Q3 2021 First Horizon Corp Earnings Call
Good morning.
Welcome to the first Horizon Corporation third quarter 2021 earnings release conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press.
Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ellen Taylor head of Investor Relations. Please go ahead.
Great. Good morning, everyone. We really appreciate you joining us on such a busy day.
This morning, our president and CEO, Bryan Jordan, and our Chief operating officer, and interim CFO, Anthony Michelle will provide some prepared remarks, and then we'll be happy to take your question.
And we're pleased to have Susan Springfield, our Chief credit officer in the room with us today.
With that effort.
So I need to remind you that.
We will make forward looking statements today that are subject to risks and uncertainty.
Ask you to review the factors that may cause our results to differ from the expectations on page two of our presentation and in our SEC filings you can find our earnings materials.
De website IR Dot F N C dot com.
Additionally, you need to be aware that our comments will refer to adjusted results, which exclude the impact of notable items is our non-GAAP measures.
Really important for you to review the GAAP information in our earnings release and on page three of the arc.
Our presentation.
And last but not least you need to understand there are comments reflect our current views.
Good.
And that we are obligated to update them and with that I'll hand things over to Brian. Thank you Allen.
Turning to everyone and thank you for joining the call.
I'm pleased with the continued progress across our company.
So this quarter and believe that our results demonstrate the benefit of our more diversified model.
Our attractive base of specialty businesses and higher growth markets are starting to drive our performance with.
We delivered EPS of <unk> 50.
A share and our return on tangible common equity of over 18%.
Company adjusted basis, despite the near term headwinds that the industry is facing with continued pressure on short term rates and strong competition, given growing levels of excess liquidity and muted loan demand.
Given the continued improvement in the macroeconomic environment as markets reopen I'm increasingly comp.
That our client focused value proposition with a broad product positions us well to be nimble and focus on the key segments, where we can differentiate.
As a result, there were several bright spots in the quarter that I think are worthy of noting.
While net interest income was down in the quarter of <unk>.
Comp protected reductions in net merger related and Triple T.
Portfolio benefits, we generated core net interest income growth of 1% with underlying loan growth of 1%, which was driven by commercial loan growth of 2%.
We continue to see momentum in our.
Our commercial pipelines in the quarter ended with unfunded commitments of 5% to just over $19 billion.
Our team remains strongly focused on serving clients and anticipating their needs to continue to deepen relationships across our expanded footprint.
Our net.
Net interest bearing deposits declined three basis points.
Our net interest deposit costs declined three basis points in the quarter. The team is intensely focused on moving our calls towards peer median and we think we are well positioned to hit the target sometime next year.
It's also important to note that were well position.
Benefit in a rising rate environment and ended the quarter with interest rate sensitivity profile of a 16% increase in net interest income and a 100 basis points shot across the yield curve.
And while we expect the total fees to be down given relatively healthy levels of fixed income.
<unk> the mortgage banking fees last quarter. We also saw also saw a return to more normalized levels and traditional banking fees, which were up 2% in the quarter with particular strength in wealth.
Annuity sales.
Credit quality continues to be excellent with improvement.
Income in the overall quality of the loan portfolio highlighted by net charge offs of only two basis points and a 47% decrease in loan balances one deferral in the quarter.
That coupled with improving macroeconomic environment drove another robust reserve released with a provision credit of 80.
And billions of dollars.
In the quarter.
This was a 26% decrease in the provision benefit this quarter versus last quarter.
Given the impact of seasonal as we look ahead provision expense will likely be a headwind for us and the industry overall.
As our capital levels remained strong.
Pharmacy tier one ratio of around 10, 1%, we increased our capital return nearly 60% in the quarter repurchasing 9 million shares of common stock and ended the quarter with a tangible book value per share of $10 88.
And despite the difficult decision.
All in with them to delay the systems integration until February of next year, we continue to execute on the objectives of BMO.
Strong progress on integrating systems, and aligning products and capabilities, including piloting a new digital platform for Treasury services Paul.
The new relationship and banker profitability.
Susie tools and completing the first round of banking center consolidations.
Given some higher cost tied to integration of our platforms, along with higher costs due to markets reopening much of which is marketing as well as the seasonality in the idiosyncratic items in our expenses.
Billings are up 3% in the quarter.
However, as Anthony will cover later, we expect expenses to moderate in the fourth quarter.
Alongside our integration efforts, we continue to invest in technology and people to drive revenue synergies and expense efficiencies.
Thus far we've identified.
Approximately $35 million in revenue synergies tied to the merger.
We remain confident in our ability to deliver at least $200 million in net annualized savings by the fourth quarter of next year.
As we begin to look ahead in the next year.
Recently optimistic about the pace.
So the macroeconomic recovery as the world emerges from the pandemic and that's the power of our combined organization will continue to be increasingly evident.
I am very grateful for the dedication and hard work of our associates as they continue to work to deliver value for all of our constituents clients communities.
These and shareholders and help drive the momentum to achieve our long term performance objectives.
And now Anthony will run through the financial details Anthony.
Thanks, Brian Good morning to you all.
Slide six provides the highlights of the quarter most of which Brian has already covered overall.
We continue to make solid progress across the combined organization and we're pleased to see evidence of the power of the MLB starting to emerge.
I'll briefly touch on slide seven where we outline the notable items in the quarter, which reduced our results by $51 million after tax or <unk> <unk> per share. In addition to merger related and notable items of 44 million.
We recorded 23 million of noncash pretax costs tied to retiring legacy Iberia Bank Trust preferred securities in the quarter and expect to record an additional 3 million next quarter.
Ademption will reduce interest expense by about $5 million annually with an expected payback of approximately five years.
Slide.
<unk> eight provides an overview of our adjusted financials for the quarter, we generated <unk> of $284 million is underlying improvement in core net interest income and traditional banking fees.
It's masked by the impact of expected declines in net merger related and Triple T. Non net interest income along with lower fixed income.
And mortgage banking fees adjust.
Adjusted expenses of 480 million moved higher largely reflecting idiosyncratic items tied to strategic investments in additional cost we incurred tied to markets reopening.
Given continued improvement in the macro environment overall credit quality and muted loan growth, we posted a credit to provision.
