Good morning, and welcome to the First Horizon Corporation Second Quarter 2021 Earnings Release Conference Call. All participants will be in a listen only mode. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Mr. Brian Jordan, President and CEO.
Please go ahead.
Hi, everyone. First, it's Ellen Taylor. I've got to do a little housekeeping. Thanks so much for joining us this morning. We really greatly appreciate To start things off, our CEO, Brian Jordan and CFO, Vijay Loesch, will provide opening comments and an overview of our results.
And then of course, we'll be happy to take your questions. We're also pleased to have with us today our Chief Operating Officer, Anthony Ristel, who will be taking on the role of Interim CFO and our Chief Credit Officer, Susan Springfield. Our remarks today are going to reference the earnings presentation, which you may find at ir. Fhnc.com. As always, I need to remind you that we will make forward looking statements that are subject to risks and uncertainties, And we ask that you 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 We also will address adjusted results, which exclude the impact of notable items.
You should understand that these are non GAAP measures, So it's really important for you to review the GAAP information in our earnings release and on Page 3 of our presentation. And then of course, last but not least, our comments reflect our current views and you should understand that we aren't obligated to update them. And now with that, I'll give it to Brian.
Thank you, Ellen. Good morning, everyone, and thank you for joining our call. I'm proud of the First Horizon team as we continue to deliver solid performance. The economy continues to strengthen, loan demand and activity is continuing to build and our strong credit quality is performing well. Liquidity and cash levels are strong broadly in the economy, which is leading to higher loan payoffs, more competition for new lending We delivered adjusted EPS of $0.58 with a return on tangible common equity of 22% in the quarter.
Our capital levels remain healthy with a common equity Tier 1 ratio at 10.33 percent And we grew tangible book value per share by 4% in the quarter to $10.74 Our revenues this quarter were down from strong first quarter levels. FHN Financial and mortgage remained strong, but also Extraordinarily strong first quarter levels. Our results this quarter were bolstered by the impact of continued rapid improvement in the overall We are encouraged by the uptick in activity across the franchise as markets and sectors reopen. Our associates are having lots of Constructed dialogue with clients and prospects and we feel we are in a relatively strong position to benefit from further economic improvement. Loan pipeline certainly continued to reflect the strengthening economy in May June.
Still near term, the industry is confronting continued lower rates, high levels of excess liquidity and very little incremental loan demand. Clients are still cautious about new investments and are still facing supply chain and labor force constraints that are problematic. We are also starting to see PPP loan forgiveness pickup. All of this translates to a fiercely competitive landscape Capturing revenue synergies, being good risk managers, all while focusing on serving our clients and anticipating their needs. We continue to do a great job of capturing revenue synergies across the markets and product lines by leveraging our expanded $200,000,000 in cost savings and controlling costs while still making prudent investments in technology and products to drive future revenue We also continue to opportunistically deploy capital through share repurchases.
We bought back 3,100,000 shares this quarter. Including dividends, we returned a total of And the increased activity levels we are seeing across our footprint as our markets continue to reopen. But like many, I continue to be highly confident that our business model and benefits of the merger of Ingalls position us well to deliver top quartile returns over the medium term. And now I will turn it over to BJ for some comments on the results. BJ?
Thanks, Brian. Good morning, everybody. Let's start off on Slide 6. As Brian mentioned, we're really pleased with the continued execution in the first half of the year. The merger is delivering the enhanced efficiencies that we expected and we're capturing the benefits of the merger savings And really starting to see the additional revenue synergies across the platform, which we think will only ramp from here.
As Brian said, we delivered GAAP EPS of $0.53 or $0.58 on an adjusted basis, reflecting the resiliency of our balanced business model and exceptionally strong credit quality performance. Our results this quarter from a revenue and expense Effective, we're in line with expectations. And as expected, net interest income headwinds persist, and we experienced Continued strong fee income, albeit lower than the outsized levels in the Q1, and we delivered continued improvement in expectations and drove a provision credit of $115,000,000 in the quarter with net recoveries, I repeat, net recoveries of $10,000,000 In fact, for the first half of the year, we have an aggregate net recovery of $2,000,000 on a fifty $7,000,000,000 loan portfolio outstanding performance. We remain on track for our final systems conversion in the fall And continue to make progress towards our $200,000,000 net savings target with $92,000,000 of those annualized savings in the quarter. At the same time, we are making nice progress on those revenue synergies I talked about briefly via cross sell and leveraging our balance sheet to serve the broader customer base.
We currently estimate that we're on track for roughly $20,000,000 of annualized revenue synergies across various Turning to Slide 7, I'll quickly review the notable and merger related items in the quarter. As you can see, we had $26,000,000 after tax or $0.05 of $50,000,000 We continue to be confident in achieving these savings. In addition, we're now expecting our pre tax merger cost to total about $500,000,000 and this increase is largely driven by 3 components. 1st is tied to more recent While the car is on the lift, so to speak, as we prepare for our systems conversion. Secondly, we are seeing post pandemic vendor and staffing constraints That have caused an increase in both the level and the cost of estimated man hours required to complete our technology integration.
