First Horizon Corp (FHN) 2021 Q1 法說會逐字稿

Good morning, and welcome to the First Horizon Corporation First Quarter 2021 Earnings Call.

(Operator Instructions) Please note, this event is being recorded.

I'd now like to turn the conference over to Ellen Taylor, Head of Investor Relations.

Please go ahead.

Thanks, Jason, and good morning, everybody.

We really appreciate you joining us.

We know this quarter has been quite a whirlwind.

To start things off, our CEO, Bryan Jordan; and CFO, BJ Losch, will provide some opening comments and overview of our results.

And then, of course, we'll be happy to take your questions.

Our Chief Credit Officer, Susan Springfield, is also with us today.

Our remarks will reference the earnings presentation, which is available at ir.fhnc.com.

I also need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and we ask you to review the factors that may cause our results to differ from our expectations, which you can find on Page 2 of our presentation and in our SEC filings.

We also will address adjusted results, which exclude the impact of notable items, and these are non-GAAP measures.

So it's important for you to review the GAAP information in our release and on Page 3 of our presentation.

And last but not least, our comments reflect our current views, and you should understand that we aren't obligated to update them.

With that, I'm going to turn things over to Bryan.

Thank you, Ellen.

Good morning, everyone.

Thank you for joining our call.

I'm really proud of the great progress we've made over the last 9 months in integrating our merger of equals a great momentum I see building in the business.

We're off to a strong start in the first quarter of 2021.

We demonstrated solid performance in the quarter with good PPNR results reflecting the resiliency of our more diversified business model.

While loan demand continued to be muted as clients are still cautious, we're starting to see growth in the loan pipelines and expect demand to pick up some in the back half of the year.

Our deposit growth remained strong with inflows from government stimulus and clients continuing to preserve cash.

During the quarter, we generated impressive results in our fee income businesses and are gaining traction by capitalizing on additional revenue synergies tied to our merger of equals.

I'm also proud of the work we're doing to control the things that we can control, particularly around expenses and deposit pricing.

Despite the seasonal headwinds, we reduced our linked quarter adjusted expenses driven by our ongoing cost discipline.

We achieved annualized merger-related cost saves of $76 million in the quarter.

The improving economic backdrop from January to March and our continued prudent risk management largely helped drive a $53 million reserve release.

The power of our diversified and countercyclical model, our strong risk profile alone -- strong risk profile along and the benefits from our MOE helped us deliver a return on tangible common equity of 20%.

Excluding the impact of a $53 million reserve release, we generated a return on tangible common equity of over 17.5%.

We're making great progress for our key merger milestones.

We have completed early systems conversions, including our mortgage and retail brokerage conversions with wealth of trust schedule for the summer.

Our core deposit systems conversion is still on track for the early fall of this year.

We have and will continue to make strategic investments in new technology that optimizes the client experience and improved productivity.

We continue to leverage FinTech capabilities to enhance our product offerings, drive efficiency and improve the customer experience.

Our capital levels remain healthy with a common equity Tier 1 ratio of 9.96%, and we grew our tangible book value per share to $10.30 at quarter end.

Given the relatively limited loan demand, we chose to opportunistically deploy capital through share repurchases and fall back about 4 million shares in the first quarter.

So including dividends, we returned a total of $143 million of capital to our common shareholders.

I'm incredibly proud of our efforts to serve our clients, communities and associates throughout the pandemic with PPP loans, charitable contributions and by offering our associates to increase flexibility and benefits.

Our team is also intensely focused on capturing revenue synergies across markets and product lines leveraging our expanded suite of products, services and expertise.

All instrumental in retaining and growing our client relationships.

We are increasingly optimistic about the economic recovery as we've seen improved rollout of the vaccine in our markets, which is helping accelerate reopening.

We are also mindful of the fact that the past year had a number of unexpected turns and that the path forward is unlikely to be a straight line with no surprises.

So while we're prepared for a recovery in this year, we also are prepared for the unexpected.

We remain confident that the strength of our highly attractive franchise, more diversified business model and benefits of the merger of equal position us well to deliver top quartile returns over the medium term.

With that, I'll hand over to BJ for some comments.

Great.

Thanks, Bryan.

Good morning, everybody.

Let's start off on Slide 6 and just do a flyby on some of the key highlights in the quarter.

As Brian mentioned, we're really pleased with the profitability and the returns that we're generating for shareholders.

We delivered GAAP EPS of $0.40 or $0.51 on an adjusted basis, highlighted by strong fee income, expense discipline and even further improvement in our credit quality.