Provision of $85 million, which was down from the $115 million credit last quarter. This reduction drove a <unk> decline in EPS.
But overall, we continue to post healthy returns with an adjusted return on tangible common equity of 18, 4% and 14% before the impact of the provision credit.
As Brian mentioned tangible book value per share came in at $10 88 up 1% as GAAP net income was largely offset by a 23 impact tied to the return of capital and a 7% decline tied to the mark to market on the securities portfolio and OCI moving to slide nine.
Interest income was down $5 million linked quarter, given the expected decrease tied to lower merger accretion in triple T portfolio balances.
Sure.
Net interest income was up 1% as the benefit of lower deposit costs day, count commercial loan growth and higher investment portfolio income was partially offset by continued.
Climbs in consumer loan balances and overall loan some spread compression given the continued reductions in LIBOR in the competitive landscape.
During the quarter, we ramped up our security purchases to put more excess cash to work and added around $400 million on a spot basis at a yield around of around one 5%.
As a result, our securities to interest, earning assets ended the quarter at 11% up 1%.
Our current plan is to put a total of 1 billion of excess cash to work and securities by year end, and we will continue to reevaluate opportunities to redeploy additional cash as we move forward.
Reported.
<unk> was down seven basis points linked quarter with core NIM down eight basis points, driven by a five basis point impact tied to accept higher excess cash we ended the quarter with excess cash of $14 billion up from $12 7 billion in the second quarter.
Core NIM was also lower given a two.
[noise] basis point reduction in interest recoveries on nonaccrual loans as well as overall spread tightening with new origination spreads down around 15 basis points linked quarter, which collectively translated to about three basis points of pressure on the margin. We also generated a two basis point benefit to the margin with further improvement.
Improvement in deposit mix towards a D D E and a decline in interest bearing deposits I would also note.
But this quarter, we added disclosure to the relationship of course, not net interest income to risk weighted assets to help illustrate the impact of NII, excluding the excess cash position under this view.
You can see that year over year. The metric is down about 10 basis points compared to the core margin, which is down about 40 basis points.
And on Slide 10, let's cover the puts and takes on fees headline.
Headline fees were down around 7% in the quarter. This reflected anticipated declines in other noninterest income and fixed income.
And mortgage that were partially offset by growth in brokerage trust and insurance tied to higher annuity sales as well as higher service charges and fees as an increase in transaction volume and higher leasing income tied to terminations helped to mitigate the impact of our recent change in our NSF pricing structure.
Fixed income average daily revenue came in at $1 3 million compared with $1 4 million last quarter.
Mortgage banking entitled fees were down $4 million.
Given continued spread tightening and our focus on driving more of our origination originations on balance sheet, while overall originations were.
Down 11% for the quarter portfolio originations were up 5%.
The reduction in our other noninterest income was driven by an $11 million decrease in security gains tied to a legacy I BK seed investments in the second quarter.
With regard to service charges. We recently began aligning key features across the <unk>.
Legacy institutions approach to service charges with the goal of simplifying and streamlining the experience for our clients. The New program was launched in late August at first horizon with the remainder of the change occurring following the system conversions in February for our for our Iberia Bank franchise.
Overtime.
With the changes to reduce our overall NSF overdraft fees.
In the range of nine to 10 million annually with changes going into production in August for first horizon and with the February conversion for the Iberia Bank clients.
Turning to slide 11, and review expense trends.
Adjusted.
<unk> expenses totaled $480 million up $15 million in the quarter, largely because of seasonality and some idiosyncratic cost related to strategic investments in additional costs related to markets reopening, which was slightly offset by 1 million tied to incremental merger cost saves.
Personnel expense decreased 4 million linked quarter with salaries and benefits.
<unk> stable as a $4 million FICA credit helped mitigate the impact of day count seasonally higher medical cost and labor supply constraints.
Incentives and commissions remained relatively stable as a $3 million increase from pandemic related vacation carryover, partially offset lower revenue based payouts in fixed income.
And mortgage.
I should note that as we continue to shift more of our mortgage originations on balance sheet, you will see a reduction in mortgage fee income without a corresponding reduction in incentives.
Additionally, higher contractor costs tied to investments in new systems, largely in areas like Treasury solutions and business banking.
Online as well as increased advertising spend given our reopening of markets pushed outside services up $9 million and finally other noninterest expense was 11 was up $11 million in the quarter driven by higher tax credit related contributions of $2 million increase in fraud cost and higher in travel and entertainment.
Tainment costs also for markets reopening.
We are focused on driving efficiencies and identifying opportunities to redeploy expenses toward areas, which provide higher growth for the organization, particularly post the systems conversions in February on.
On slides 12, and 13, we cover our balance sheet profile excluding.
Triple P balances, which were down $1 8 billion in the quarter average loans increased 1% in the quarter and as Brian mentioned this reflected commercial growth of 2% our pricing strategies and the mortgage warehouse business helped deliver a 7% increase in balances with purchase volume up three percentage points linked quarter.
To 56%. Additionally, we continue to see traction other specialty businesses with growth in asset based lending equipment finance and franchise finance somewhat offset by a reduction in commercial and commercial real estate given higher levels of refinancing activity from the capital markets.
This is being somewhat offset by continued.
<unk> pressure in retail real estate secured refinancings, which drove a 1% decline in consumer loans, but we are reviewing opportunities to increase our recapture of these with refi opportunities.
Overall, we are pleased to see the path of the economic recovery.
And the increased activity levels across our footprint.
Translate to this level of loan growth on the liability side. We saw a continued inflow of deposits driven by a $1 1 billion average increase in DDA or 4%.
Which helped to further improve the mix of deposits and with interest bearing deposit costs down three three basis points to 17 base.
Basis points for the quarter on total funding costs improved two basis points as Brian mentioned, we are intensely focused on driving.
Our interest bearing deposit costs down towards peer median levels on slide 14, and 15, we provide information on asset quality and reserves, where we continue to see exceptional.
Low levels of charge offs, and nonperforming loans and our allowance coverage of loans is healthy at 145% and $1 six 5% excluding loans to mortgage companies and the Triple P portfolio. Additionally, when you consider the unrecognized discount on acquired loans. Our total loss absorption is roughly 2% which is very.