And third, As we finalized our decisions around accelerating our branch closures given the shift towards digital adoption, We still have plans to close a total of 50 branches, but now expect to see a higher level of impairment costs given the ultimate mix of those branch closures that we've decided upon. So we believe spending an incremental 3 basis points of capital To position us far better for the future makes good long term business sense. And it's important to note that the payback period on the increased cost saves and the addition of the revenue synergies we're already seeing, it's still well in line with our original estimate of about 2 years. Slide 8 provides an overview of our adjusted financials for the quarter. We generated PPNR of 3 $21,000,000 As expected, revenues decreased 3% from strong 1Q 2021 levels, given expected reductions, Fixed income and mortgage banking fees, along with continued NII pressure.
Adjusted expense $465,000,000 remained relatively stable linked quarter as the benefit of our incremental merger cost saves Was muted by some higher long term incentive costs. In this quarter, the provision credit, which we talked about at $115,000,000 was compared to 45 And as we sit here today, we see opportunity for more reserve releases in the future, dependent of course upon several factors, including further macroeconomic improvement, low levels of net charge offs and positive grade migration. As updated, financial statements will be received from borrowers over the next two quarters. Bottom line though, we expect the net impact of all those factors to be positive with further reserve releases quite likely. And as Brian mentioned, we grew tangible book value per share by a strong 4% and generated an adjusted ROTCE of 22% or 16% before the impact of that provision credit, very, very strong performance.
Moving to Slide 9, NII performed in line with expectations declining $11,000,000 linked quarter on an FTE basis. Both reported and core NIM were down 16 basis points linked quarter, driven by about 12 basis points of impact tied to higher excess cash. We ended the quarter with increasing levels of cash at about $12,700,000,000 up from $10,800,000,000 in the Q1. We did also see pressure from lower loan balances and given the competitive landscape experienced spread tightening on new originations compared to the runoff, which collectively translated to about 2 basis points on the NIM. Given the change in rates and housing supply constraints, our mortgage warehouse And we saw increased pressure from premium amortization and lower LIBOR.
In the face of these environmental pressures, We are very, very focused on controlling what we can control and our continued deposit pricing discipline is helping to mitigate the impact of those lower rates and overall muted loan demand. Interest bearing deposit costs of 20 basis points in the quarter remained stable and were down 2 basis points And as we look forward, we continue to believe we're well positioned to benefit from an improving At quarter end, our interest rate sensitivity or NII sensitivity to an up 100% shock was about 10% And about 6% on a gradual basis. Moving to Slide 10, taking a look at fee income dynamics. Fixed income ADR came in at $1,400,000 compared to the very strong Q1 of 1,900,000 reflecting continued favorable operating environment for the business given high levels of cash in the banking system and the needed loan demand. Mortgage banking and Title fees came in at $38,000,000 compared with higher first quarter levels.
While fee income was lower And our mortgage banking business, overall mortgage originations across our platform were very strong, up 21% Quarter over quarter with an intentional shift to on balance sheet mortgages. The lower mortgage fee income reflects the impact of housing supply constraints, Lower gain on sales spreads and that intentional shift in origination mix toward portfolio. Our focus here is on customer oriented relationships, which we believe is a better alternative for adding interest earning assets as compared to securities purchases. Importantly, given the overall economic momentum across our footprint, we saw a $4,000,000 lift card and digital banking fees with the benefit of an increase in transaction volumes. And finally, I'd note That you'll see a $15,000,000 increase in other income, which was driven by a nice $9,000,000 expense was $465,000,000 stable relative to the Q1.
Personnel expense decreased $7,000,000 linked quarter, driven by a $6,000,000 decline in incentives and commissions, partially offset by increases in long term revenue and performance based incentives. In Occupancy and Equipment, we saw a $3,000,000 increase largely tied more to the equipment line, which was related to some strategic software investments. And finally, increased activity levels Given the reopening of markets post pandemic caused about a $2,000,000 increase in our outside services line. We're down about $1,400,000,000 in the quarter, with commercial down about $800,000,000 and consumer down about 580,000,000 Commercial was impacted by about $1,100,000,000 decrease in our loans to mortgage companies, partially offset by $272,000,000 increase in PPP balances. Last quarter, our mortgage Warehouse volume was around 67% refi and that's moderated in the 2nd quarter to 47%.
And as we look forward, we do believe that some of our volume related strategies in that business will allow us to gain more share In mortgage warehouse lending with a net benefit to profitability and outside of PPP and mortgage warehouse, we did see a lift in overall commercial balances, which we are hopeful will continue in the second half of the year. As Brian mentioned, we continue to be optimistic about the path of the economic recovery and the increased activity levels as markets continue to reopen. Quickly on the liability side, we saw continued inflow of deposits driven by $2,100,000,000 average increase in non interest bearing deposits, with commercial balances, including benefits from the 2nd round of PPP. Total deposit costs are at a very low 13 basis points with interest bearing deposit costs at 20. On asset quality, starting with Slide 14, Our overall credit quality continues to surprise to the upside.