And as we've said, we positioned the company to succeed through various cycles, and our diversified business model is working as we expected.

The fee businesses are performing very well to counter rate pressure.

We're controlling what we can control with expense and deposit pricing.

Merger integration is on track.

Credit trends are excellent.

And our capital flexibility has allowed us to return capital to shareholders in a meaningful way.

Given the overall muted landscape for loan growth, we opportunistically repurchased 3.6 million shares in the quarter at an average price of $16.12 and including dividends, as Brian talked about, returned a total of $143 million in capital to common shareholders.

Looking at Slide 8, on adjusted financials.

We give you an overview for the quarter.

We generated PPNR of $343 million, up 1% from 4Q '20.

Revenues were down just slightly as impressive.

Results from fixed income largely offset an expected reduction in NII.

While we saw a 2% linked quarter decline in expenses, which reflects ongoing cost discipline, the benefit of merger saves despite higher revenue-based incentives and seasonal headwinds for the personnel.

Given the very low net charge-offs of only $8 million or 6 basis points on a $58 billion loan portfolio combined with overall improvement in the macroeconomic outlook and a reduction in our loan balances, we released $53 million in reserves this quarter resulting in a provision credit of $45 million.

And as Bryan mentioned, these strong results helped drive our return on tangible common equity above 20%.

And even if you adjust for the reserve release, our return on tangible common equity was over 17.5%.

Moving on to Slide 9, talk a little bit about net interest income.

We generated reported NII of $511 million, down $14 million linked quarter, driven largely by a reduction in loan balances, fewer days in the quarter and a further decline in the average LIBOR basis.

As mentioned, we are focused on controlling what we need to control in this environment, and we continue to drive down our funding costs with somewhat mitigated the headwinds.

We lowered our interest-bearing deposit rate taken [another] 6 basis points this quarter to 20 basis points overall.

And we'll continue to look for opportunities to lower our overall funding costs further while we remain in this low rate environment.

The reported first quarter NIM was $2.63, which decreased 8 basis points linked quarter, driven by a 10 basis point impact of continued increasing levels of excess cash, which ended the quarter at $10.8 billion.

Moving on to Slide 10 and fee income.

The benefit of our more diversified platform was clearly on display again this quarter with a $10 million linked quarter increase driven by the great results in fixed income along with nice momentum in brokerage and wealth as well.

Linked quarter fixed income average daily revenue was up 25% to $1.9 million a day driven by favorable conditions as banks put increasing levels of excess cash to work in bonds, along with the path and continued volatility in rates.

In particular, our mortgage and our government guarantee debts were particularly active.

While mortgage banking and title decreased $4 million linked quarter, our results remained relatively strong compared to historical levels despite the impact of seasonality, higher interest rates and limited healthy inventory.

Moving on to expenses on Slide 11.

You'll see that adjusted expenses in the quarter were $464 million, down $10 million linked quarter, highlighting our commitment to continued expense discipline along with the benefit of an incremental $5 million reduction tied to merger cost base.

We held personnel costs overall relatively stable with 4Q '20 levels with additional benefits from merger cost saves and ongoing tight expense control, offsetting seasonal headwinds from FICA tax resets and a $10 million increase in revenue-based incentives and commissions.

In our ongoing efforts to control what we can control, we are intensely focused on not only capturing merger efficiencies but continuing to streamline processes across the platform to position us well to continue to drive investments in the future.

Turning to Slides 12 and 13.

We give you a look at our loan growth and our funding profile.

And as expected, we continue to see pressure on loan balances, which were down $1.6 billion in the quarter driven by decreases in mortgage-related loans, both in the consumer portfolio and in our loans to mortgage companies business.

Period-end loans were up slightly at 1%, largely due to a net $1 billion increase in PPP loans.

As we look forward, our lending pipelines are showing really nice momentum.

So we are optimistic that as the economy continues to improve, we will see increased levels of customer activity in the back half of the year.

At period end, we saw a modest uptick in commercial utilization rates as well.

And we're seeing nice early signs of revenue synergies across our platform, particularly in the areas of the asset-based lending and equipment finance.

On the liability side, we saw continued inflow of deposits.

Commercial deposit balance growth was driven by PPP and consumer deposit increases reflected the new stimulus checks.

As I mentioned earlier, we leveraged our excess liquidity position and decreased our interest-bearing deposit costs by another 6 basis points and 20 basis points overall, which helped drive a 4 basis point decrease in our overall funding costs.

Turning to asset quality, starting on Slide 14.