Strong Tony.
Turning to capital on Slide 16, our CET one ratio of 10, 1% down from 10, 3% in the second quarter tied to the accelerated share repurchases in the quarter loan growth and higher unfunded commitments as Brian mentioned, we returned $224 million in capital to common shareholders during the.
Including $142 million or 9 million shares of common stock repurchases.
Moving on to merger integration on slide 17, while we had to delay the core systems conversions to early next year, we continue to make substantial progress across a number of fronts. During the quarter. We completed a couple of mark convert.
Quarter events and completed our wealth and trust.
And credit card conversions finalize the mortgage system conversion and launched a pilot of our new online banking platform for commercial customers.
We achieved 96 million in annualized run rate savings against our net target of 200 million. Additionally.
Inversion continued making solid traction on revenue synergies.
Have thus far identified roughly $35 million of annualized revenue synergies that are tied to commercial loans and additional synergies tied to debt capital markets mortgage and private client wealth.
We are extremely focused on.
We can and growing our client base by continuing to enhance or expand.
Or expand our set of products and services.
On slide 18, we provided.
Our fourth quarter outlook, we expect NII to be down at the high end of the low single digit range with average.
<unk>, earning assets and loans down modestly given the outlook for reduced merger accretion and triple P benefits.
And continued low rates, we'd expect to continue to see modest loan growth. Excluding P. P. P and that we will see benefits as we continue to lower deposit costs.
Yeah.
And then we had a total of 2 billion and P. P P loans, including $600 million related to round, one and total P. P. P fees of $45 million, we expect the vast majority of the round one portfolio to be forgiven by the end of the year and that the round two will largely be forgiven by the third quarter of next year.
Regarding noninterest income, we expect fee income to be down in the high in the mid to high single digit range with additional decrease is tied to our NSF pricing changes and seasonally lower mortgage and wealth fees as well as further moderation in fixed income we expect noninterest expense.
Decrease in the low to see low single digit range with higher third quarter levels, which included investments seasonality costs tied to markets reopening and some idiosyncratic items in our outlook calls for charge offs to be in the range of five to 15 basis points.
And then it's reasonable to see continue.
Reserve outflows near term.
Finally, we expect our CET one ratio to remain in the nine 5% to 10% range as Brian mentioned, we feel good about our positioning and our ability to perform well given the current economic environment. Finally, slide 19 includes our short and long term objectives. We.
Our more diversified model and highly attractive franchise will continue to deliver revenue synergies and loan growth our M. O objectives to complete the systems integration and to identify other expenses to redeploy into higher growth and higher return opportunities will allow us to continue to support the dynamic digital needs of our clients and associates.
And drive continuous improvement in productivity and efficiency beyond the integration and fine and as we continue to actively manage capital our balance sheet and credit quality performance position us well to continue to deliver attractive results near term and into the future and with that I'll give the call back to Brad I'll give the call.
Bolivar. Thank you Anthony I'm excited about the momentum and the results of the combined organization, what we've achieved this quarter.
Power of our attractive franchise with the benefit of a more diversified business model in higher growth markets as evidenced in our results.
<unk>, we have made towards our merger integration objectives continues to.
To deliver revenue synergies provide our clients with improved products and technology as.
As the macroeconomic environment continues to improve our capital structure and risk management infrastructure positions us to deliver higher growth and top quartile returns into the future.
I am grateful again to our.
<unk> for their dedication towards building and strengthening client relationships and supporting our communities and I am confident in our ability to become a top performing regional bank and to drive enhanced shareholder value.
With that Kate we'll now open it up for questions.
We will now begin the question and answer session.
So I'll ask a question you May press Star then one on your Touchtone phone.
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The withdrawal from the question queue. Please press Star then two.
The first question comes from Casey Haire with Jefferies. Please go ahead.
Yes, thanks, good morning, everyone.
Just Anthony a point of clarification on the NII guide the low the high end of the low single digits does that mean, 3% or 1%.
Alright, 30, 30% Casey.
Okay very good.
Okay.
On the expense.
The reopening costs.
Continue to tick up in our kind of chewing into the.
Into the.
The cost saves I know there wasn't a lot of progress there this quarter, but I just just curious as you look forward. You know are we are the reopening costs.
And of fully in there or is there more potential headwind there that could mute the cost saves that you have remaining.
No I think the.
Reopening costs are largely.
We're kind of in the numbers now.
Okay very good.
Okay, and then just lastly on the fee.
Syed the.
The NSF fee.
The policy change in the fixed income is.
Or are you mentioned as a potential drags where do you can you give us some color on where you expect to trend.
This quarter, and then where can the.
Side the service charges line.
Run rate in the fourth quarter.
Yeah. Casey this is Brian in the fixed income business is inherently unpredictable, we still feel good about the environment. There is still a tremendous amount of excess liquidity across the financial system and bond activity continues.
Our forecast for the year is one 5 million average average daily revenue, we expect that will fall in that range.
For the full year, so that implies a little lower level in the fourth quarter, but we still expect to be in that one and a half million dollars.
Average daily revenue.
The NSF fees.
We have done some made some changes.
One reflect.
Our desire to be more customer friendly, which has some impact on it and then the fact that the liquidity is so strong it has driven down.
U S F O D.
Service charge fees et cetera, and in this environment. The changes we made on an annual basis amount to about $8 million on an annual basis. So it's a.
On a quarterly basis, it'll be rather insignificant, but we think it'll be better for customer acquisition retention and growth over.
Down in long term.
And then Casey one just add just since I know this somewhat turns into modeling for you.
That number that Brian mentioned on the annual impact is not it is not an equivalent number every quarter right. So just recognize that typically early in the year a lot of our consumer customers benefit from tax refunds et cetera.
Which kind of keep the number of deflated in the early part of the year and then typically it accelerates through the year. So I guess just know that it's not a flat number every quarter.
Okay, Great and just one more.
The deposit growth, obviously continues to be very strong you've got the cash position increased again this quarter.
Over the.
What is the do you expect that to continue the liquidity strength and then what is a normalized cash position for you guys.
Yes, I do.
