Good morning, and welcome to the First Horizon Corporation First Quarter 2021 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Ellen Taylor, Head of Investor Relations.
Please go ahead.
Thanks, Jason, 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, Brian Jordan and CFO, Vijay Loach, will provide some opening comments and an 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. And with that, I'm going to turn things over to Brian.
Thank you, Helen. 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, the great momentum I see building in the business. We're off to a strong start in the Q1 of 2021.
We demonstrated solid performance in the quarter with good PP and R results reflecting the resiliency of our more diversified business model. While loan demand continued to be muted as clients were 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 remains 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 some seasonal headwinds, we reduced our linked quarter adjusted expenses driven by our ongoing cost discipline. We achieved annualized merger related cost saves of $76,000,000 in the quarter. The improving economic backdrop from January to March and our continued prudent risk management largely helped drive a $53,000,000 reserve release. The power of our diversified and countercyclical model, our 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 $53,000,000 reserve release, we generated a return on tangible common equity of over 17.5%.
We're making great progress toward our key merger milestones. We've completed early systems conversions, including our mortgage and retail brokerage conversions with wealth and trust scheduled 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 improves 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 percent and we grew our tangible book value per share to $10.30@quarterend. Given the relatively limited loan demand, we chose to opportunistically deploy capital through share repurchases and bought back about 4,000,000 shares in the Q1. So, including dividends, we returned a total of $143,000,000 of capital to our common shareholders. I'm incredibly proud of our efforts to serve our clients, communities and associates throughout the pandemic with PPP loans, charitable contributions and by offering our associates increased flexibility 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 to accelerate reopening. We are also mindful of the fact that the past year had a number of unexpected turns and this 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 Equals position us well to deliver top quartile returns over the medium term. With that, I'll hand over to B.
Jacobs for comments.
Great. Thanks, Brian. Good morning, everybody. Let's start off on Slide 6 and just do a fly by 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've 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. Mercer 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 3,600,000 shares in the quarter at an average price of $16.12 and including dividends, as Brian talked about, returned a total of $143,000,000 in capital to common shareholders. Looking at Slide 8, on adjusted financials. We give you an overview for the quarter.
We generated PPNR of $343,000,000 up 1% from 4Q 'twenty. 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 in personnel. Given the very low net charge offs of only $8,000,000 or 6 basis points on a $58,000,000 loan portfolio. Combined with overall improvement in the macroeconomic outlook and a reduction in our loan balances, we released $53,000,000 in reserves this quarter, resulting in a provision credit of $45,000,000 And as Brad mentioned, these strong results help 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 $511,000,000 down $14,000,000 linked quarter, driven largely by a reduction in loan balances year 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, which somewhat mitigated these headwinds. We lowered our interest bearing deposit rate, paid 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 dollars 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 10,800,000,000 dollars Moving on to Slide 10 and fee income.
The benefit of our more diversified platform was clearly on display again this quarter with a $10,000,000 linked quarter increase driven by the great results in fixed income along with nice momentum in brokerage as well. Link quarter fixed income average daily revenue was up 25% to $1,900,000 a day driven by favorable conditions as banks put increasing levels of excess cash to working bonds along with the past and continued volatility of rates. In particular, our mortgage and our government guaranteed debts were particularly active. While mortgage banking and title decreased $4,000,000 linked quarter, our results remained relatively strong compared to historical levels despite the impact of seasonality, higher interest rates and limited housing inventory. Moving on to expenses on Slide 11.
You'll see that adjusted expenses in the quarter were $464,000,000 down $10,000,000 linked quarter, highlighting our commitment to continued expense discipline along with the benefit of an incremental $5,000,000 reduction tied to merger cost saves. We held personnel costs overall relatively stable with 4Q 'twenty levels with additional benefits from merger cost saves and ongoing tight expense control offsetting seasonal headwinds from FICA tax resets and a $10,000,000 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 and continue to drive investments in the future. Turning to Slides 1213. 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 $1,600,000,000 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 $1,000,000,000 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 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 to 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 the year, We are incredibly pleased with the steps that we took to reposition our overall risk profile coming out of the Great Recession over a decade ago are now clearly being illustrated.