It's really hard to believe how dramatically the landscape has changed in a year, and we are incredibly pleased that the steps to [reach] us to reposition our overall risk profile coming out of the great recession over a decade ago are now clearly being illustrated.

Net charge-offs to average loans improved 6 basis points, down 14 basis points from last quarter while nonperforming loans remained relatively stable.

As I previously mentioned, the combination of a significant improvement in the overall macroeconomic outlook and a reduction in loan balances drove a provision benefit of $45 million and a reserve release at $53 million.

And as you can see on Slide 15, the allowance to credit losses coverage ratio declined only modestly from 4Q '20 to 170 basis points in 1Q '21.

And as a reminder, we used the Moody's February scenario and then incorporated other economics and portfolio factors to evaluate our overall reserve coverage.

We continue to feel very comfortable with our risk profile and our reserve levels.

Briefly capital on Slide 16.

As Bryan mentioned, tangible book value per share was $10.30, up 1%.

reflecting strong earnings.

And in addition to a reduction in RWA helped drive a 28 basis point improvement in our CET1 ratio to 9.96%.

Moving on to Slide 17 and our merger integration update.

We continue to drive strong progress on the integration front as we convert platforms and upgrade turn systems.

And we remain on track for the full systems conversion in early fall of 2021.

We have achieved $76 million in annualized run rate savings against our debt target of $200 million.

We're still on track for an annualized $115 million by the end of the year.

As a reminder, our gross savings are higher and is providing the flexibility to continue to make technology and other investments to drive continued improvement in processes and the overall customer experience.

Additionally, we're making solid traction on revenue synergies and thus far experienced roughly $10 million of annualized revenue synergies that are tied to about $400 million of commercial loan commitments.

We see significant additional opportunities with revenue synergies across markets and product lines as economic activity continues to pick up.

On Slide 18, we're really pleased with our performance just far through the first quarter of the year with all line items in line or better than the outlook we provided on our first quarter earnings call in January.

We have therefore updated our expectations for both the second quarter and our full year outlook based on the strength we are seeing in our business and the economy.

For the second quarter, in particular, for NII, we expect our low single-digit decrease with average loans down modestly given the outlook.

And while we anticipate a continued relatively strong environment near term for our mortgage and fixed income business our output reflects a high single-digit to low double-digit decrease on the first quarter.

On the expense front, we expect noninterest expense to be relatively stable as we continue to focus on overall expense discipline and capture our merger efficiencies.

We expect charge-offs to continue to be very low in the range of 5 to 15 basis points, and that we're likely to see continued reserve releases.

We expect to see our CET1 ratio to remain in the 10% range for the second quarter.

And in terms of full year, given our strong fee income performance in the first quarter and continued improvement in credit quality, we've provided an update for the full year where we now expect only a mid- to high single-digit increase in noninterest income, lower net charge-offs in the 10 to 20 basis points range for the year at a CET target in the 9.5% to 10% range.

Our business model is working.

Wrapping up on Slide 19.

We're capitalizing on the opportunities of our more diversified business model and our highly attractive franchise.

We've demonstrated solid revenue trends through strength in our fee businesses despite interest rate headwinds.

We're controlling what we can control as evidenced by deposit cost and expense reductions.

We're benefiting from merger cost saves and revenue synergies.

Our credit quality is excellent.

And we're delivering enhanced returns for shareholders.

Before I hand it back over to Bryan, I just wanted to acknowledge Aarti Bowman who all of you certainly know.

This happens to be my 50th earnings call with First Horizon.

And she has been there every step of the way with all of us.

And she will be moving on to pursue a passion of being Head of Development for an excellent nonprofit here in town.

And she's very excited about that.

We're very excited for her about that.

And I'm deeply thankful for everything that she's done for us.

She has made us a better place and better Investor Relations group, and we will miss her.

So with that, I hand it back over to Bryan.

Thank you, BJ.

I will add my thanks and appreciation for the great efforts of Aarti over the last 10 or 12 years, and she certainly will be missed.

I am exceptionally proud of our continued execution and the results that we're delivering.

We feel good about the strength of our balance sheet, capital and liquidity positions as the economy starts to improve.

We've maintained underwriting standards and built a diversified portfolio focused on profitability and stability.

We are positioned to capture merger opportunities with enhanced scale, better efficiency and improved earnings power and we will create significant shareholder value through it.

Thank you to all of our associates for their hard work serving our customers, communities and helping deliver for our shareholders.

With that, Jason, we'll now take questions.