Do think the cash Unfortunately, probably continues to build just recognized as we continue through the PPP forgiveness process that we end up receiving.
<unk> cash.
From that as we kind of go through that exercise. So we do have cash will likely continue to be very strong for us.
What I will tell you is.
You know, we probably have I don't know, Brian maybe you can maybe $10 billion to $12 billion of excess cash relative to what we would typically hold in a kind of more normalize.
Order environment I'll remind you, although it's painful and we always spend a lot of time talking about what we're going to do to to use the cash or dispose of the cashless recognize that.
That cash is coming in it's something lower than slightly lower than what we earn on the cash and so although it's painful just recognize that we're in and 15 basis points and in lot of cases, it's yes. It is inflating.
<unk> tightened cheap, but when you look at the growth during the quarter were really not paying anything for that so.
Although I don't like it because it creates a lot of noise for us I don't mind, the concept of picking up a lot of nickels along the way to generate some income the other thing. It does two entities is it adds dips.
Deposit lag when the fed starts increase right.
The bound minutes amount of liquidity and I think across the board for the industry you will see more deposit lag than it's been historically model simply because of that level of liquidity.
Thanks very much.
Thanks, guys.
The next question is from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, Good morning, guys good morning Rudy.
If I look at loan growth for the quarter X P. P P and extra warehouse I think our loan growth was about 3% linked quarter annualized.
I was just wondering if you had.
You have any thoughts on on doing that.
All lines up better than that I mean, we've seen especially this quarter. We've seen some of your peers really start to inflect synovus like for example grew 10% linked quarter annualized this quarter I know pinnacle was even over that so some of your peers are putting up notably higher loan growth as we're as we're coming out.
So just wondering if you guys could comment on that.
The idea of better loan growth beyond just the 3% level you saw this quarter.
Yeah, I'll start and then I'll ask Susan to the.
Add any color she she lives.
Very close to this.
Uh huh.
This is an interesting environment and.
The demand for loan growth is not extraordinarily high even with the recovery, we see the market being very very competitive and.
If I had to characterize the markets I'd say that they are becoming very competitive.
Out of total home price structure and old term.
And we're being selective one of the things that we have emphasized and we highlighted in our comments a couple of different ways. This morning.
We want to protect the integrity of the balance sheet and one protect credit quality, so we're being very thoughtful.
About price structure in term with an eye.
Towards long term credit quality that said.
We see real opportunity in our customer base, we're seeing real strong momentum across our franchise our pipelines.
You've to strengthen.
We have.
To highlight it on this call that our commitments were up about 5% quarter over quarter, which is in my view spring loading the balance sheet for future growth.
So I'm optimistic.
Domestic about our ability to grow loans and to protect credit quality, we do.
Don't get fixated.
Setting a number that we've got to go out here, we focus on.
One acquiring good bankers, having our bankers focus on their customers and their communities and picking up.
The opportunities and being competitive.
Just in the marketplace.
I'm not close enough to others.
Results to have a sense of what drove their growth, but I'm encouraged about our ability to grow loans in a quality fashion. Susan anything you want to add to that sure. Yeah. We are we are seeing good momentum and pipeline also with.
As mentioned earlier the revenue synergies from the combined organization.
It only really starting to show up.
With referrals into asset base lending equipment finance.
And those both of those areas had good huh.
Increases quarter after quarter and if you look at pipeline, there's additional pipeline for revenue synergy in it.
Additional to those specialty businesses where scale.
We're seeing strength in our markets, which as you know are very very good strong growth markets.
Hum, Texas.
Sure Jeff.
North Carolina, Florida, Middle, Tennessee, et cetera, where in some of the best markets in the southeast and Texas.
In addition to that market is good.
Markets, we've had good success continuing to hire.
Both our relationship managers and market leaders.
Those are some of those markets that are very very important to us from the high growth perspective.
In addition to new to bank type relationships that we're getting both from existing bankers.
As well as some of the steps that we're bringing over its strong producers. We're also selectively taking higher open it with our existing clients as a result of our larger balance sheet.
So we're very optimistic about the future, but as Brian said, we will remain prudent and be selective.
Alright, and then my second question is on just.
Just deploying the cash into the bond book overtime.
So you're going to do another $1 billion by the end of the year, but as Anthony said, you have $10 billion to $12 billion of excess cash, which sounds like it's not going anywhere anytime.
You know the long into the curve is starting to rise here I mean, as we look into 2020 two.
We think about you know more cash being pushed into the bond book over time kind of similar to what you've done in the back half of this year.
Yeah Brady so just a point of clarification right, So we announced putting 1 billion.
Colors in the in the in the in the last quarter Quarterly Conference call. We've we've got about 400 or so million of that done. This in the third quarter. So we've got a little bit of $600 million I'll call. It tail piece of it we expect to get done by the end of the year. You know look the good news is rates are moving up but I'll tell you I think we're gonna kind of.
Kind of roll through the end of the year, and then reevaluate kind of where we think we are.
Relative to where the economy's, Adam what makes sense for US right. So as you know right the expectation for an increase in federal funds continues to creep forward and so I think we're gonna as supposed to tell me what we're definitely going to do now what I would tell you is we're going to evaluate.
Billion dollar native to what makes the most sense for us.
But I think it probably prudent here to wait and see what kind of evolves over the next two to three months before we make that call. So it's a good question for the for the January Conference call.
Yeah, that's fair all right. Thanks, guys.
Thanks Rudy.
The next question is from Steve.
To run the alexopoulos of Jpmorgan. Please go ahead.
Good morning, everyone.
Good morning, good morning.
I want to start so Brian on the 5% increase of commitments, you're calling out was that from existing customers or new customers and then when you say the competition is high on price structure and term is that from Pierre <unk>.
Steve banks larger banks, maybe give some color there too.
The last part is yes, it's across the board.
Competition is.
Start with smaller institutions, all the way up through some of the bigger players in it.
It's really trying to show growth in.
A period, where loan demand is not as strong as you might expect and as is reasonably intuitive I suppose given the amount of excess liquidity that sits in the system.
We talk about the excess liquidity on our balance sheet, that's customers money. So that means that they don't need to borrow as much.