We had net recoveries again of 10,000,000 $50,000,000 5-0. Given the large provision credit, the allowance credit losses coverage ratio came in at 157 basis points compared with 170 last quarter, driven by the continued improvement in the outlook, positive grade migration, Those net recoveries and lower loan balances. As you can see, our overall loss absorption capacity excluding mortgage Warehouse and PPP as well as the unrecognized discount on our acquired loans stands at a very healthy 2.23%. Our credit quality is excellent and while all peers are experiencing low levels of net charge offs, As Brian mentioned, CET1 ratio is at a healthy 10.3%, up about 30 basis points or so in the quarter, driven by growth Moving on to merger integration on Slide 17. It's been a little more than a year since we closed Our merger with Iberia Bank and we continue to make very good progress.
We're focused on retaining and growing the client base with our expanded products Fair for our fall 2021 core systems conversion, we plan to complete our wealth, trust and credit card conversions as well, our first round of banking center consolidations and training for all associates on our new systems. Turning to our outlook on Slide 18, our results this quarter were in line with the outlook we provided you in April And we are providing an outlook for both the Q3 and the full year of 2021. You can see in the Q3, we do expect modestly given the outlook for lower PPP and the impacts of continued low rates and reduced merger accretion. While we anticipate relatively resilient results in our fixed income business, we do expect fee income to be down in the low double digit The low teens range due to lower mortgage banking fees. We expect non interest expense to decrease in the low single digit range As our ongoing focus on efficiency and merger cost saves comes through, we expect charge offs to be in the range of 0 to 10 basis points and we it's reasonable to see continued reserve outflows.
We expect CET1 to remain in the 10% to 10.5% range. We now expect a mid Single digit decrease in non interest income with net charge offs in the 0 to 10 basis point range in the CET1, 10,000,000 and 10.5 As Brian mentioned, we feel good about the positioning and our ability to perform well given the current economic environment. Finally, on Slide 19, we are well positioned to capitalize on opportunities of our business model and Our fee income businesses are performing just as we would have expected. We're controlling expenses. We're driving down deposit costs.
We're making good, prudent long term investments in talent and technology. We're seeing good business activity as markets reopen. Credit quality is excellent and we believe we will continue to deliver attractive returns near term and in the future. Just a quick note, as many of you know, today is my 51st and final earnings call with First Horizon. In fact, it is exactly 12.5 years since my 1st earnings call on January 16, 2009.
That day, we reported a loss of $0.27 Whereas today, we report positive results of $0.58 It's been quite a ride. And I started here at a Time when the company was arguably at its weakest and I'm proud to say confidently I'm leaving here when it's at its strongest. I've put my heart and soul into this place and it's returned to me so much more than I could have ever given it and I'm forever grateful for that. I want to thank Brian, the Board, my executive team colleagues, my finance accounting procurement properties groups and all my friends and colleagues First Horizon that have been an absolute pleasure to work with. And finally, thanks to the investor community for your support of our company.
I have enjoyed the performance, accountability and intellectual challenge you provide to people fortunate enough to be in my seat. I know I wasn't always right, but I always tried to do the right thing and I hope you experienced that. So with that, I will turn it back over to Brian.
Thank you, P. J. I am exceptionally proud of the team's continued execution and the results we are delivering. We are seeing activity levels pick up across our franchise in many of our specialty businesses. We are continuing to execute well on And I continue to be confident in our continued progress towards becoming a top regional bank and our ability And now before I open it up for questions, I will also make a couple of comments about BJ.
As Vijay just stated, he did join us in 2,009 in the midst of the financial crisis. Over the past 12, 12.5 years, He's been a key leader in helping us reposition and position our business. He's been critical to developing our strategies, controlling our costs and many of the great accomplishments that we've had over the past 12 years. BJ is a trusted friend and a partner. We will miss him.
While I am disappointed to see him leave, I fully support him and his new endeavors. You will be missed. So with that, Betsy, we'll now take questions.
We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good morning, everybody.
Hey, Jared. Good morning.
Maybe just starting
on the expense Side, with the additional $40,000,000 investment, is there an opportunity to see that $200,000,000 Ultimate cost save level increased from there or is that really more just the cost to get there has gone up and that We should that we'll probably see some additional negative operating leverage here in the next few quarters as that gets rolled in.
Hey, Jared, it's BJ. I'll take that one. As you know, since you've known us for quite We're never done with cost saves and expense efficiencies. And so, we started at 1 70, we're up to 200 and in an environment like what we're operating in, I think we'll continue to look for additional opportunities over time. Right now, we are all laser focused on getting to our conversion in the fall, which is our most important hurdle.
The annualized $200,000,000 is to be expected to be out of the run rate by the first
This is Brian. I'll piggyback Well, BJ's comments, we feel very, very good about our ability to hit the $200,000,000 and we think, if anything, There is very little, if any, downside to it and we think there is potential upside. As BJ said, we consistently look for opportunities to drive efficiency. I think the nature of the business is such that we've continually got to look for opportunities to reduce cost And changing our non value added areas and put that into areas that require future investment in Technology and Infrastructure. So we continue to use our all of our levers around expense control to make sure we position the business for the long term.