(Operator Instructions) Our first question is from Brady Gailey from KBW.

I wanted to first ask about loan growth.

I think if you look at period-end loans, ex-PPP and warehouse, they were down about 10% annualized, which is not really a big surprise.

I think the industry is seeing that as a whole this quarter.

But how do you think about what gets loan growth headed in the right direction?

It seems like both of your clients are flushed with cash.

When do you think you really start to see some decent loan growth?

Is it this year?

Do we have to wait for next year?

What are your thoughts on the timing there?

Brady, it's BJ.

I'll start.

We talked in our opening comments about significantly increased activity.

And just to give you a little bit more color on that.

On the commercial side, our pipelines, which we have a high confidence in closing are up 60% to 70% from the beginning of the year.

So we are starting to see really, really nice trends there.

Utilization rates picked up slightly.

So that is -- we're [planning] a little bit more activity as well.

And we started to see a little bit of turn in some of our markets, particularly in places like North Carolina or Middle Tennessee, Alabama on the specialty side, asset-based lending, equipment demands are starting to see pretty good upticks.

We expect loans to mortgage companies to strengthen in the spring and summer buying seasons.

So on the commercial side, we are certainly seeing a lot more activity and are optimistic about what that means to our balance sheet in the back half of the year.

I would also say on the consumer side, If you look at our consumer portfolios, we have seen a fairly meaningful decline on those portfolios as people have refi.

And a lot of that has gone to secondary production.

We did make some changes in our product set on the affluent side and then in certain areas around 7, 10-year arms, 15-year fixed, where we believe that that's going to change the trajectory of our portfolio growth on the consumer side.

And as a matter of fact, we have seen blocked pipelines increase significantly in the last 45 days as we made those changes.

So all of that to say is we see a lot of activity starting to come on, and we're optimistic about the back half of the year.

Great.

That's good to hear.

And then my follow-up is just on the buyback.

I mean if you look at your common equity Tier 1, it's now 10%.

You were active in the buyback and then you have a $500 million buyback out there.

That's a big number.

I think you can repurchase about 5% of the company over the next couple of years.

Is the right way to think about it that you guys will utilize the full $500 million over the next couple of years?

Or do you think that's too big of an assumption.

Yes.

I think as we talked about before, Brady, it's always going to be opportunistic repurchases.

We did $56 million this quarter at an average price of [6 12] . So we felt pretty good about that.

We want to put our capital into loan growth.

We would have thought that CET1 would have been more towards the 9.5% range, obviously floated up on lower RWA.

We just talked about the fact that we think organic loan growth coming back.

All of that to say is we are bullish on ourselves.

And so we do expect to continue to opportunistically repurchase shares.

And whether it's over the next couple of quarters or the next 1.5 years, using most or all of that authorization is our expectation.

Great.

And I didn't know about Aarti.

So Aarti, you'll be missed and congrats on the new spot.

It was great working with you over the years.

Good luck.

Next question is from Michael Rose from Raymond James.

Just trying to get a sense for the margin trajectory here.

I appreciate the disclosure on the purchase accounting accretion, things like that.

How does the PPP fees kind of look like?

And then on a core basis, if you strip out PPP and PAA, what would be the kind of the nearer-term expectation?

Michael, it's BJ.

So I'll start.

I'll give you kind of an overall view of our PPP trajectory that may help.

So in terms of Round 1, we expect that 90% of those will be forgiven by sometime in the third quarter of this year.

So I think we originated something along the lines of $4 million to 90% of that gone by the third quarter.

And therefore, all the fees associated with that accelerated and collected by that.

On Round 2, we're at about $1.3 billion or so, and we'll probably climb a little bit more of that.

We assume that those fees will be accretive over the next 1.5 years or so.

So hopefully, that gives you a little bit of color on PPP.

In terms of net interest income and the trajectory there, based on my commentary earlier around a little bit more optimism on loan growth in the back half of the year, our continued focus on driving down deposit costs where we can, where we have a little bit more opportunity, and the LIBOR base is hopefully flattening out here.

Ellen is knocking on wood.

We expect that our NII, as we said on Slide 18, might be down modestly, but generally, around this area and hopefully can see a little bit of uptick towards the back half of the year.

In terms of margin, we estimate that anywhere between 30 and 40 basis points of drag on the margin today is coming from the excess cash.

We certainly want to put that to work in loan growth.

We do expect that deposit growth will continue to remain elevated, but over time, start to come back out.

But it's going to be here for a while.

So we're focused less on the margin and more on stabilizing and starting to improve the NII trajectory.