The 5% commitments is a combination of things it's it's.
A lot of it is construction lending you know one of the variables that we and everybody else is dealing with I suppose as is and just the sheer amount of payoffs are commercial real estate business for example.
<unk> had very strong originations in the second into third quarter, but payoffs were actually greater there's a there's an end to that and so when we book a new loan and commercial real estate that loan will fund that flows into those numbers. So it's a mixture of existing customers. It's a mixture of new customers. We've got a.
Nice blend we are seeing good momentum across the franchise and our higher growth markets and some of our our more stable market is one of the ones that's done extremely well over the last several quarters is Alabama for example, we're seeing.
Rate growth opportunities, there and acquiring new customer relationships.
Okay.
That's actually very helpful.
I wanted to shift gears and follow up on the $8 million annual impact from the NSF pricing change, which is actually fairly minimal how much revenue would you have ultimately given up if you've just eliminated the $15 transfer fee also.
Ill tell you what let us see if we can do I don't have that right in front of US wanted to see if we can dig that up during the call. If we can get it will come back before a week before we get off yeah.
It'll be more than a.
More than that okay. It would be helpful to see that number.
I mean, Brian just final Big picture.
So looking at the list of items on slide 17.
Regarding the merger integration there is still quite a bit of wood to chop right, particularly with the system conversion being delayed a bit.
When do you see the company moving more fully back on offense right less focus on retaining staff more focus on recruiting staff is this a mid 'twenty. Two event is that the point, where we'll start to see the growth.
17 radio companies capable of delivering thanks.
So first on the on the deferral of the integration event, we pass the Columbus day weekend and the.
Like everybody else, we hope that we would have it done and then as I reflect back on the decision.
At this we were making in the midst, Nevada and being forced to drop customer notifications et cetera on the Monday following on hitting New Orleans zone on Sunday I feel good about that position that decision I think seeing the devastation there the difficulty in recovery in the market and the impact on our associates.
And that and our ability to train and deploy technology et cetera, and then the impact on our customers I think that was a good move.
We'll get that integration completed in February I have a high degree of confidence and will make good use of the time, we've talked about the impact on one times when we've talked about the impact of them delay.
And cost savings.
I would say that you will start to see the significant benefits of the integration starting in the in the last part of the first quarter and clearly picking up on the cost savings side in the second quarter of 2022 I think.
As we sort of alluded to in a number of different ways. We're starting to see the benefit of the revenue side of it today, we mentioned the $35 million in revenue and we've talked about the acquisition of customers into the franchise. So I would tell you that our markets.
Its that our bankers are very much front footed theyre looking to bring a talented bankers onto the platform Susan mentioned that we've hired.
New President for example in Dallas, it's come onto the onto our platform into the organization. We're hiring bankers. So I think we're very much front put it and I think.
See that momentum start to build over the next couple of quarters and into 'twenty two.
Yes.
Great. Thanks for taking my questions, Hey, Steve Hey, Steve One following up on your question right. If you look at kind of the kind of run rate, where we are a few weeks if you adjust for the that $8 million number.
We're around 40 $45 million.
And remaining NSF fees on an annual basis now keep in mind thats relative to transaction volumes in all today. So that can all change that would be the current kind of run rate okay.
Perfect. Thanks, a lot.
Yep.
The next question is from Jon <unk> from RBC.
Thank you was all markets. Please go ahead hey.
Thanks, Good morning.
John.
Just one clarification on the earlier expense question, Anthony I think youre, saying that <unk>.
Q4 expenses, probably dropped back down to the levels. We saw in Q1 and Q2 is that fair.
Yes.
<unk> comprehensive we'll pull back.
Okay, Okay and then.
Some of the other other items. That's what you are talking about that will come out is that right yes.
Yeah look we had some items that you know that are that don't don't don't reach the definition of kind of I'll call. It a onetime, but but but from our view that we don't expect them to repeat and so those will certainly.
You sound, a little bit and then it clearly.
As we expect to see some moderation within that fee income they are.
Several incentive structures tied to those fees and so that will also roll down.
That's what gives us confidence that we'll see the decline in the expenses in the fourth quarter John.
This is Brian.
We hadn't been spending much on marketing, we increased our marketing spend in the quarter is one of the things that we called out.
And that.
We're piloting a new Treasury services platform, we haven't taken out the old Treasury services platform on either side, but we're now depreciating the new one as well so theres a little bit of.
We rolled it see that has sort of gotten built out that's what drove a lot of the surge in the third quarter.
I would hang my head on the fact that we have demonstrated in the past that we have the ability to control and take costs out of the organization.
And that we're focused on that and I'm confident.
And I think I said in my opening comments at least $200 million in cost savings I feel good about our ability to reduce the cost of doing business and I would look at this as sort of a onetime aberrational trend and then as Anthony said, you'll start to see expenses coming down later this year.
Okay <unk> been great unexpected.
Maybe for Susan <unk>, Brian.
Thoughts on where the reserve could go longer term, it's still seems a little bit elevated relative to your credit quality and I just want to square that Brian with your some of your prepared comments, saying that provision expense is likely.
<unk> be a headwind for you and for the industry help us.
Figure out exactly what you mean on that thanks.
I'll start.
John we are.
Assuming that the economy continues to.
Emerge from Covid, which obviously doing that now.
And any other events we believe.
Likely to be.
The coverage.
Can you kind of a seasonal day, one coverage in the 115 range or so.
That's kind of what we're thinking.
Yeah My comments about the headwind that we highlighted we had a reserve release I think was $110 million in the while $85 million.
That was great. This quarter is less than it was last quarter and reserve releases will continue down inheritance. Cecil every dollar of loan growth requires that you are actually booking reserves. So to the extent we brought it down 85 million further loan growth we book.
We ended up at 165 ex PPP et cetera.
We're setting up reserve, we're just sort of acknowledging that reserve releases over time will diminish and that as we get into a point, where we get to this $1 15 pretty seasonal.
Cecil day, one area pre pandemic area that those reserves under Cecil Bill when he book alone you essentially both the LIFO.
Loan losses, So your front end and the credit cost on it and it's just going to be a headwind for us in the industry is all we're trying to highlight.
Alright, so more of a longer term comment.