Okay, great. Thanks. And then as my follow-up, maybe just on the mortgage side, what ultimately do you think you could be Retaining from that production as we go forward versus selling And I guess the impact of that on the gain on sale margin?
So I think what You'll see from us is a continued shift to on balance sheet portfolio originations. I do expect that you'll see net increases in originations, maybe not as high as 20% that we had seen, but the secondary volume that we're seeing is still strong and we're capturing many opportunities. Our clients have seen more opportunity in our portfolio originations, particularly around 7 year ARMs or 15 year fixed, which we've seen quite a bit of interest in. So I think you'll see that continued shift with overall originations continuing to go up, Probably secondary continuing to moderate down portfolio up. In terms of gain on sale, it is continuing to moderate and we expect That to continue to come down over the next few quarters.
Okay. Thanks and congratulations, BJ, on
Hi, Jennifer. Hi, Jennifer.
Hi. Could you just talk about the revenue synergies you've seen to date with Iberia? And what's been kind of better than And what's kind of lagged versus your expectations and where you see the biggest opportunities in the next 12 months, 18 months or so.
Hey, Jennifer, this is Brian. I will start. We feel very, very good about The trend on revenue synergies, and I would say there are very few areas that we're concerned about lagging at this point. As you might expect, there's Natural synergies that come from just being a larger organization, larger hold positions, but we are seeing very, very good momentum across Specialty lines of businesses where either organization may not have had an opportunity in the past, our equipment Finance business, our asset based lending business, our private client wealth management businesses, some of those take a little longer to build the structure around it, but at the end of the day, we feel very, very good about the progress that we are seeing. We are seeing opportunities We continue to multiply.
And at this point, we feel very, very good that we are on track to See the $35,000,000 that I've talked about in the past, we think we're in that $20,000,000 annualized area today and building momentum. Once we get through this integration, we think it will pick up further momentum in the 1st and second quarters of next year.
Okay, great. And in terms of the loan loss reserve, you said more releases are likely assuming These credit trends and economic trends continue. Do you could you see the reserve going lower than it was
Hey, Jennifer, it's BJ. Likely not. I think day 1 CECL would have been around 110 basis points for us, I think on a combined basis. So, it's hard for me to think about it going much lower than that. It certainly could, but I don't think that we would get there for a while.
But with that said, if you exclude PPP and loans to mortgage companies, which Carry very, very little. We've got 60 basis points or 70 basis points from where we're at today to get down to those levels. So again, we do believe that the macro environment will continue to improve. Credit quality is excellent. The way we've managed both portfolios, both legacy portfolios Are really starting to shine now.
So we do believe there is very healthy reserve releases to come over the next several quarters. Jennifer, I want
to pick up on Vijay's last comment, so Susan doesn't have to do it. A year ago, as we got into the Pandemic and not knowing how the economy was going to play out, there was a lot of concern industry wide about how credit would play out. And at that time, we said We thought that our portfolios would do as well or better than most. And albeit admittedly, the fiscal policy The Iberia Bank portfolio and the First Horizon portfolio, now the combined portfolio has performed in a very strong fashion and we believe While it's top performance today, we think that will continue given the way we approach credit and risk in the portfolio. So, I am very, very proud of the results.
I can't say that I am a big fan of CECL and the reserve methodologies And but I do believe that we will migrate back down towards those day one levels as quickly as anybody and I think And we will continue to deliver that very strong and consistent credit performance as a result of our efforts to manage risk in an appropriate way.
The next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning everyone and congrats Vijay on your role.
Hey, Brett. Good
morning, Brett. Good morning.
I wanted just to talk about just the liquidity on the balance sheet. If you think about the cash balances, they're Now 16% of average earning assets and with the guidance for that for the cash to continue to build, obviously not a Great environment for reinvesting cash and securities, but just how you intend, if anything, to maybe manage some of the liquidity if you might do Some securities purchases from here and just thinking about trying to manage, obviously, you managed NII more than the margin, but just thinking about the margin and possible ways to kind of offset the margin pressure?
It's BJ. So, yes, we're actively thinking about that and we are seeing accelerated Levels of cash that we're reinvesting in the securities portfolio, in aggregate, we have not Materially increased it at this point. We're buying mostly agency CMO MBS with a little bit of high quality municipal And we could modestly look at something there over time as well. But we We're more focused on trying to create interest earning assets on the portfolio that have a customer relationship to it. And going back to our earlier comments on mortgage originations and finding ways to give clients More opportunities from a portfolio usage perspective is likely where we're going to go.
We've also Been a bit more active in owner occupied commercial real estate on the commercial side and offering some Attractive opportunities across our footprint there. So a little bit more fixed rate Type lending opportunities that we're looking to try to build upon. So I think we're a little bit more focused There, so I think fortunately or unfortunately, I think it's a high class problem to have, but I think we'll have these deposit Excess cash balances for a while, but to your point, we're much more focused on NII And I think we're hopeful that the core NII is really bottoming out at this level And we see going forward opportunity for growth in the core NII. So That's what we're planning on and executing upon. Okay.