Net charge off to average loans improved 6 basis points, down 14 basis points from last quarter, while non performing loans remained relatively stable. As I previously mentioned, the combination of a significant improvement in the overall macroeconomic outlook and a reduction in the loan balances drove a provision benefit of $45,000,000 and a reserve release of 50 $3,000,000 And as you can see on Slide 15, the allowance to credit losses coverage ratio declined only modestly from 4Q 'twenty to 170 basis points in 1Q 'twenty one. And as a reminder, we used the maybe February scenario and then incorporated other economic 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 Brian 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 current systems, and we remain on track with the full systems conversion in early fall of 2021. We've achieved $76,000,000 in annualized run rate savings against our debt target of $200,000,000 We're still on track for an annualized $115,000,000 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 $10,000,000 of annualized revenue synergies that are tied to about $400,000,000 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 Q1 of the year with all line items in line or better than the outlook we provided on our Q1 earnings call in January. We have, therefore, updated our expectations for both the Q2 and our full year outlook based on the strength we are seeing in our business and the economy.
For the Q2, in particular, for I, we expect now a low single digit decrease with average loans down modestly given the outlook. And while we continued relatively strong environment near term for our mortgage and fixed income business, our outlook reflects a high single digit to low double digit decrease on the Q1. On the expense front, we expect non interest 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 Q2.
And in terms of full year, given our strong fee income performance in the Q1 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 decrease in noninterest income, lower net charge offs in the 10 to 20 basis point range for the year at 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 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 costs 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 Brian, I just wanted to acknowledge Arty 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 a better Investor Relations group, and we will miss her.
So with that, I hand back over to Brent.
Thank you, BJ. I will add my thanks and appreciation for the great efforts of Artie 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 earning 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.
Thank you. We'll now begin the question and answer Our first question is from Brady Gailey from KBW. Please go ahead.
Hey, thanks. Good morning, guys.
Hey, Brady.
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 most 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?
Hey, 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 of 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 ticked up slightly, so that is portending 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 finance 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 for 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. Then my follow-up is just on the buyback. If you look at your common equity Tier 1, it's now 10%. You were active in the buyback.
You have a $500,000,000 buyback out there. That's a big number. I think you can repurchase about 5% of the company over the next couple of years. And is the right way to think about it that you guys will utilize the full $500,000,000 over
the next couple
of years? Or do you think that's too big of an assumption?
Yes. I think as we've talked about before, Brady, it's always going to be opportunistic repurchases. We did $56,000,000 this quarter at an average price of $612,000,000 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 year and a half, using those or all of that authorization is our expectation.
Great. And I didn't know about Artie. So Artie, you'll be missed. And congrats on the new spot. It was great working with you over the years.
Good luck.
Thanks, Craig.
Next question is from Michael Rose from Raymond James. Please go ahead.
Hey, good morning. Thanks for taking my questions. Just trying to get a sense for the margin trajectory here. I appreciate the disclosure on the purchase accounting accretion and things like that. How does the PPP fees kind of look like?
And then on a core basis, if you strip out PPP and PAA, what would be the kind of the near term expectation? Thanks.
Hi, Michael. Good morning. It's P. J. 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 Q3 of this year. So I think we originated something along the lines of $4,000,000,000 to 90% of that gone by the 3rd quarter And therefore, all the fees associated with that accelerated and corrected by that. On round 2, we're at about $1,300,000,000 or so, and we'll probably climb a little bit more of that. We assume that those fees will be accretive over the next year and a half 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 the positive costs where we can, where we have a little bit more opportunity. And the LIBOR base is hopefully flattening out here, Ellen's 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 basis points 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?
Thanks.
Michael, this is Brian. Our focus really hasn't changed. As you point out, we're making good progress on the integration of our merger of Equals, Iberia Bank 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 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 we're doing today with our merger vehicles.
All right, great. Thanks for taking my questions and congrats on the new role, Ari.
Thank you.
The next question is from Steven Alexopoulos from JPMorgan. Please go ahead. Good morning, everyone. Hi, Steven. I wanted to start so nice start out of the gate on revenue synergies.
