which was driven by a nice.
$9 million securities gain largely related to a legacy iberiabank equity investment.
Slide 11, and taken a look at expenses adjusted expense was $465 million and stable relative to the first quarter personnel expense decreased 7 million linked quarter, driven by a $6 million decline and incentives and commissions.
Partially offset by increases and long term revenue and performance based incentives and occupancy and equipment, we saw $3 million increase largely tied more to the equipment line, which was related to some strategic software investments and.
And finally increased activity levels, given the reopening of markets post pandemic caused about a $2 million increase and our outside services line.
Slides 12, and 13, we take a look at our loan growth and our funding profile.
And see that our average loan balances were down about $1 billion and 4 in the quarter with.
With commercial down about $800 million and consumer down about $580 million commercial was impacted by about 1 billion, 1 decrease and our loans to mortgage companies.
Partially offset by a $272 million increase in PPP balances.
Last quarter, our mortgage warehouse volume was around 67% re Fi and Thats moderated in the second quarter to 47%.
And as we look forward, we do believe that some of our volume related strategies in that business will allow us to gain more share and mortgage warehouse lending with a net benefit to profitability and outside of PPP and mortgage warehouse, we did see a lift in overall commercial balances, which we're hopeful will continue in the second half.
For the year.
And as Brian mentioned, we continue to be optimistic about the path of the economic recovery and the increased activity levels as markets continue to reopen.
Quickly on the liability side, we saw a continued inflow of deposits driven by $2.1 billion average increase in non interest bearing deposits.
And with commercial balances, including benefits from the second round of PPP total deposit costs are at a very low 13 basis points with interest bearing deposit costs at 20.
On the asset quality, starting with slide 14.
Our overall credit quality continues to surprise to the upside.
We had net recoveries again, a $10 million or 7 basis points down 13 basis points from last quarter with nonperforming loans decreasing $15 million.
$50 million 5 zero given.
Given the large provision credit the allowance for credit losses coverage ratio came in at 157 basis points compared with $1.70 last quarter driven by the continued improvement and the outlook positive grade migration, those net recoveries and lower loan balances.
As you can see our overall loss absorption capacity, excluding mortgage warehouse and PPP.
And as well as the unrecognized discount on our acquired loans stands at a very healthy 223%.
Our credit quality is excellent and.
And while all peers are experiencing low levels of net charge offs are performance is among the best in class and we expect that to continue.
Turning to capital on Slide 16, as Brian mentioned CET, 1 ratio is at a healthy 10, 3% up about 30 basis points or so and the quarter driven by growth and retained earnings and a reduction in risk weighted assets increase was partially offset by the capital return Brian talked about through repurchases.
And dividends, we expect capital levels to remain strong with flexibility to both deploy and optimize our capital structure.
Moving on to merger integration on slide 17, it's been a little more than a year since we closed our merger with Iberia Bank and we continue to make very good progress.
We're focused on retaining and growing the client base with our expanded products and services.
As we talked about we achieved $92 million and annualized run rate savings and early July you see we successfully converted virtual bank customers onto our new fully cloud based things that core and in the coming months as we prepare for our fall 2021 core systems conversion and we plan to complete our wells.
<unk> Trust and credit card from conversions as well, our first round and banking center consolidations.
And training for all associates on our new systems.
Turning to our outlook on slide 18, our results. This quarter were in line with the outlook. We provided you in April and we're providing an outlook for both the third quarter and the full year of 2021, you can see and the third quarter, we do expect NII to decrease modestly given the outlook for lower <unk>.
And the impact of continued low rates.
And reduced merger accretion, while we anticipate relatively resilient results and our fixed income business. We do expect fee income to be down and the low double digit to low teens range due to lower mortgage banking fees and.
We expect non interest expense to decrease and a low single digit rage as our ongoing focus on efficiency and merger cost saves comes through.
We expect charge offs to be and the range of zero to 10 basis points.
And it's reasonable to see continued reserve outflows, we expect our CET 1 to remain in the 10 to 10, 5% range.
We now expect a mid single digit decrease and noninterest income with net charge offs.
And the zero to 10 basis point range and the CET, 1 tenant in 10 and a half.
As Brian mentioned, we feel good about the positioning and our ability to perform well given the current economic environment.
Finally on slide 19, we are well positioned to capitalize on opportunities of our business model and franchise. Our fee income businesses are performing just as we would have expected. We're controlling expenses were driving down deposit costs, we're making good prudent long term investments and talent and technology were seeing.
And good business activity as markets reopen and credit quality is excellent and we believe we will continue to deliver attractive returns near term and and the future.
Just a quick note as many of you know today's my 51st and final earnings call with first horizon.