I appreciate the color, Vijay, on that. And then I guess the other thing I wanted to address was just the guidance around the 3Q non interest income, low double digit to low teens decrease. Can you talk maybe about the components of that? What percentage of that might be fixed income versus other segments that are in fee income?
Hey, Brad. It's BJ again. I think it's going to be mostly on the mortgage side. And again, it's related to some comments I made earlier around secondary originations probably continuing to trend lower plus Continued moderation in gain on sale. Fixed income, we still expect to be relatively strong Around the levels that we're at, maybe $100,000 $200,000 Yes, plus or minus where we're at, but it's mostly on the mortgage side.
The next question comes from Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning. Good morning. I guess, first, just around loan growth, Brian. Some of the comments you made around the headwinds, be it inventory, lack of inventory, labor shortage, etcetera, How should we think about any chances of loan growth picking up meaningfully this year for the bank. Like do you see this being a 3rd quarter event, 4th quarter or most likely a first half twenty twenty two event where you actually see net loan growth coming in, in a meaningful way?
Yes. So you used the term Meaningful a couple of times. That's a term of art. So I'm going to try to avoid defining meaningful. But We are pretty optimistic about the back half of the year in terms of our loan pipelines, as I mentioned and BJ mentioned in his comments.
We saw loan pipelines building in May June. When we look across where we see Those pipelines building, it's very broad based. It's in our really high growth markets that are sort of a Combination of Iberia and First Horizon markets like Texas, we see strength in Louisiana, the Carolinas, It's very broad based there and we also see very strong pipelines in our specialty businesses, Particularly those specialty businesses like asset based lending, franchise finance, equipment finance, which In many ways, sort of lead or early signs of a strengthening economy. So we're encouraged by that. The other specialty businesses are mortgage warehouse lending business.
Our balances came down a bit this quarter. We expect that that will strengthen in the 3rd and the 4th quarter, given the pipelines that we see there. So, We do see the signs of strengthening pipelines and loan growth. On the Converse side of that, We believe based on what we know that there's still going to be a relatively high level of payoffs, paydowns in certain sectors, Particularly, real estate oriented sectors, for example, where refinance activity, taking stuff into the capital markets Or using significant liquidity is reducing outstanding. But on the whole, We feel good about how we are positioned with growth markets.
We feel pretty well positioned with the pipelines that We see the specialty businesses that we have and to the extent that there is growth in the overall economy that's driving loan growth, We think we are going to get our fair share and maybe more.
One thing I would add to that is, as you know we were a big participant in the PPP program at both legacy banks. And while that's obviously the PPP is contributing to runoff, we've got really good feedback across our markets and some of our specialty areas about the ability and we're working on all these to pick up additional business where we were able to service Both clients and prospects and help them with PPP when their potentially their existing bank could not. And what we're seeing is that That could really be an additional benefit for us later this year and into 2022 as well.
Got it. And just
as a
follow-up, you talked about revenue synergies. In particular, Brian, if you could address, When we think about the mortgage business and the capital markets business, where do you see the greater synergies now that we've had 1 year since the deal closed from the merger and how quickly do you think you can start monetizing on those opportunities in terms of its impact on revenue growth?
Yes. So if you take the mortgage business as an example, Our team, Dayton Boyd and his team have done a really good job of taking the mortgage Product, we've integrated our systems. We're rolling out the expanded capability across the First Horizon footprint. And I would say that over 12 years, if we developed a bad habit, the bad habit We didn't really and know First Horizon legacy footprint view the mortgage as a critical part of the consumer banking relationship simply Because we were outsourced on the delivery of that product, now that we've got it in source, we're seeing tremendous momentum pick up As people are leveraging that muscle again to really ask for the mortgage and build out that capability and As P. J.
Alluded to in his comments a few minutes ago, we are seeing our bankers Originate more mortgages for customers and a lot of that is going on to the balance sheet. So I'm optimistic And our fixed income business, which we are seeing significant momentum building over the last 2 or 3 quarters. So I am optimistic that on the revenue synergy side that the goals we set, which I think Based on Capital Bank integration, we are relatively modest will lead to significant revenue growth down the road.
Got it. Thanks. And BJ, congratulations on the move. Awesome move. Thank you.
Thanks, Ebrahim. Thanks, Ebrahim.
The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Hey, thanks. Good morning. Just wanted to go back on, again, getting some more color on Green Shoots and the loan business. I know you touched on this already, but from the perspective of kind of using the new systems to drive new business, Will we see some examples of that in 3rd Q4 or will that kind of implementation post conversion kind of be seen more next year?
Yes. From a systems perspective, you will see that principally next year. We are implementing The Encino system, for example, which is a complete rollout across the entire organization, I very thank yous that we are
Got it. And then as you think about the continual build out of the digital Bank and what you talked about with FinZACT, will you do kind of more sort of public announcements on that and or even have more visible Examples of sort of additional cost saves kind of beyond what you've already pledged on the $200,000,000 I'm just sort of curious if we'll see some signs of that as you continue to go forward.
Yes. Anthony is on the line. Anthony, do you want to take that one?