Could you give more color on the $400,000,000 of commercial loans you're calling out from the synergies? And how are you seeing the bigger picture now for revenue synergies?
Good morning, Steven. It's Steven. 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 a 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 special lines, we've had equipment needs.
So that's going to continue to build. Just as a side note, I think during the COVID environment that we've already seen $400,000,000 in commitments related to revenue synergies, I think, is 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, it 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 the great thing is 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.
Hi, Steve. This is Brian. I'll add to it. 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 we're take for example, the Private Client and Wealth Business. That's an area that Iberia Bank 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 $30,000,000 and then sort of stopped on the Capital Bank merger several years ago. We think this opportunity of combining these two organizations and bringing this combined products as a bigger balance sheet, the opportunity to do more for our customers, we think we're going to well exceed the $30,000,000 of revenue synergies over the next couple of years that we've created in our capital bank merger.
Okay. That's helpful. Brian, a big picture question for you. So you guys are delivering on the cost saves from Iberia. The revenue synergies are starting to come through.
Countercyclical businesses are doing their job. I know 2021 is a bit of an odd year given the pandemic and you have PPP programs, stimulus, etcetera, 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? Is this a high single digit grower?
What do you see for us? Thanks.
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 this stimulus. I think we are going to have a footprint and a demographic that is going to grow at or above what you see in peers and others. As I look at our footprint, you think about the markets we're in and we're in Atlanta, Houston, Dallas, Miami, we're in 15 of the top 20 MSAs in the South.
Pre pandemic, the South was growing faster than the U. S. As a whole post pandemic, I think that is 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, etcetera.
I think we're going to be in a position that we will clearly grow better than average. I've been in the camp that 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.
Okay.
That's very helpful color and best of luck to Arthi as well. Thanks guys.
Thanks Steve.
The next question is from John Pancari from Evercore ISI. Please go ahead.
Good morning. Hey, John. Hi, John.
And first off, best of luck to Arty as well in your new gig. On the excess cash side, I believe you're sitting on about $10,800,000,000 in excess. And just want to 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 NAND portfolio purchases or areas like that? Thanks.
Hey, Scott. 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 took up some of this excess cash. So that's priority number 1. Number 2, I think over time, there's going to be a reduction in deposit 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 above the left. But I think deposit levels will come down because of that as well. On the securities portfolio, we did modestly increase it this quarter. 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've 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 the effort to get NIM not really hurting our NII. So to me, deploying it is all upside.
Great. Thanks, BJ. That's helpful. And then separately on the a lot of focus around the countercyclical businesses here certainly doing their job, I agree. I guess if you could just talk about the outlook for each in terms of the Capital Markets business here.
You saw 1,900,000 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? Thanks.
Sure. So starting on fixed income, dollars $3,800,000
was very,
very strong in the quarter. We expect continued strength, maybe not there, but maybe more in the $1,500,000 somewhere between the $1,500,000 and the $1,900,000 where we're at this quarter. 90 plus percent of the business days last quarter had $1,000,000 days across the desks. 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 $1,900,000 level that we saw this quarter.
On loans and mortgage companies, as you would know, we do see seasonal declines in the Q1. We do expect some pickup in the second spring buy season happens into the 3rd as well. So we do expect a little bit of a pickup from 1st quarter levels. So that will help drive some of the loan growth that we see in the back end of the year.
John, also we've in mortgage warehouse, we've efforts done a great job of continuing to add clients. But just in the last 2 years, the client count's gone up about 8%. So we've got more clients that are working with us. And obviously, in the business, it's quite complex to line up. And we'd like to be the 1st that they come to when they need for our money for their loans for mortgage lending.
So we think we're well positioned because of the good quality out there as well.
Great. Thank you.
The next question is from Parag Vandervliet from UBS. Please go ahead.
Thank you. Just following up on John's question, Vijay, 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?
Hey, Ross. Yes. So go back to a couple of questions ago where I was kind of talking about loan growth outlook. 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, yields that we're seeing right now coming on the portfolio would be in the 125 range with a 5 year duration. So we're trying to take our spots there, but we'd rather do what we just talked about, which is increased portfolio production, serve more clients, particularly on the affluent side, give our bankers more to talk to our clients about and that's exactly what we're going to do.