Fact is exactly 12.5 years since my first earnings call on January 16th 2009 that day, we reported a loss of 27.
Today, we reported positive results at 58 cents and.
And it's been quite a ride and I started here at a time when the company was arguably at its weakest and I'm proud to say confidently on leaving here when it's had its strongest.
Put my heart and soul into this place and it's returned to me so much more than I could have ever given it and I'm forever grateful for that.
I want to thank Brian and the board My Executive team colleagues, My finance accounting procurement properties groups and all my friends and colleagues at first horizon.
And I have been and absolute pleasure to work with and finally, thanks to the Investor community for your support of our company I've enjoyed the performance accountability and intellectual challenge you provide the people fortunate enough to be in my seat.
I know it wasn't always right, but I always tried to do the right thing and I hope you experienced that so with that I'll turn it back over to Brian.
Thank you Vijay.
I'm exceptionally proud of the team's continued execution and the results we're delivering.
Activity levels picked up across our franchise and many of our specialty businesses.
We're continuing to execute well on our merger integration, while making prudent investments to position us well for the future.
Our strong risk management posture showcased by our asset quality metrics.
I'm grateful to our associates for their diligence around serving our customers and our communities and I continue to be confident and our continued progress towards becoming a.
Top regional banks.
And our ability to drive long term shareholder value and now.
Now before I open it up for questions and I'll also make a couple comments about D. J.
Hey, Jay just stated he did join us in 2009 in the midst of the financial crisis over the past 12, 12, and a half years, he's been a key leader and helping us reposition and position our business.
And he has been critical to the development of our strategies and controlling our costs and.
And many of the great accomplishments that we've had over the past 12 years.
Jay is a trusted friend and partner.
And we will miss him, while I am disappointed to say.
<unk> support him and his new endeavors, you will be missed.
Betsy we will now take questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
And we're using a speakerphone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then 2.
And the interest of time, please limit yourself to 1 question and 1 follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
And good morning, everybody.
Good morning.
Maybe just starting on the expense side.
With the additional $40 million investment is there an opportunity to see that $200 million ultra.
Ultimate cost save level increase from there or is that really more just the cost to get there has gone up and net.
Sure.
Yes, and it will probably see some additional negative operating leverage here and the next next few quarters as that gets rolled in.
Hey, Jared it's P J I'll take that 1.
As you know since you've known us for quite some time and followed US we're never done with cash.
Cost saves and expense efficiencies and so.
We started at $1.70 were up to 200 and and in an environment like what we're operating and I think we'll continue to look for additional opportunities over time right. Now we are all laser focused on getting to our conversion in the fall, which is our most important.
Hurdle and.
Annualized 200 million is.
To be expected to be out of the run rate by the first half of 2022 and between now and then we will continue building on additional expense opportunities beyond that to continue to find more efficiencies and the expense line.
Jared This is Bryan up piggyback on on Bjs comments, we feel very very good about our ability to hit the $200 million and and.
And we think if anything.
Very little of any downside to it and we think there is potential upside as BJ said, we consistently look for opportunities to drive efficiency.
And I think the nature of the business is such that we've continually got to look for opportunities to reduce cost and and.
Changing our non value added areas and put that into areas that require future investment and technology and infrastructure. So that we continue to use our all of our levers around expense control to make sure we position the business for the long term.
Yeah.
Okay, great. Thanks, and then as my follow up maybe just on the on the mortgage side.
And ultimately do you think you could be retaining and from that production as we go forward versus versus selling.
Sure.
And I guess the impact of that on the gain on sale margin.
So I think what you'll see from us is a.
Continued shift to on balance sheet.
Portfolio originations I D.
And do.
Expect that Youll see net.
Increases in originations, maybe not as high as the 20% that we had seen but the secondary volume that we're seeing and still still strong and we're capturing many opportunities our clients are seeing more opportunity and our portfolio originations, particularly around 7 year arms were 15 year.
Fixed, which we've seen quite a bit of interest and so I think youll see that continued shift with overall originations continuing to go up probably secondary continuing to moderate down portfolio in terms of gain on sale. It is continuing to moderate and we expect that.
2 to continue to come down over the next few quarters.
Okay, Thanks, and congratulations B J and your your next steps and now great working with you.
Thank you you as well.
The next question comes from Jennifer <unk> with <unk> Securities. Please go ahead.
Thank you good morning.
Hey, Jennifer.
Hi, pitch and talk about the revenue synergies, you're seeing today with Iberia, and what's been kind of better than expected and whats.
And on a lagged versus your expectations and.
And where you see the biggest opportunities and the next 12.18 months from Sam.