That's great color.

Very helpful.

And maybe just as my follow-up, we've seen a bunch of deals announced here lately in the industry.

You guys are well on your way with IBERIA.

What's the appetite as we move forward for additional deals, if you can update us?

And have those priorities maybe changed just given the recent activity.

Michael, this is Bryan.

Our focus really hasn't changed.

As you point out, we're making good progress on the integration of our merger of equals, IBERIABANK and First Horizon.

We feel outstanding opportunity exists in our existing franchise.

We see great demographics in our Southern footprint, great growth opportunities.

And so our focus is clearly on getting the merger integrated.

And then as we come out of the integration in the fall, really start to build momentum and capitalize in these growth markets that we see out there.

So our priorities haven't changed.

It really is trying to capitalize and deliver the benefits we believe that exist in the work that we're doing today with our merger vehicles.

The next question is from Steven Alexopoulos from JPMorgan.

I wanted to start, so a nice start out of the gate on revenue synergies.

Could you give more color on the $400 million of commercial loans you're calling out from the synergies?

And how are you seeing the bigger picture now for revenue synergies?

So Steven, it's Susan.

As it relates to revenue synergies, and BJ alluded to, we're seeing 2 areas specifically early on, really benefiting from the merger of equals.

One is the legacy IBERIA specialty business, which is equipment finance.

We're seeing great opportunities across all of our markets and even within some of our other specialty lines to have equipment needs.

So that's going to continue to build.

Just as a side note to think during a COVID environment, and we've already seen $400 million in commitments related to revenue synergies, I think it's great.

And then also asset-based lending, which, as you know, First Horizon has been in that business for many, many years, and we're seeing great referrals from our legacy IBERIA market and relationship managers.

We also believe there's an opportunity to continue to expand specific [bankers] within those 2.

Also would be remiss if I didn't mention mortgage, the opportunity that we now have with the legacy IBERIA mortgage business, we're seeing mortgage activity, both secondary and portfolio mortgage synergies as it relates to bringing that together.

So we're very, very pleased with bankers, even a great thing, and our bankers are so excited to have additional things that they can talk to clients about and not have those go to another institution.

So I feel very, very confident that we'll continue to see that build as the economy continues to open.

Steve, this is Bryan.

I'll add to that.

I think this is one of the more underappreciated opportunities in our merger.

I think there's a lot of revenue synergies that we would generate.

Some of it is the obvious stuff, a bigger balance sheet.

Some of it is the product set that Susan just described.

And take, for example, the private client and wealth business.

That's an area that IBERIABANK is not focused on as much.

We're having really good success hiring private bankers and wealth managers in our Florida footprint, for example.

So we look at this area from a big picture perspective.

We captured or tracked $30 million and then sort of stop on the Capital Bank merger several years ago.

We think this opportunity of combining these 2 organizations and bringing this combined product set, bigger balance sheet, the opportunity to do more for our customers, we think we're going to well exceed the $30 million of revenue synergies over the next couple of years we've (inaudible) in our capital bank margin.

Okay.

That's helpful.

Bryan, a big picture question for you.

So you guys are delivering on the cost saves from IBERIA.

The revenue synergies are starting to come through.

Countercyclical businesses are doing their job.

I know 2021 is a bit of an odd year given the pandemic and you have PPP program, stimulus, et cetera, all impacting loan demand.

But from a big picture view, can you talk about how do you see growth potential of this new company over the longer term?

Is this a mid-single-digit grower?

Or is this a high single-digit grower?

What do you see for us?

Yes.

It's a good question.

You didn't stipulate what you think the economy is going to do when we come out of all the stimulus.

I think we are going to have a footprint and a demographic that is going to grow at or above what you'd see in peers and others.

As I look at our footprint, you think about the markets we're in.

We're in Atlanta, Houston, Dallas, Miami.

We're in 15 of the top 20 MSAs in the south.

Prepandemic, the south was growing faster than the U.S. as a whole.

Post pandemic, I think that has probably accelerated.

And if you look at those markets in many cases, we have a very focused and in some ways, smaller presence, but we see a tremendous opportunity to take that focus and expand that presence.

So the work that Michael Brown and our bankers are doing today to position us through hiring, et cetera, I think we're going to be in a position that we will clearly grow better than average.

I've been in the camp and I think over time that the growth in the U.S. economy is going to return back to that 2% to 2.5% area.

So I think that would dictate that we'd probably be in more in the mid-single digits.