Yes. This is Brian, Brock. And as you think about the alternatives for investing this excess cash, if you're doing anything, the securities portfolio mortgages are adding duration. And so our preference is always to use our balance sheet for building customer relationship. And at least in the mortgage products, which you have the relationship opportunity either to expand it or solidify, you don't get that in the securities 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 it a question of seeing a different risk reward here or other concerns? Or how you're thinking about energy?
Yes. This is Brian. That's an important business I mentioned in the growth markets that we're in. I mentioned Dallas and Houston clearly and Texas. It is an important product set and we are all likelihood going to have continued presence in energy lending.
All likelihood that exposure will be flat to down as we 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 and 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 and in all likelihood, we're going to focus it much more on how do we support the commercial businesses in both of those markets.
Got it. Okay. Thank you. Good color.
The next question is from Jennifer Demba from Truist Securities.
Most of them have been asked, but Brian, two 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. 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 of employees? Thanks.
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, and 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 and 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 scenario is 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 from home back. You have to keep in mind about half our people or more are in the office today, whether it's in a banking center or whether it's in an operation center or technology center, etcetera. 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, 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 property 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 to all
of that.
Yes. I'll add a few things just around office in general. As Brian and C. J. Both said earlier, we are in very attractive markets in the South, and we have seen even during the pandemic and still as we're working out of it, interest in companies that essentially have 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 become somewhat of an issue, we believe we're well positioned because of the markets that we're in. The other thing I would state, Jennifer, is that we've remained very consistent and prudent in our underwriting across office. And the average upfront equity in our office portfolio in excess of 35%, I think 38%. We don't have huge loans to one office buildings. Our average loan size in that portfolio
is about $12,000,000 And then
we're diversified across our own geography Florida, North Carolina, Tennessee, Texas, Georgia, Louisiana would be our top 76 markets, which is what you would expect based on our footprint. So based on our underwriting, the 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 same
same day.
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 and just looking at the details on Slide 12. Yes. It's C. J.
Kreta. 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 the new production is going to be a little bit less than what we see, which obviously is going to 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 an overview.
Chris, this is Brian. 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's a lot of competition and a lot of that competition is manifesting itself in spreads. And unfortunately, we think that we in 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 the full deployed in loan growth.
No, I appreciate that. Thank you for the additional color. And then just, P. J, just a follow-up on the gain on sale spread in the mortgage business. Are there any technology improvements that eventually help 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 $370,000,000 compared to being in the 3s or 2s a year ago. Yes. I mean, I think 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 yet 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 it remains to be seen because as you know, there's a lot of moving parts that go into the Genome 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. Great.
Thanks, guys. Thanks again.
Thank you.
The next question is from Jared Shaw from Wells Fargo. Please go ahead.
Hi, good morning. This is actually Timur Braziler filling in for Jared.
Good morning. Good morning.
Good morning. 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 sheet 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're we kind of 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 $700,000,000 to $1,000,000 range in any given quarter where $11,000,000,000 right now. So I don't think that $10,000,000,000 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 the $10,000,000 level. I expect it to continue to fall based on increased loan growth, increased usage of those excess cash balances, particularly our commercial clients, the burn off of stimulus checks on the consumer side, etcetera. So but I think it's going to be here to stay for 1.
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 come back to that 2019 level. So we're optimistic. Although again, we're still waiting to see additional vaccinations, etcetera, and some states, I mean, it's just that we 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 throughout the remainder of the year.
Yes, I agree. I said in my earlier comments that based on what we're seeing and the economic outlook And I mean, we have said for quite some time that we significantly repositioned this credit portfolio since the financial crisis, and it's showing up in the very low levels of charge offs we've got. So all of that to say, we're at 170 coverage ratios. And pre pandemic, on a combined basis, we would have been at 110. That applies excuse me, that we've got pretty significant reserve releases assuming that the economy continues to improve.
So do we get back there by the end of this year? Probably not. But do we get back closer to maybe 1st or second quarter levels by the end of this year? Yes, probably.
Okay. That's great color. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Brian 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.
Hope you all have a great day. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.