Hi, Jennifer this is Bryan I'll start.
We feel very good about the trend on revenue synergies and I would say there are very few areas that we're concerned about lagging at this point.
As you might expect there are some natural synergies that come from just being and larger organization larger hold positions, but we're seeing very very good momentum across specialty lines of businesses were either organization may not have had an opportunity and the past our equipment finance business.
Our asset based lending business.
Private client wealth management businesses, some of those take a little longer to build the infrastructure around it but at the end of the day, we feel very very good progress and we're saying we're seeing opportunities.
We continue to multiply and at this point.
We feel very very good that we're on track to exceed the $35 million that I've talked about in the past, we think were and that $20 million annualized area today and building momentum once we get through this integration and we think that we think it will pick up further momentum and the first and second quarters of next year.
Okay great.
And in terms of the loan loss Reserve you said more releases are likely assuming.
These.
Credit trends and economic trends continue do you could you see the reserve doing lower than it was.
Hello, Good day, 1 and Stifel model.
Hey, Jennifer it's D J.
Likely likely not I think.
Day, 1 C. So would have been around 1.
110 basis points for us I think on a on a combined basis.
So it's hard for me to think about.
It going much lower than that it certainly could but I don't think that we would get there for for a while but with that said if you exclude.
PPP.
Loans from mortgage companies, which carry very very little.
We've got 60 basis points or 70 basis points.
From where we're at today to get down to those levels. So again, we do believe that the macro environment will continue to improve per.
Credit quality is excellent.
The way we've managed both portfolios both legacy portfolios are really starting to shine now. So we do believe there is there is very healthy reserve releases to come over the next several quarters.
First of all picked up on.
And the Joe's last comments, Susan and I have to do it.
And so it goes we got into the pandemic and not knowing how the economy was going to play out there was a lot of concern industrywide about how credit would play out and at that time.
We said we thought.
And our portfolios would do as well or better than most and.
Albeit admittedly.
Fiscal policy and the country reduce losses across the industry, we do believe very strongly that on.
Our portfolio has both the legacy Iberia Bank portfolio and the first horizon portfolio and now the combined portfolio has performed at a very strong fashion and we believe while it's top performance today, we think that will continue given the way we approach credit and risk and the portfolio is very very.
And proud of the results.
I can't say that.
And a big fan of seasonal and.
And the reserve methodologies and.
But I do believe that we will migrate back down towards those day, 1 levels as quickly as anybody and I think.
And we will continue to deliver that very strong and consistent credit performance as a result of our efforts to manage risk and an appropriate ROI.
Okay. Thank you look forward to continuing to work with U B J.
Yes.
Thanks, Jennifer.
The next question comes from Brett Robinson with hub group. Please go ahead.
Hey, good morning, everyone and congrats TJ on your new role and Brett.
Good morning.
Yes.
Wanted to just talk about this and the.
The liquidity on the balance sheet. If you think about the cash balances are now 16% of average, earning assets and with the guidance for that from the cash to continue to build.
And obviously not a great environment for reinvesting cash and securities but.
And just how you intend if anything too.
Maybe manage some other liquidity as you might do some from securities purchases from here and just thinking about trying to manage obviously, you managed NII and more than the margin, but just thinking about the margin.
And possible ways to kind of offset the margin pressure.
Yes.
It's BJ. So yeah, we're actively thinking about that and we are we are seeing accelerated levels of.
Cash debt, we're reinvesting in the securities portfolio in aggregate we have not.
Materially increased it at this point.
We're buying mostly agency CMO MBS with a little bit of high quality and municipal and it and we can modestly look at something there over time as well but.
We.
We're more focused on trying to create interest earning assets on the portfolio that have a customer relationship to it and going back to our earlier comments on mortgage originations and and finding ways to give clients more opportunities from a portfolio usage perspective.
It is likely where we're going to go we've also.
Been a bit more active and owner occupied commercial real estate on the commercial side and offering some attractive opportunities across our footprint, there so little bit net little bit more fixed rate.
Type lending opportunities.
Debt, we're look into to try to build upon and so I think we're a little bit more focused there.
So.
I think fortunately or unfortunately, I think it's a high class problem to have but I think we will have these deposits excess cash balances for a while but to your point, we're much more focused on NII.
And I think we're hopeful that the core NII, it's really bottoming out at this level and we see going forward.
And opportunity for growth and.
In the core NII. So that's what we're that's what we're planning on and executing upon.
Okay.
First the power Vijay on that and then I guess the other thing I wanted to address with just the guidance around the <unk> non interest income.
Digit to low teens decrease can you talk maybe about the components of that what.
What percentage of that might be fixed income versus.
Other segments.