What you are saying that okay. Thank you.
Thank you. Thank you.
The next question is from Michael Rose of Raymond James. Please go ahead.
Hey, good morning, and thanks for taking my questions I just wanted to go back to the fixed income business.
We get into a rising rate environment, and I think if I look back to the way the business performed last cycle. You know there was some pressure on ADR as you guys did the coastal securities during that period as well.
Which helped to soften the.
Michael decline, but can you just remind us how in a rising rate environment. The ADR is would would trend.
Assuming we get there.
Nine later next year into 2023.
Yes, I think Michael this is Brian.
Fixed income business is going to be affected by really the shape.
Save for the yield curve more in this cycle I think Ben then rising rates.
A couple of thoughts on our expectations one.
We still have a reasonably steep yield curve.
And in the longer term of the curve the longer.
End of the curve has been moving.
And with the significant liquidity that exists in the financial system and the continued level of prepayments.
Actually been good for the bond business, even in a rising rate environment. So our.
<unk> patients is that the fed will continue to.
Uh huh.
Reduced purchases or start to reduce purchases continue to sort of telegraphed that they're going to do it later this year start to reduce purchases.
The quantitative easing program that will diminish over the course of the first half of 2022 that will steepen the yield curve a bit the long term expectations, we will come out, but we think.
Moving out a tremendous amount of liquidity and that that will drive a significant fixed income revenue if you get.
Hey.
Significant move in the short portion of the curve on.
That would be less attractive for the business, but.
We've got a significant offset in the extreme interest sensitive.
Think there's nothing strange very strong interest sensitivity.
The interest rate sensitivity that we have two to rising short term rates, where the vast majority of our balance sheet is so we.
We don't expect a significant spike in short term rates we do.
<unk> the fed will start moving up a little late.
Last year early 'twenty, three but the bond business will continue to be good because you've got a relatively steep curve.
That's great color back couple of years ago during that cycle.
On the guidance for <unk> was kind of in the one to one and a half a day.
They range any reason to think that it would be.
Different this go around just just broad strokes.
Tell you what I'm not going to.
You might talk to Anthony and to put in that range out there.
P J and I missed that one for so many quarters that we had to say we were wrong and I.
I think you know as I look.
Into 'twenty, two I don't think that.
Nick that's something in that.
One job at one one to one three range is a bad range, but I don't know what I don't know about interest rates and it's it's a it's a business that we trade every single day, we deliver bonds to our customers, we buy bonds from our customers and.
And the shape of the yield curve will impact it. So while we can have an expectation today, we don't know what rates really look like we just have to position for them.
Very helpful. Thanks for taking my questions Youre welcome. Thank you.
The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.
Alright, great. Thanks.
Just in terms of the expenses and things of that $200 million.
Cost savings related to the deal.
Is there going to be a meaningful step down in expenses when the system conversion happens in February of next year.
We noticed it from our end.
Yeah, Ken It's Anthony I think youre going to see just because of the conversions kind of towards the tail end of.
February that the more likely scenarios, you'll really see the significant move in the second quarter.
Got it.
And then sorry.
Second quarter to actually be like sequentially like apps.
Loot dollars lower or just lack of growth I'm, just trying to get gauge the magnitude of that and we shouldn't tell you should we should see a significant step down as we kind of move between the second and third quarters.
Not just that we're in.
Not growing expenses should should start to decline.
I see all right perfect and then just a clarification question in the guidance Slide you mentioned that you expect modest loan growth ex PPD in fourth quarter. I know this quarter you had I think it was like up 1% ex P. P. P. On a core basis. When you say modest are you talking sort of a similar 1% or what number you're.
<unk> hung up there thanks.
Yeah. So I think we're looking at total loans X P. P.
Around that 1% ish gonna be it'll be up so that's a good range to kind of think about.
Alright, great. Thank you.
The next question is from Jennifer.
Perfect Gamba that's true with please go ahead.
No.
Thank you good morning.
Jennifer.
Brian question for you or the other day, we've seen a lot of deals.
Year, I'm wondering where you think ryzen stands after the merger integration.
Gentlemen, first year.
Hmm.
What are your thoughts on teacher every day.
Right.
Yeah.
There have been a quite.
Quite a few number of transactions.
My.
I don't I don't know, how the world changes, but as we sit here today.
And then my expectation is is that we've got so many tremendous growth opportunities in places to deploy capital across our franchise posted its integration that.
Merger and merger and acquisition is not really a priority for us.
There are a couple of.
You might have mentioned that go into that I think when we get this integration while we will have eliminated the vast majority of any technology deficits that have existed we still believe that the goalposts continue to move on technology and we have a number of things that we think will continue to invest in feature functionality.
<unk> that will be better for our customers and add to our growth rate, we feel strongly about our ability to capitalize on being in 15 of the top 20 msas in the south.
And really the opportunity to leverage the relatively small or new presence that we have in many of those markets.
Markets and finally.
The other thing Thats, a practical consideration as we're in round numbers 80 $990 billion balance sheet, you don't just sort of stumble across 100 billion dollar threshold. So you know in our view we want to do.
Our focus on organic growth growing our.
Base and taking advantage of these markets and we think that coming out of this integration will be uniquely positioned to demonstrate the power of this franchise.
That's a long way of saying M&A is not a priority in our view is not the next logical step we don't believe.
Customer win a spending game when it comes to technology scale matters, but it's not the only thing that matters and we want to execute and demonstrate the power of this footprint in this franchise.
Thank you.
Youre welcome. Thank you.
The next question is from Jared.
<unk> <unk> Wells Fargo. Please go ahead.
Hey, good morning. Thanks.
Thanks for taking the questions.
I guess a couple one follow up on.
On the ACL when you talk about the approaching that day, one level of 115 basis points is that something that you think like you know should we be thinking that by the end of 'twenty two.
Chuck do you get there or is that something that you know with the.
The improving economy, we can get there faster than that.
There are as you mentioned a number of factors.
The economy continues to improve and there is not.
Another variant or something else, they can't possibly could be.
Yeah.
We can't hear next year.
As Bryan said earlier some can't.
And how do you think that we can't predict at this point.
Okay.