Sure, Brian. So Chris, what I'll tell you is certainly We are a big believer in technology being able to drive overall efficiency for the corporation as we move forward. So I think the simple answer to your question is our expectation would be as we continue to invest in technology and then you overlay kind of The, I'll call it, the shifting preference of our customer base, we should be able to drive more efficiency and leverage Technology moving forward. So I think you'll see that kind of bleed in continuously as we kind of cross the conversion period into next year and then hopefully continue thereafter.
The next question comes from John Pancari with Evercore ISI. Please go ahead.
Good morning. Good morning, John. Good morning, John. BJ, congrats. All the best in the future and really enjoy working with you.
Look for the margin from here. I know you saw the impact of the liquidity drive a portion of the 16 basis points compression this quarter. So Wanted to see how you think about the NIM progression? And then also, I know you mentioned competition a couple of times and Pressure on loan spreads. Can you give us a little bit of color there, like for example, where some of your new money loan yields are coming in at this point?
Thanks.
Sure.
It's a slippery slope trying to forecast the margin at this We've just seen continued buildup of excess cash here and across the industry and with a 3.5 Continue. So that's why we're more focused obviously on NII and We do think that the core NII for us is bottoming out for a couple of different reasons. One is We still think that there is opportunity to move deposit costs down modestly. We've got Some exception price deposits that are still at higher levels than we would want, and we'll continue to move those down. We do expect that we're going to start to see a pickup in loan demand as markets reopen.
So that's going to add To our NII. So we are optimistic that we're going to see some there. In terms of what kind of loan yields we're seeing right now, from a Commercial perspective, we're seeing new loan yields in the regional bank just over 3% with average durations in the 5 year range. Our specialty businesses are probably a little bit lower than that, maybe 2.75% with slightly lower durations. So those yields are probably 40 basis points to 50 basis points lower than our portfolio yields Across those portfolios right now.
So there is yield compression and margin compression out there across the industry.
And then secondly is on the capital funds. I want to get Okay. The thoughts on your CET1 target. I know your internal target is about 9.5% to 10%. And I know you mentioned some flexible book to deploy and optimize your capital structure.
Any consideration around the potential reduction in
some reason, you were breaking up a bit, but I think you were asking about CE 1 target and that we're a little bit above where We've said 9.5% to 10%. We are not uncomfortable seeing it move up or We've seen it move up or down a little bit around those areas as we pointed out a couple of different ways. We have been using capital to repatriate it to shareholders through our stock repurchase program. We have plenty of capacity available in that and we will continue to be opportunistic and we think that today's valuations are very attractive vis a vis a long term value. We are, as you know, and one of the great legacies that BJ will leave is the Bonefish Our drive towards capital efficiency and we focus very much on excess capital in the organization and don't believe letting it build up And being deployed for bad uses is a good thing and that we will use excess capital to repatriate To our shareholders.
So at the end of the day, we still believe in that 9.5% to 10%. We think given some of the signs of opportunistic Growth, we will absorb it between growth, organic growth and our share repurchase.
Ken Zerbe with Morgan Stanley. Please go ahead.
Hi, great. Thanks.
Thank you. Actually just wanted to go
back to the net interest income guidance just a little bit. If I take your Q3 guidance and sort of put it in with kind of with the actual numbers in the first half, it still feels Actually, numerically, it looks like your net interest income has to decline in 3Q and then it also has to decline even further in 4Q To get to your full year guidance is sort of that mid single digit decline, I'm using 5% is sort of that midpoint. But it just feels like that's a bit contradictory To your more optimistic outlook around, I think, P. J. Just mentioned, your core NII is stable because you expect a pickup in loan demand.
Presumably, you mean in the second half, but it's just unclear. And I was hoping you can clarify that. Thank you.
Hey, Ken. Thanks. Yes, it's BJ, so we've still had a healthy amount of PPP accretion. We still had a very healthy amount Of loan accretion from the marks on the Iberia loans And if you look at kind of the walk forward that we have for you on the NII page, You can kind of see that the moderation in our total NII is coming down. So while We do expect that core NII will continue to strengthen and increase.
It's likely to be more than offset by lower loan accretion and less PPP benefits Than we have had in the first half of the year. So that's really the dynamic that is going on there. On our outlook slide, We give you total NII outlook, but that's the underlying dynamics as to why it looks the way it does.
Got it. Okay. No, that is helpful. And just to go back to the prior question on loan growth in the back half of the year. I think, Brian, When you mentioned when you were answering the question, it feels like you spoke a lot about pipelines.
And because I just want to make Sure. I know you said you're optimistic about pipelines improving, but as we all know, pipeline and balances are sort of 2 different things. Are you also and just to be clear on this, but are you also optimistic that loan balances actually improve in the back half of the year? Or is it just Pipelines? Thank
you. Yes, Ken. I did that I spoke about pipelines, but I also spoke about the outlook for payoffs and the Significant liquidity and the short answer is we are optimistic about loan growth. I think in our mortgage warehouse business and others we should see some growth, but it's In this part of the cycle with a significant amount of liquidity in the markets, it's hard to know what payoffs might be. And so that is the sort of the Toggle factor that we just don't know.