And fee income.
Hey, Brad it's BJ again, I think it's going to be mostly on the mortgage side.
And again, it's related to some comments I made earlier around secondary.
And the originations probably continuing to trend lower.
Yes.
Continued moderation and gain on sale.
Fixed income, we still expect to be relatively strong.
No.
Around the levels that we're at maybe.
$100000.200000.
Plus or minus where we're at.
But it's mostly on the mortgage side.
Okay.
Mostly on mortgage okay, great appreciate on the color.
Thanks, Brett.
The.
Question comes from Ebrahim <unk> from Bank of America.
Please go ahead.
Good morning.
Good morning.
I guess first just on loan growth on Brian.
Some of the comments you made it on the headwinds meet and inventory lack of inventory labor shortage et cetera.
How should we think about net.
And any chances of loan growth picking up meaningfully this year for the bank like do you see it.
And just being a third quarter event and fourth quarter or most likely first half 'twenty 2 event.
D C net loan growth coming in in a meaningful way.
Yes.
You used the term meaningful a couple of times from both a term of art, so I'll move on but try to avoid the bottom.
But we're we're pretty optimistic about the back half of the year in terms of our loan pipelines as I mentioned and BJ mentioned in his comments.
We saw loan pipelines building.
And then May and June when we look across where we see those pipelines building is very broad based.
And our.
<unk>.
Really high growth markets that are sort of a combination of Iberia and first horizon markets like Texas, we see strength and Louisiana Carolinas, It's very broad base, there and we also see very strong pipelines and <unk> and our specialty businesses, particularly the specialty business.
And there's like asset based lending franchise finance equipment finance.
And in many ways sort of Lee.
There are early signs of a strengthening and economy. So we're encouraged by that and other specialty businesses, our mortgage warehouse lending business.
Our balances came down a bit this quarter, we expect that that will strengthen and the third and the fourth quarter.
Given the pipelines that we see there so we do see signs of strengthening pipelines and loan growth on the.
And on the converse side of that and we believe based on what we know that theres still going to be a relatively high level of payoffs and paydowns in certain sectors, particularly.
Real estate oriented sectors for example, where refinance activity taking stuff into the capital markets or use and significant liquidity.
And is reducing outstanding but on the whole we feel good about how we're positioned with growth markets.
And well positioned with the pipelines and we say the specialty businesses that we have and to the extent that there is growth and the overall economy and is driving loan growth. We think we're going to get our fair share and maybe more.
1 thing I would add to that is as you know we.
And we're.
Big participant in the PPP program at both legacy Bank.
And while that obviously the PPP is contributing to run on we've got really good feedback across our markets and some of our specialty areas.
About the ability and we're working on all of these to pick up additional business, where we were able to service those clients and prospects and help them with PPP linear.
And there are existing bank could not.
And what we're seeing is that that could really be and.
And additional benefit for US later this year and into 2020 team is wrong.
Got it and just as a follow up.
You talked about revenue synergies and particular, Brian if you could exist and we think about the mortgage business and the cabin and market your business.
Where do you see the greater synergies and on W had 1 year since the deal closed.
And from the merger and how quickly do you think you can start monetizing on those opportunities in terms of its impact on revenue growth.
And so.
No.
If you take the mortgage businesses and example.
And our team they import and his team have done a really good job of.
Taking the mortgage product, we've integrated our systems, we're rolling out.
The expanded capability across a first horizon and footprint.
And I would say that over 12 years, if we if we develop a bad habit and a bad habit and will be we didnt really and they'll first horizon and legacy footprint and view the mortgage as a critical part of the consumer banking relationship simply because we were outsourced on the delivery of that product now that we've got it.
And source, we're seeing tremendous momentum pick up.
And as people are leveraging that muscle again.
Really ask for the mortgage and build out that capability and that has been.
BJ alluded to in his comments a few minutes ago, we're seeing are.
<unk> originate more and mortgages for customers and a lot of that is going on to the balance sheet. So I'm optimistic that our FHA business.
We will continue to see opportunities to grow we've added debt capital markets capabilities and <unk> and.
And our fixed income business, which we're seeing significant momentum building over the last 2 or 3 quarters. So I'm optimistic on the revenue synergies.
And the goals, we set which I think based on capital Bank integration were relatively modest will lead to significant revenue growth down the road.
Got it thanks and BJ congratulations on the move awesome. Thank you.
Thanks, Brian.
The next question comes from Christopher Merrimack with Janney Montgomery Scott. Please go ahead.
Hey, Thanks. Good morning, just wanted to go back on that and getting some more color on green shoots on the loan business I know you touched on this already but from the perspective of kind of using the new systems to drive new business, where we see some examples of that and third and fourth quarter or will that kind of implementation post conversion kind of be seen more next year.