And then you know usually taking that extra time for the systems conversion.
Has that allowed you to find any incremental opportunities to emphasize or expand technology and digital offerings that.
Werent initially considered.
Yeah. So we have not really significantly changed our scope of what we plan to deliver for the conversion.
We've taken the extra time really to run through additional marks and a dress rehearsal it'll be in play just to make sure that decline experiences what we want certainly around.
There's been a few I'll call a client experience opportunities, which we enhanced but for the most part we haven't really changed the scope of what we intended to do from a conversion perspective.
Coupled with with a declining delta variant of time gives us more opportunity to do training all systems and get our people better prepared than they might otherwise have been.
Okay, and just finally for me how our spreads on the new loan production this quarter and do you think that we're at a bottom yet on an incremental loan yield.
Yeah look spreads came in you know.
About 15 basis points lower quarter over quarter, I always like to say, there's a limit to how low they can go.
So I think as we think about the core the core NII right. If we see some stability within that that kind of number but you know I'll call. It a and we have modeled in terms of going forward our expectations for some continued level of spreads spread compression.
The wildcard really is a competitive environment where that might.
So I think I think the guidance, we've given is pretty clear in terms of we feel good that we kind of reaching a trough at least in our view on that core non core number but you know like like Brian said, the competitive environment continues to evolve and so just recognize that that that that is out there as well.
Great. Thank you.
Our next question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
Good morning.
I guess just first quick question is a follow up on Brian.
Hum.
Some of the responses, but I think when you talk to longer term hold.
I think there is some frustration around just when do we see the father of defend changed.
And is it stands from the outside.
Anthony you talked about they want by the end of <unk> 'twenty, two and we think that's coming together should we look at 2022 in terms of our OTC loan George do you have any growth.
You.
Who does any outperforming your peers in kind of delivering on all.
All the good things even expected post the deal.
Yeah, sorry, Ebrahim. This is Bryan I think I think 2022, you will start to see the power of the franchise I think you're actually seeing it it's masked a little bit.
Should the transition and some of the fee oriented businesses, but but the loan growth pipelines and what we're seeing across the franchise, we're starting to see emerging signs of it and we feel very strongly that.
By this time next year, you will see the strength of our ability.
Some are grow this franchise given our expectations for the macroeconomic environment the interest rate environment for 2022.
Yeah, and then one other thing Hubert just to point out I mean, I realize everybody probably knows this but as we head into all the various conversions that we're doing whether it's card conversion.
Yeah, whether we're putting people on tea.
M products right, we do go into some I'll call. It some closeout periods, where we're not selling legacy iberiabank clients into a new product to then have them onboard them and then have to convert them right. So just recognize that there are some natural things that limit our ability to do some sales as we kind of move up to the conversion point.
And so all of those I'll call it a safety.
Theater kind of come off.
Relative to the client experience in terms of making sure. We don't have to move them twice and so I think you'll you'll all with all of that stuff kind of out of the way I think you'll start to see some of the incremental kind of push not only on the loan sales, but really across the other fee categories in the cross selling efforts that we know we're going to be pretty strong.
That's helpful and just a separate question and apologize if you go against this September.
September you announced a partnership with.
The Pearl in the virtual bank cloud infrastructure.
Yeah.
I don't think Thats. The same provided for the bank just give us a sense of what's the play with virtual Bank gives did a big deal.
Strategic.
Isn't that big sort of plan in terms of breaking it out at some point and what what she does on both lending and deposits right.
Yeah. So look we're so you kind of hit Abraham our call a couple of different things that I'll tell you. We're very we're very excited about the the FERC the virtual bank.
Well, we were the first bank actually to convert off of a legacy.
Legacy system onto that kind of new Fintech core in a cloud environment and we continue to build out that you know the reception to the kind of the product and the offering has been really good we haven't quite unveiled two to the masses, yet or I'll call. It the strategy that we're really going to employ you should expect that we will continue to build out product functionality.
Capabilities within the virtual bank and.
And that will have a distinct marketing effort and kind of how we're gonna branded and drive it going forward, you'll see that in the next call. It three to six months, although that'll become more apparent to you but for the meantime for the near term right. Our intent is to grow it to where it can support itself and kind of really help us.
Strive not only revenue, but learning and experiences in terms of the same what takeaways, we can bring back to the bigger larger bank.
It'll be part of.
It'll be part of first horizon for the foreseeable future. So there's no intent right now to do something different other than grow it learn from it make profit from it and then longer terminals, we will see.
Yes.
Got it and just Anthony you spent a lot of time during the last year around the integration looking at Fintech or windows as you come out of the conversion talk to us about the top want to see things that the bank needs to do from a system.
And technology upgrade perspective that.
What happened when there will be a multiyear process.
If you want to jump in here.
Yeah look I'll tell you that I think the biggest thing.
As we kind of move so so Brian talked about really that we'd really close most of the technology deficits and gaps that we wanted to get close as we were kind of leading up to it so I would say as a starting.
I must I think that we're in a pretty good position technology wise related too.
You know call it peers still have some work to do around the edges on a few things that we need to do some upgrades on but I think what really matters to us as we move forward is really about leaning in on those things that can drive significant improvement in either our efficiencies or our delivery. So.
Credit process is one that really kind of stands out and so obviously, we've installed encino and then with that you know whether it's front end side of that or backend side of what we're gonna do there I think is it can be pretty powerful so.
Well hear more about how were kind of taken and going further with the whole once you know upgrade to really drive a complete improvement.
The second thing is the Treasury management platform. We've had both companies have made a strategic priority to invest and recognize.
Growth in the and the TM space.
That should continue we've started on that journey, we've made significant investment I will tell you that I'm very proud.
And I think the T M system that will have.
But I was in a kind of a top echelon of available a.
T M systems once we're kind of through all of our pilots and all and so you should expect to hear us to continue to really lean into that with more investment and more development and then of course with that you should expect to get some nice growth out of that so those are probably the two big that kind of land relative to.
We'll put I'll call it driving revenue and that you would see on the back side, we put in some new performance management type tools to help our.
Our regional presidents and bankers fully understand the profitability and depth of their books, which should help us not only improve overall profitability just from clarity, but I really point out cross sell opportunities et cetera.