So, our outlook is optimistic, We don't control what we don't control, which is payoffs. The PPP balances are clearly going to come down with forgiveness, So depending on what part, it's a little bit like the net interest margin question that you asked BJ, it really depends on what line or what sector of Line item you are looking at, but I think on the core business we are reasonably optimistic about our ability to grow if we can retain the balances That sit out there today.
And Ken, we did. If you looking at May June in terms of new commitment production, granted to your It doesn't necessarily translate into the balances yet, but very strong new commitment production in both May June And really across many of the areas that Brian mentioned in the earlier question, it was the number of our specialty areas, ABL, finance, franchise And then in the regional bank, Alabama, Texas, Louisiana, East Tennessee, North Carolina, So we I know the credit team is busy working with the line on looking at these opportunities to increase both for existing clients, but also opportunities that we have with prospects. So the activity level has definitely picked up.
Got it. Okay. Thank you.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, thanks for taking my questions. Just wanted to go back to capital. You guys have used A little bit of your buyback here. I think you got around $385,000,000 left just with the stock coming in here along with Allbank stock Seemingly in the past couple of weeks, would you expect to be a little bit more active on the repurchase front as we move into the back half of the year? Thanks.
Thank you, Michael. This is Brian. We're always opportunistic. And as I said A minute or so ago, I think we are attractively valued at these levels visavis the long term value that we will create visavis peers, The strong momentum that I think we see in our business coming out of this integration. So yes, sure, we We'll pick our spots, but we'll be opportunistic and use the authorization to repurchase shares to manage our capital levels,
Okay, thanks. And then maybe just as a follow-up to go back to the fee income Outlook, it does imply it's seemingly another decent step down in Q4. I guess my question is, You said earlier that a lot of that has to do with mortgage, but obviously has probably to do with some fixed income headwinds too, just off really high levels. But that said, I mean, do you think Q4 will be the trough? And do you think you can actually grow fee income as you move into next year?
Thanks.
Yes. Hey, it's BJ, Michael. And actually, I'm happy you brought that up Because one thing I forgot to mention when I was talking about that step down was don't forget that we had about $11,000,000 or so of securities gains In this quarter, which is kind of a part of the adjusted baseline, if you will. So Obviously, those security gains on the legacy Iberia investment and another smaller one aren't going to reoccur. So that's part of the step down.
Then the majority of the rest of it is related to mortgage. And like I said, fixed income continues to remain Strong with all the excess cash in the system and what I said earlier was we're at 1,000,000 $1,450,000 I think to put a fine point on it. And so being somewhere around that range plus All right.
Thanks for taking my questions.
Thank you.
The next question is from Steven Alexopoulos with JPMorgan. Please go ahead.
Hey, everybody.
Hey, Steve. How are you today?
So I know that overall deposit levels continue to rise for the industry, right, just given stimulus and other factors. But I'm curious, when you guys look at your typical mid market customer in your markets, are they starting to draw down deposits to fund investments Or are their deposit balances still also rising?
Like any generalization, It'll be wrong. But for the most part, their balances are still rising. There's still a fair amount of cautiousness around new investments. And To pick an example, fiscal policy and what a capital gains rates look like, what a tax rate corporate tax rates look like, What is the return on investment? All of those things are still affecting people's psychology about making investments.
This isn't an anecdote, but we had an equipment lease that was actually We repaid with cash in spite of prepay penalties, etcetera. So people are taking cash and they're being fairly cautious With it and reducing debt and putting it on the sidelines until they get a little bit more clarity about Where the economy and the pandemic are headed and quite bluntly, where we end up from a monetary and more importantly maybe a fiscal policy. As we work through this period of uncertainty around corporate tax rates, etcetera.
Yes. But Brian, regarding the optimism around loan growth resuming in the second half, are the your customers signaling they plan to draw on credit lines Despite that they are still sitting on excess liquidity themselves?
Yes. Credit line utilization It hasn't changed much. It's sort of hung in there at that 45% area. And we see customers it's It's a mixed bag. We see some customers that are looking at things.
They're booking new commitments and they're indicating that they're going to draw On these commitments and others that are being more cautious about it. So it is one of the things where I guess everybody, us included, has A little bit fuzzy crystal ball about how things are going to play out. If you spun back 18 months ago or 15 months ago or even 6 months ago, we wouldn't have been able to predict how things have played out with a whole lot of certainty. And I think we look at the next 6 months and say that there are a lot of things in motion. And on the whole, what we see in terms of building pipelines, what we see in terms of customer acquisition and calling efforts, We are more optimistic than not, but there is still a certain amount of uncertainty.
There is a fair amount of uncertainty.
Okay.
Thanks. And then for my follow-up question, with the 10 year trending lower despite the firming inflation data, the $1,000,000 question everybody has is outside of central banks, Who is exactly purchasing treasuries here? And you guys have a very unique vantage point into this, right? ADR was very strong again in the quarter. So maybe could you give us some color on what types of investors you guys see in your fixed income business actively buying treasuries here and is it banks?
Thanks.