From a systems perspective, youll see that principally next year, we're implementing the Encino system. For example, which is a complete rollout across the entire organization iberiabank used and we're putting in and newest relation that momentum and the technology drivers of.
Speed will really start to show up and the fourth quarter and and the first and second quarters and next year.
Got it.
And then as you think about the continued build out of the digital.
And what you talked about with some soft you will you do more sort of public announcements on that or even have more visible examples of sort of additional cost saves kind of beyond what you've pledged on the $200 and I'm just curious if we'll see some signs of that as you continue to go forward.
Yes, Anthony is on the line and Anthony you want to take that 1.
Sure, Brian So Chris what I'll tell you is certainly.
We are a big believer and technology being able to drive overall efficiency for the corporation as we move forward. So I think the simple answer to your question is our expectation would be as we continue to invest in technology and then you overlay.
The I'll call it the shifting preference of our customer base.
Should be able to drive more efficiency and leverage the technology moving forward. So I think youll see that kind of bleed and continuously as we kind of crossed the conversion period into next year and then.
And hopefully continue thereafter.
Great. Thanks for the color I appreciate it and not P. J best of luck to you as well.
Thanks, Chris.
The next question comes from John <unk> with Evercore ISI. Please go ahead.
Good morning.
Good morning, John.
D J, congrats and all the best and the future really enjoyed working with you.
On the on on the margin and just wanted to see if you can give us your thoughts on the on the outlook for the margin from here I know you saw the impact of the liquidity.
Right.
A portion of the 16 basis points compression this quarter. So I wanted to see how you think about the NIM progression and then also I know you mentioned competition and a couple of times and pressure on loan spreads can you give us a little bit of color. There like for example, where some of your new money on loan yields are coming in at and at this point. Thanks.
Sure.
Sure.
It's a slippery slope trying to forecast.
Margin at this point right. We've just seen continued buildup of excess cash here and across the industry and with a $3.5 trillion dollar infrastructure program and.
More.
<unk> tax credit payments comment.
Think that buildup is going to continue so that's why.
We are more focused obviously on on NII and we do think that the core NII for us it's bottoming out for.
A couple of different reasons..1 is we we still think that there is opportunity.
And to move deposit costs down modestly.
Got.
Some exception price deposits that are still that at higher levels than we would want and we will continue to move those.
Those down.
We do expect that we're going to start to see a pickup in loan demand as markets reopen so that's going to add.
And to our to our NII. So we are optimistic that we're going to see some there in terms of what kind of loan yields we're seeing right now from a commercial perspective, where we're seeing.
New loan yields.
And the regional bank just over 3%.
With average durations and the 5 year range.
Our specialty businesses are probably a little bit lower than that maybe 2 and 3 quarters percent.
With slightly lower durations.
And so.
And those yields are probably 40 to 50 basis points lower than our portfolio yields.
Cross those portfolios right now so.
There is there is yield compression and margin compression out there across the industry.
And then secondly on the mechanical and wondering okay. The thoughts on on your CET, 1 target I know Youre your internal target is about 5% to 10%.
And and I know you mentioned some flexibility on and off.
<unk> capital structure any consideration around from total reduction.
And again.
And just look out.
For some reason youre breaking up.
But I think you were asking about see you on target and that were a little bit above where we've said and I have 2 sales.
Sure.
And we.
We are.
And we're not uncomfortable seeing it move up or down a little bit around those areas as we pointed out a couple of different ways.
We have been using capital to repatriate it to shareholders through our stock repurchase program.
We have plenty of capacity available and that and we will continue to be opportunistic and we think that.
Today's valuations are very attractive vis vis our long term value.
We are as you know and 1 of the great legacies and BJ will leave us the bonefish and on our drive towards capital efficiency and.
We focus very much on excess capital and the organization and don't believe led and that buildup and.
And being deployed per bed uses is a good thing and that we will use excess capital to repatriate.
Through our shareholders. So the end of the day and we still believe in that 9.5%, 10%. We think given some of the signs of opportunistic growth, we will absorb between growth organic growth and our and our.
Our share repurchase program.
And.
Got it alright, thanks, Brian sure thing.
The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.
Hi, great. Thanks.
And actually I just wanted to just wanted to go back to net net interest income guidance, just a little bit.
If I take your third quarter guidance and sort of put it in.
And with kind of with the actual numbers and the first half of it is still feels.
And actually numerically it looks like your net interest income has to decline and <unk> and then it also has to decline even further and <unk>.
To get to your full year guidance is for that mid single digit decline I'm using 5% is sort of that mid point.