But I think the easier way to describe it is I think we will do better than most in terms of being able to deliver growth, given where we're positioned the focus of our bankers and the product set that we offer.

The next question is from John Pancari from Evercore ISI.

And first off, best of luck to Aarti as well in your new gate.

On the excess cash side, I believe you're sitting on about $10.8 billion in excess.

And just wondering see if you can give us a little bit more color on how you're thinking about the deployment there.

I know you indicated into loan growth opportunities.

But outside of that, where do you see opportunities?

Are you looking at the bond portfolio any differently these days?

Or do you see any loan portfolio purchases or areas like that?

John, so I see in a couple of different ways.

One is we do -- we are optimistic that loan growth is going to come back.

And so some of the excess cash.

So that's priority number one.

Number two, I think over time, there's going to be a reduction in deposits balances as the stimulus rolls off, as economic activity picks up, commercial clients will go to cash holdings first, then lending second, right?

So I think there's enough activity to see a little bit of both of that.

But I think deposit levels will come down because of that as well.

On the securities portfolio, we did modestly decrease it this quarter.

And we'll look for opportunities to deploy that.

But I wouldn't expect that we're going to significantly increase the securities portfolio.

We're really looking more at deploying it on the loan growth side.

So as I said before, yes, of course, we'd like to put excess cash to work, but this is a high-class problem to have.

It's really just dampening the NIM not really hurting our NII.

So to me deploying it is all upside.

Great.

BJ, that's helpful.

And then separately, on the -- a lot of focus around the countercyclical businesses here certainly doing their job, I agree.

The -- and I guess if you could just talk about the outlook for each.

In terms of the capital markets business, you saw a $1.9 million ADR this quarter.

Certainly, a high level.

Where do you see that going, just given the backdrop here on the rate side?

And then separately, I guess, also on the mortgage warehouse business, if you can give us an outlook there as well, given the rate dynamics?

Sure.

So starting on fixed income, $1.9 million was very, very strong in the quarter.

We expect continued strength maybe not there, but maybe more in the $1.5 million, somewhere between $1.5 million and $1.9 million where we're at this quarter.

90-plus percent of the business days last quarter had $1 million days across the desk.

That is very, very strong.

So all in, like we said in our outlook on Slide 18, we expect that strength to continue.

But maybe not quite at the $1.9 million level that we saw this quarter.

Unless mortgage companies, as you would know, we did see seasonal declines in the first quarter.

We do expect some pickup in the second spring buying season happened into the third as well.

So we do expect a little bit of a pickup from first quarter levels.

So that will help drive some of the loan growth that we see in the back half of the year.

John, also, we -- in mortgage warehouse, we -- (inaudible) done a great job of continuing to add clients.

So just in the last 2 years, the client count gone up about 8%.

So we've got more clients that are working with us and obviously, the business is (inaudible) [line up], and we'd like to be the first that come to when they need (inaudible) for their [fund] -- for mortgage lending.

So we think we're well positioned because of the good point out here as well.

The next question is from Brock Vandervliet from UBS.

Just following up on John's question, BJ.

It sounds like you're relatively cautious given the rate environment on securities, which I understand.

We are seeing some of your peers, particularly those with mortgage banking operations, simply retain more on the residential side in this environment, especially if they can avail themselves to jumbo or non-QM, something with a stepped-up rate.

Is that part of the -- part of your strategy here?

Brock, yes.

So I go back to a couple of questions ago where I was kind of talking about loan growth out, on the consumer side, we -- you're exactly right.

We did make some changes to some of the portfolio products to try to position them more attractively for our affluent clients, but then also our retail clients in general.

And like I said, the lock pipeline in the last 45 days, for portfolio production is up pretty significantly.

So yes, we are looking to put a little bit more on the portfolio.

On the security side, just to give you a little bit more color.

I mean, the yields that we're seeing right now coming on the portfolio would be in the 1 25 range with a 5-year duration.

So we're trying to pick our spots there, but we'd rather do what we just talked about, which is increased portfolio production to serve more clients particularly on the [influence] side.

Give our bankers more to talk to our clients about.

And that's exactly what we're going to do.

Yes.

This is Bryan, Brock.

And as you think about the alternatives for investing this excess cash, if you're doing anything, the securities portfolio of mortgages are adding duration.

And so our preference is always to use our balance sheet for building customer relationships.

And at least in the mortgage products, which you have the relationship opportunity either to expand it or solidify, you don't get that security portfolio.

So we'll always look for opportunities if we're going to add duration to add it through our loan book.

Got it.