To those if I had to put three kind of items on that table I'll tell you those are probably the big three that are going to have the most impact for next year.
Ebrahim.
I think Anthony and Randy Brian has done a fantastic job building the core for us to focus on driving our technology and improving technology.
Over the long term one of the things I'm really excited about with Anthony put it on and you have later this year to run our regional banking franchise.
As him and his process technology orientation being much closer to that.
The customer and understanding customer needs.
Yogurt landscape, we've got a great push capability I think Anthony leading our regional banking work working with our bankers will create more pull for technology. So I think we will be better in the end as a result of the infrastructure, that's been built and having somebody with with Anthony.
<unk>.
Competitive to help us get better with that and in customer facing set all the time.
And then Abraham I apologize you asked me about Wipro.
Just want to tell you that we use wipro for a number of things integration of systems, but but a big healthy dose of helping us test testing of what we're doing to make sure we're getting it right before we deploy stuff.
They've been a fabulous partner for us and so I just wanted to give you some context, so there'll be around helping us on a lot of different things through the upcoming years, but they've been a fabulous partner for us.
Thanks for taking my questions.
The next question is from Christopher Merrimack of Janney Montgomery Scott. Please go ahead.
Thanks, Susan wanted to ask about the modestly lower unfunded commitment reserves when there's C&I commitments went up is that purely related to credit.
So that you outlined earlier and would we see that reserve slip further.
Yes, I mean, we just.
Look at.
Economic environment as well as our own.
Quality.
For the main drivers of friend funding commitment.
You can find it.
Okay. So it's a southern China, even though the taxes have gone up.
Yeah.
Okay, and then Anthony I'm back to the service charge commentary.
Are you seeing visibility on behavior changes that lead to a transaction.
Those volumes or is it more just seasonal activity that you were citing earlier.
What I will tell you, Chris and I'm sure you can appreciate this right customer behavior dynamics have shifted post COVID-19 and so there's certainly that has an impact to us and then there's just a tremendous amount of liquidity right. If you think about our excess cash it all sits in not only our commercial.
<unk> customers, but a lot of our consumers have more so overall NSF fees right in terms of the historical pattern. It probably break from any historical precedent and so it's too probably too early for me to tell you exactly where things are going to go. The number I gave you was kind of the current run rate adjusted for that so I'm trying to give you the best info I got but.
But first to tell you that we transaction volumes are starting to reemerge I think we said transaction volumes were up about 10% and so what kind of have to see where things go just it's a different world and so it's a little bit hard to look at historical numbers to give you a real sense that that's going to be the trend going forward.
No I.
But it will be then I appreciate the background thanks very much.
Thanks, Chris.
The next question is from Brett Robinson Humphrey Group. Please go ahead.
Hey, good morning.
I wanted to.
Good morning, I wanted to make sure I understood the guidance around NII in the fourth quarter.
Understand the high single digit or high end of the low single digit decrease which assumes lower accretion on PPP.
Totally sustainable core NII can you maybe break that apart a little bit in terms of the core NII versus the linked quarter change in accretion in PPP.
<unk>.
Hum.
At our core.
That's about 4 million linked quarter.
When you say break it.
Warner well for them.
For the fourth quarter.
Right.
So I'd say, we I think.
Leave that yeah.
Core NII and margin relatively bottomed this quarter and that we're going to continue to see some headwind.
Merger integration.
And lower.
Okay.
Overall.
Uh huh.
We think we think of low single digits in San Juan.
And we're saying can be down that level.
We.
Continued probably model performance.
Okay.
And then you were.
We're talking earlier I am curious about the CFO position on if you think he might make some announcements this year or if it might drag out into 'twenty two.
Yeah.
So.
First Oh.
I'd say I really appreciate what Anthony is doing he's wearing a number of heads and doing a fantastic job.
Yeah, So I'm grateful.
For what he's doing I think we're making good progress Anthony and really our entire leadership team has been engaged we've seen a number of good internal and external candidates and we think that we are making very good progress and if I had to guess this year.
Year or next I think we will get to a conclusion this year.
Okay, and then maybe one last one in your prepared comments you were talking about the revenue synergies.
$35 million wanted to make sure I was clear.
B.
Fee income.
Or would that be more product sets on the lending side for the <unk> franchise.
Little bit of it's a little bit of both right. So.
So we've got you know we've had some expansion of I'll call. It.
Credit to put to use in the larger balance sheet to kind of provide larger credit to some of our existing clients also our leasing products effectively show up.
It's kind of loan balances as well.
At the same time right, we've been able to cross sell some wealth and we've captured some international fees as well as some debt capital market fees. So it's really a combination. If you asked me to kind of waited my head I'd tell you the predominance, which show up as loan balances.
And that number that I gave.
It's pretty impressive.
To me when I look at you know, where the where the synergies are coming from we've got something like $10 million to $15 million of the incremental synergy revenue is coming just from referrals between our equipment finance equipment leasing business and the old <unk>.
Franchise, and then referrals in the ABL business from the OTA Iberiabank franchise and those are opportunities that we wouldn't otherwise have gotten we've got the other benefits of larger balance sheet, but just the product synergies the mortgage product I think will be a huge one as we go forward a private client wealth management is starting.
First rolled in a significant way.
I'm very optimistic about our ability and we talk a lot about the products, yet, but I think the bigger.
The bigger franchise and footprint that we can sort of spread this combined product set around will drive I think a lot of revenue as we go forward.
The only thing I would add too is just theres.
The excitement about our relationship managers at both legacy banks because of the expanded products that being able to now offer as an example, the equipment leasing equipment finance when we might've had to refer that outside the company.
So it's there's a lot of excitement around that and we are seeing a pipe.
Pipeline growth as a result.
A lot of that expanded offering.
Both companies coming together.
Okay, that's great color I appreciate that.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bryan Jordan for closing remarks.
Thank you Kate Thank you all for joining US. This morning, we appreciate your time and your interest please feel free to reach out to any of US. If you have any further questions or need additional color or information.
You again and I hope you have a great after a great day and great afternoon as well thanks.
The conference has now concluded.
You for attending today's presentation you may now disconnect.