And it just feels like that's a big contradictory to your more optimistic outlook around I think Peter you just mentioned your core NII stable, because you expect to pick up and loan demand.
Presumably you mean in the second half and it's just unclear and I was hoping you can clarify that thank you.
Hey, Ken.
Thanks, Yes, it's BJ so.
We still had a healthy amount of PPP accretion, we still at a very healthy amount of.
And our loan accretion from the marks on the Iberia loans and if you look at kind of a walk forward debt that we have for you on.
On the NII page.
You can kind of see that the moderation in our total NII is coming down and so while we do expect that core NII.
We will continue to strengthen and increase.
And it's likely to be more than offset by lower loan accretion and less pvp.
Benefits than we have had and the first half of the year. So.
That's really the dynamic debt that is going on there on our on our outlook slide we give you total NII outlook, but thats the underlying dynamics as to why it looks the way it does.
Got it okay.
Is helpful and just to go back to a prior question on loan growth and the back half of the year.
I think Brian when you mentioned when you were answering the question.
It feels like you spoke a lot about pipelines and because I just want to make sure that.
You said, you're optimistic about pipeline is improving.
But as we all know pipeline and balances are sort of 2 different things.
Are you also and just to be clear on this but are you also optimistic the loan balances actually.
Improve and the back half of the year or is it just pipelines. Thank you.
Yes, Ken.
I was talking about pipelines, but also spoke about the outlook from payoffs and the significant liquidity and the short answer is we're optimistic about loan growth.
And I think you know and.
And our mortgage warehouse business and others, we should see some growth, but but it's it's and this.
And as part of the cycle with a significant amount of liquidity and the markets. It's hard to know what payoffs might be and so but that is the sort of the <unk>.
And we'll factor that we just don't know so on.
And our outlook is optimistic but.
But we don't we don't control, we don't control, which is payoffs PPP balances are clearly going to come down with forgiveness et cetera. So depending on what part is a little bit like the net interest margin question.
D J it really depends on what line on what sector and the line item, you're looking at but I think on the core business, we're reasonably optimistic about our ability to growth. If we can if we can retain the balances.
They sit out there today.
Thank you and we did.
Looking at May and June in terms of new commitments production and granted to your point it doesn't necessarily translate into the balances yet but on.
On very strong new commitment production and those names.
And really across so many of the areas that Brian mentioned and the earlier question on the number of our specialty areas ABL Finance franchise Finance health care.
And then and the regional bank.
Alabama, and Texas, Louisiana, and East, Tennessee, North Carolina et cetera, So we.
And.
And then the credit teams does he work and with the line on looking at these opportunities to increase both for existing clients, but also opportunities that we have with prospects.
So the activity levels and definitely picked up.
Got it okay. Thank you.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, Thanks for taking my question I just wanted to go back to.
On the capital you guys have used.
A little bit of your buyback here I think you got.
Around $385 million left just with the stock coming in here along with all bank stocks seemingly in the past couple of weeks would you expect to be a little bit more active on share repurchase front as we move into the back half of the year. Thanks.
And Michael This is Bryan and were always opportunistic and and as I said a minute or so ago.
Think we're attractively valued at these levels vis a vis D.
The long term value that will create.
Peers.
And momentum.
I think we see and our business coming out of this integration. So yes, sure, we'll we'll pick our spots, but we'll be opportunistic and use the authorization.
And to repurchase shares to manage our capital levels, particularly our excess capital levels and the organization.
Okay. Thanks, and then maybe just as a follow up and go back to the fee income outlook. It does imply it seemingly another day.
And stepped down in fourth quarter and I guess my question is you said earlier that a lot of that has to do with mortgage book, but obviously has probably to do some fixed income hedge.
And Stu.
Off really high levels.
But that said I mean, do you think fourth quarter will be the trough and do you think you can actually grow fee income as you move into the next year.
Yeah, Hey.
D J, Michael and yes.
Actually I'm happy you brought that up because 1 thing I forgot to mention and when I was talking about that step down was don't don't forget that we had about $11 million or so of securities gains.
And in this quarter, which is kind of a.
Part of the adjusted baseline if you will so.
Obviously, those those security gains on the legacy Iberia investment and another smaller 1 arent going to go on.
Reoccur. So that's part of the step down than a majority of the rest of it is related to mortgage and like I've said fixed income continues to remain strong with all of the SaaS excess cash and the system.
And what I said earlier was we're at $1 million.
And $4.50, I think to put a fine point on it and so being somewhere around that range plus or minuses is likely where we'll be at least over the next quarter if not through the rest of the year.
Alright, thanks for taking my questions.