And just as a follow-up, I think the only thing that's rebounded more than bank stocks in the last year has been oil prices.

I didn't hear you mention that as a source of incremental growth.

Could you talk about that area?

Obviously, a focal point in the past for the bank is that a question of seeing a different risk reward here or other concerns?

Or how are you thinking about energy?

Yes.

This is Bryan.

That's an important business I mentioned in the growth markets that we're in.

I mentioned, Dallas and Houston, clearly, and Texas is an important product set.

And we are all likelihood going to have continued presence in energy lending.

All likelihood that exposure will be flat to down as we expect that those portfolios will come down some and that we will reduce our exposure a little bit over time.

We think it's important to be in those markets and to facilitate lending in oilfield services and E&P and so on and so forth.

But we also think it's a very volatile place to land.

And so we're not going to increase our exposures in all likelihood.

We're going to focus it much more on how do we support the commercial businesses in both of those markets.

The next question is from Jennifer Demba from Truist Securities.

Most have been asked.

But Bryan, I have 2 questions.

I assume that when loan demand does return more that the competition is going to be quite challenging given all the excess liquidity in the system.

I'm just wondering how you guys are thinking about that?

And then my second question is, when do you think we'll know what the real estate implications are going to be from the shift to more working from home for the banking industry's employees?

Yes.

Thanks, Jennifer.

First on loan demand, you're absolutely right.

It is a very competitive environment.

It probably becomes more competitive every day.

I would argue that you've got competition around pricing, obviously in duration or term, but you're also starting to see more competition around structure.

We are being mindful of how and where we compete.

We're focused as we've pointed out a couple of times in the prepared comments on the strength and stability of our balance sheet.

We're also mindful that growing with our customers and protecting our customer base is important.

So we're being very thoughtful on a transaction-by-transaction basis, and we're trying not to draw a whole bunch of bright lines other than let's make sure that we're booking assets and serving our customers in a way that will be good for our customers through the long term.

It will be good for our balance sheet through the long term.

With respect to real estate and Susan will have probably some additional comments.

I think that's an area that's going to take a little while to unfold.

If you take us as an example, we're working through now how and when we return to the office over the next 3 or 4 months, and we expect that we will be bringing the vast majority of those that are working for home back.

You have to keep in mind, about half our people are more -- or in the office today, whether it's in a banking center or whether it's in an operation center or a technology center, et cetera.

So we're looking at return to work.

We think that there's going to be some short-term impact on commercial real estate.

As I focus on it today, I'm more focused on, can we see the return to opening in some of the businesses that like hospitality and restaurant services where we need to get workers back to come back to full capacity.

So I think more of the short-term stress in commercial real estate is, are we going to be able to get properties open because we can get housekeeping and food servers and so on and so forth back to work.

I think the commercial real estate sector will probably level out over time as more people come back to the office.

I think there are tremendous amount of benefits for people being together, at least if not with more flexibility but more together.

So that you get the communication, the collaboration, the culture, all the things that go along with interacting with one another.

Susan, I don't know if you want to add anything though.

Yes.

I'll add a few things just around office in general, as Bryan and BJ have said earlier, we are in very attractive markets in the south.

And we just been even -- during the pandemic (inaudible) for emerging out of it, interested in companies that potentially been relocating into some of the markets that we're in, places like Raleigh, South Florida, Atlanta, Birmingham, Houston, Dallas to name more than a few.

So even if office space in the big picture does becomes somewhat of an issue, we were well positioned because of the markets that we're in.

The other thing I would say, Jennifer, is that we've remained very consistent improving in our underwriting across office and average upfront equity in our office portfolio in excess of 35%, I think 38%.

We don't have huge loans to -- [1 office building] or average loan size in that portfolio is about $12 million.

And then we're diversified across our own geography.

Florida, North Carolina, Tennessee, Texas, Georgia, Louisiana would be our top 6 markets, which is what you would expect based on our footprint.

So based on our underwriting, I think, potential for good things in our portfolio, I think, is greater than others because of the markets we're in and the way that we underwrote those loans prior to the (inaudible).

The next question is from Christopher Marinac from Janney Montgomery Scott.

You may have mentioned this earlier this morning.

I just want to go back to the loan yields and comparing kind of new business going forward compared to what the core yield was.

I'm just looking at the details on Slide 12.

Yes.

It's BJ, Chris.

So on new production on the commercial side, we're seeing it in the high 2s, let's say, blended across variable and fixed.

On the consumer side, it's going to be a little bit higher than that in the low 3s, but that's what we're seeing today.