The next question is from Steven Alexopoulos with Jpmorgan. Please go ahead.
Hey, everybody.
Steve.
So I know that overall deposit levels continue to rise for the industry right just given stimulus and other factors, but I'm curious when you guys look at your typical mid market customer and your markets are they starting to draw down deposits to fund investments or their deposit balances still also rising.
Like any generalization and it'll be wrong, but for the most part their balances are still rising and theres still a fair amount of cautiousness around new investments and.
And to pick an example fiscal policy and what a capital gains rates look like what other tax rate corporate tax rates look like.
And what is the return on investment all of those things are still affecting fees.
People's psychology about making investments.
This is an anecdote, but we had.
And on equipment lease that was actually repaid with cash in spite of prepaid prepaid penalties et cetera. So people are taking cash and they're being fairly cautious with it and reducing debt and put it on the sidelines until they get a little bit more clarity about where the.
Automated and the pandemic are headed and why.
Bluntly, where we end up from a monetary and more importantly, and maybe a physical policy.
Work through this period of.
Uncertainty around corporate tax rates et cetera.
Yeah.
And frankly regarding the optimism around loan growth resuming in the second half are the your customers signaling they plan to draw on credit lines, despite that theres still sitting on excess liquidity themselves.
Yes.
Credit line utilization Hasnt changed much as sort of hung in there that <unk> 45 per cent area and.
And we see customers. It's a mixed bag, we see some customers that are looking at things are booking new commitments and.
Indicating that theyre going to draw on these commitments and others that are being more cautious and so it is 1 other things where I guess everybody US included is a little bit fuzzy crystal ball about how things are going to play out.
And if you if you spun back 18 months ago, or 15 months ago or even 6 months ago, we wouldn't have been able to predict how things have played out with a whole lot of certainty and and.
And I think we look at the next 6 months and say the there are a lot of things in motion.
And on the whole what we see in terms of building pipelines, what we see in terms of customer acquisition and calling efforts.
And we're more optimistic than not but there is still a certain amount of.
Certain amount of uncertainty there is a fair amount of uncertainty.
Okay. Thanks.
And then from my follow up question with the 10 year trending lower despite the firming inflation data the million dollar question everybody has is outside of the central banks, who are is that exactly purchasing treasuries here.
And you guys have a very unique vantage point into this ADR was very strong again in the quarter. So maybe could you give us some color on what types of investors you guys see and your fixed income business actively buying treasuries here and is it banks. Thanks.
Hey, Steve It's BJ, yeah, it's interesting.
What I think our fixed income.
And people would tell us is that it's it's actually predominantly the largest U S banks.
So we haven't really seen any material change and how theyre holding liquidity.
So they are the ones that are are buying up a lot of the treasuries were seeing a little bit of purchasing.
From Japan and Europe.
But predominantly it's being driven by the largest U S banks, which is which is interesting dynamic.
Okay, that's great color and congratulations P J and we'll talk to you soon.
Thank you.
The next question comes from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, good morning, guys and.
Good morning, Brian.
So the mortgage warehouse was down I think a little more than people had expected linked quarter was down about 20%.
Which is kind of a big move I know that has been very robust over the last year or so.
Covid and everything with it.
And just talk about where the warehouse from here do you expect it to recover at all is this or is this a good level or could we see maybe some additional weakness as mortgage continues to cool down.
There are a variety of this is Bryan as we sit here today, we're optimistic we will see some recovery and those balances over the next couple of quarters.
And there are a lot of things going on and the mortgage space right now some of it is just a constraint around housing supply and the inability for.
New purchase money transactions to actually occur refinance activity has leveled off it's going to ebb and flow given the 10 year that Steve just pointed out.
But given some some tweaks that we've been making which we think will allow us to pick up additional market share of our existing customer base or warehouse share of that existing customer base.
And we're expecting that balances will probably drift up over the next couple of quarters.
Okay. That's good to hear and then my second question is just on PPP fees. I think you guys had about $35 million of them this quarter, which was a high watermark, so far and just remind us what's the level of PPP fees that are left and any thoughts on the timing of that realization.
Hey, Brady it's D J at.
At the end of the second quarter, we have about $27 million.
Left and we think that that will.
Continue to come down and probably over the next 50.
10 months or so.
Okay, Great, we'll be J, great working with you and good luck and live oak.
Thanks Brady.
The next question is from Brock Vandervliet with UBS. Please go ahead.
Thanks for taking the question.
If we could just go back to the mortgage business in terms of the gain on sale and the gain on sales trajectory how should we think about debt I hear you.
Lower.
But should we look at that is lower for the duration.
Overall mortgage volume may be falling or is this.
Do you see this as more of a shorter term.
Adjustment.
Driven by competition and the market.
Hey, Brock this is Bryan I'll start and tend to think that the gain on sales spreads are probably not going to expand as much pricing was the leverage to slow down on volume.
And in periods of fee volume, where everybody was having trouble meetings, and my and and as that volume, particularly refinance activity has subsided.
Surprised that gain on sale of mortgages.
And it back out.
As is.
And our.
Our income statement, particularly and the fee income line and it's really a function of 2 things the level of secondary sales into the gain on sale percentages and.
And you made some real simplifying assumptions and said, Okay. We book, probably 3 and $5.350 million or so into our portfolio that might otherwise have been sold and the secondary markets and a zone that they were sold at the same gain on sales spreads, which I know are overly simplified.
It's probably $12 million of pre tax earnings that comes back to us through an enhanced yield over time. So we're looking at volumes and spreads and thinking about what's the right mix and balance sheet and on balance sheet and.
No.
We asked and answered earlier and recall about duration and expanding the size of our securities and using.
Excess cash, we clearly want to use our balance sheet.
To support customer activity, and where that is driven through duration and mortgage product, we'll look at it but on the whole and we think as you summarized earlier your other directionally mortgage gains will likely be down and the spreads and our view are not going to expand out significantly from here.
Okay. Thanks for that and just going back to your earlier comment on on mortgage and my understanding was that debt is still.
Primarily the Iberia part of the franchise and that once you knit together the systems and then you can introduce it on the legacy.
And <unk> side is that is that accurate or is that already happened.
I would say.
It's an accurate and the sense that we have that product available across the broader and franchise. It is accurate and the sense that that we are not practice.
Net originating the kinds of volumes, we think we can originate out of the first horizon franchise. So we believe that we have much more capacity and the legacy first horizon franchise, because we have.
Trained ourselves and not be in that business and have sort of indirect fulfillment model, Jim and the direct fulfillment model and the success, we're seeing with that we think that we will see much greater mortgage volume out of the legacy first for us and franchise over time.
Okay. Thank you and good luck.
Thanks, Brett.
The next question is from Casey Haire with Jefferies. Please go ahead.
Yeah. Thanks, good morning, everyone.
Good morning, Larry I wanted to.
I wanted to circle back on on capital.
The CET 1 ratio.
Youre, taking that up about 50 bps.
Just curious why.
And you sound like Youre going to be pretty opportunistic on the buyback just curious why you're taking up the.
And the capital floor.
And when you feel good about credit and just just some color there.
Yes, Keith and I wouldn't necessarily say, we're taking up the capital flow. We're just giving you kind of our view of where capital is likely to be as Brian alluded to we'll be opportunistic on share repurchases.
And that will use some capital wisely.
<unk>.
Growth is going to continue to be to be muted and so you know.
No.
The combination of those 2 will if we're at 10.3 today, we're giving you a range of 10% to 10 and a half if we start to see some on <unk> and loan growth coupled with some share repurchase it flows to the lower end and Conversely.
If we don't it goes towards the higher and but I think Bryan's point earlier was ultimately we're more comfortable from a balance sheet perspective, and a capital Optimate optimization perspective more on the 9.5% range, but just given kind of the.
The dynamics of the environment today will likely be more on the 10% to 10 and a half.
Okay, Okay got it.
And then.
On the M&A front, obviously, a pretty active environment still.
Can you just give us some updated thoughts on.
And on for <unk> appetite.
Good day.
Yep.
Thank very much has changed from our perspective.
Still very very focused on getting our integration completed and then really following that delivering on what we think are the huge opportunities that exist and our existing franchise with the <unk>.
Significant growth markets that we have the opportunity to serve and our 12 state footprint and our combined banking footprint.
And and what we think are the opportunities to just grow organically. So we don't we're not thinking that M&A is critical to our strategy is not built into our strategy. Our strategy is designed around let's execute and debt.
On a very seamless and adult all.
For our customers delivering the best products and technology to capitalize on the huge growth opportunities that we have on our footprint and invest organically and then if something comes up along the way we will certainly consider it but but at the end of the day, it's not something that we're taking our eye off the ball in terms of excuse.
And today, we're really focused on delivering the promise of the Iberiabank first horizon merger of equals.
Excellent P J, it's been a pleasure.
Yes.
Thanks Casey.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mr. Bryan Jordan for any closing remarks.
Thank you Betsy. Thank you all for joining us. This morning. We appreciate your time, we appreciate your interest and the company and you have any further questions. Please reach out and any of us will be more than happy to try to gather additional information.
You all of you all have a great weekend and thanks to all of our associates for the great work, you're doing a great weekend bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.