So repositioning of the book in terms of new production is going to be a little bit less.

And what we see, which obviously is going to kind of put pressure on the margin.

Again, I think as volume starts to pick up in the back half of the year.

So hopefully, we can mitigate some of that.

But hopefully, that gives you a little bit [of our view].

Chris, this is Bryan.

With respect to coming out of a pandemic and all of the uncertainty that, that created, you wouldn't expect to see spreads compressing at the pace that they are.

And as I suggested in my response to Jennifer's question a minute ago, there is a lot of competition and a lot of that competition is manifesting itself in spreads and unfortunately, we think that we and the industry are looking at tighter spreads for some period of time here as there's so much excess liquidity out there trying to get both deployed in loan growth.

No, I appreciate that.

And then just BJ, just a follow-up on the gain on sales spread in the mortgage business.

Are there any technology improvements that essentially helped to -- on the cost side that as time evolves, that the gain on sale spread may not come back as much as it historically did?

Chris, when you say come back as much, what do you mean?

Well, I mean, just comparing where we are today at 3 70 compared to being in the 3s or 2s a year ago?

Yes.

I mean, I think there's -- there are significant process improvements that we're working on in the mortgage business.

It's kind of hard to do a lot right now, and yes, so much volume, but we have a lot of things that we're trying to do to keep those spreads up higher.

But I do think that our expectation is they'll continue to moderate more towards maybe the 3.5% range this year.

But remains to be seen because as you know, there's a lot of moving parts that go into the gain on sales spread.

But they've been pretty healthy over the last 3 quarters at least.

And so we expect that to be above some of the historical levels for another couple of quarters.

The next question is from Jared Shaw from Wells Fargo.

This is actually Timur Braziler filling in for Jared.

My first question is a follow-up to your response to John's question on excess liquidity.

Just looking at the deposit book, Is there a way to gauge how much of that could potentially come out as borrowers start to engage in the CapEx activity and using their own balance sheets to do that?

And is it going to take years for the excess liquidity to get back to a normalized level?

Or do you foresee that being a quicker process?

Yes.

So -- yes, we try to do that analysis in terms of how much of it could come out over time.

Just to give you maybe a little bit of context of how I think about it.

Our excess cash position for a company our size should be more in the $700 million to $1 billion range in any given quarter, we're in $11 billion right now.

So I don't think that $10 billion of excess cash comes out over the next couple of quarters.

I think it's going to take some period of time for it to be soaked up.

So I think excess cash positions are going to be here for a while.

With that said, I don't expect it to continue to be at a $10 million level I expected to continue to fall based on increased loan growth, increased usage of those excess cash balances, particularly by our commercial clients, the burn-off of stimulus checks on the consumer side, et cetera.

So -- but I think it's going to be huge to [stay] for a while.

Okay.

And then as a follow-up, maybe switching gears and looking at credit and the reserve position.

So credit obviously was very clean this quarter.

To what extent or qualitative overlays still being applied to maybe slow down what otherwise would have been a larger reduction in the reserve?

And as we look ahead, barring any changes in the credit picture?

Should we expect to see accelerating declines in the allowance level?

We are feeling very good about the credit outlook as it relates to coming out of the pandemic and talking with clients and with bankers really starting to see a lot of renewed activity to come back to that 2019 level.

So we're optimistic, although we're still waiting to see additional vaccinations, et cetera.

And some states and units still haven't opened up completely.

But we do -- based on what we know now and what I've seen in the portfolio, I would expect that we'll see additional reserve releases perhaps the remainder of the year.

Yes, I agree.

I've said in my earlier comments that based on what we're seeing in the economic outlook and I mean, we have said for quite some time that we significantly repositioned its credit portfolio since the financial crisis.

And it's showing up in the -- those levels of charge-offs we've got.

So all of that say, we're at 1 70 coverage ratios and prepandemic on a combined basis, we would have been at 1 10.

That applies (inaudible) that we got pretty significant reserve releases assuming that the economy continues to improve.

So do we get back there by the end of this year?

Probably not.

But do we get back closer to maybe first or second quarter levels by the end of this year?

Yes, probably.

This concludes our question-and-answer session.

I would like to turn the conference back over to Bryan Jordan, President and CEO, for closing remarks.

Thank you, Jason.

Thank you all for joining our call this morning.

We appreciate your time and interest.

We're excited about the momentum we see in our company.

Please feel free to reach out to us if you have any further questions or need additional information.

I hope you all have a great day.

Take care.

The conference has now concluded.

Thank you for attending today's presentation.

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