Hey, Steve, it's BJ. Yes, it's interesting. What I think our fixed income People would tell us is that it's actually predominantly the largest U. S. Banks.
So we haven't really seen any material change in how they're holding liquidity. So they are the ones that are buying up a lot of the treasuries. We're seeing a little bit of purchasing From Japan and Europe, but predominantly it's being driven by the largest U. S. Banks, Which is interesting dynamic.
The next question comes from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good morning, guys.
Good morning, Brady.
So the mortgage warehouse was down, I think, a little more than people had expected. Linked quarter was down about 20%, which is kind of a big move. I know that has been very robust over the last year or so with COVID and everything. Maybe just talk about the warehouse from here. Do you expect it to recover at all?
Is this Or is this a good level? Or could we see maybe some additional weakness as mortgage continues to cool down?
Yes, Brady, this is Brian. As we sit here today, we are optimistic we will see some recovery in those balances Over the next couple of quarters, there are a lot of things going on in the mortgage space right now. Some of it is just The constraint around housing supply and the inability for new purchase money transactions to actually Refinance activity is leveled off. It's going to ebb and flow given the 10 year that Steve just pointed out. But given some tweaks that we've been making, which we think will allow us to pick up additional market share Of our existing customer base or warehouse share of that existing customer base, we are expecting that balances will probably It ripped up over the next couple of quarters.
Okay. That's good
to hear. And then my second question is just on PPP fees. I think you guys had About $35,000,000 of them this quarter, which was a high watermark so far. Just remind us what's the level of PPP fees that are left And any thoughts on the timing of that realization?
Hey, Brady, it's BJ. At At the end of the second quarter, we have about $27,000,000 left and we think that that will Continue to come down probably over the next 15 months or so.
Okay, great. Well, BJ, great working with you
and good luck at Live Oak.
Thanks, Brady.
The next question is from Brock Vandervliet with UBS. Please go ahead.
Thanks for taking the question. If we could just go back to mortgage business, in terms of the gain And again on sale trajectory, how should we think about that? I hear you, it's lower. But should we look at that as lower for the duration that overall mortgage volume may be falling? Or is this Do you see this as more of a shorter term adjustment driven by competition in the market?
Hey Brock, this is Brian. I will start. I tend to think that the annual sales spreads are probably Not going to expand as much. Pricing was a leverage to slow down volume and periods of feed volume where everybody was having Trouble meeting demand and as that volume, particularly refinance activity subsided, I'd be surprised if gain on sale mortgages Expanded back out. As in our income statement, particularly in the fee income line, It's really a function of 2 things, the level of secondary sales and 2, the gain on sale percentages.
And Yes. You made some real simplifying assumptions and said, okay, we booked probably 3 $50,000,000 or so into our portfolio that might otherwise have been sold in the secondary markets and assume that they were sold at Same gain on sales spreads, which I know are overly simplifying. That's probably $12,000,000 of pretax earnings that Comes back to us through enhanced yield over time. So we're looking at volumes and spreads and thinking about how what's the right mix The balance sheet and on balance sheet, and we asked and answered earlier in the call about Duration and expanding the size of our securities and using excess cash, we clearly want to use our balance To support customer activity and where that is driven through duration in mortgage product, we will look at it. But on the whole, we think As you summarized earlier, you have directionally mortgage gains will likely be down and the Fred, in our view, are not going to expand out significantly from here.
Okay. Thanks for that. Just going back to your earlier comment on mortgage, my understanding was that, that is still primarily The Iberia part of the franchise and that once you knit together the systems, then you can introduce it on the Legacy FHN side, is that accurate or has that already happened?
I would say It's inaccurate in the sense that we have that product available across the broader franchise. It is accurate in the sense That we are not practiced at originating the kinds of volumes we think we can originate out of the First Horizon franchise. So we believe that we have much more capacity The legacy First Horizon franchise because we have trained ourselves to not be in that business and have Sort of an indirect fulfillment model. Given the direct fulfillment model and the success we're seeing with that, we think that we will See much greater mortgage volume out of the legacy First Horizon franchise over time.
Okay. Thank you and good luck to you, Ajay.
Thanks. Thanks, Brad.
The next question is from Casey Haire with Jefferies. Please go ahead.
Wanted to circle back on capital. So the CET1 ratio, You're taking that up about 50 bps. Just curious why I mean, you sound like You're going to be pretty opportunistic on the buyback. Just curious why you're taking up the capital floor When you feel good about credit and just some color there.
Yes, Casey, I wouldn't necessarily say we're taking up the capital floor. We're Giving you kind of our view of where capital is likely to be. As Brian alluded to, we'll be opportunistic on share repurchases, Right. And that will use some capital wisely. RWA growth is going to continue To be muted.
And so the combination of those 2 will if we're at 10.3 Today, we're giving you a range of 10% to 10.5%. If we start to see some RWA and loan growth coupled with some share repurchase, It flows to the lower end and conversely, if we don't, it goes towards the higher end. But I think Brian's point earlier was Ultimately, we're more comfortable from a balance sheet perspective and a capital optimization perspective more in the 9.5 Percent range, but just given kind of the dynamics of the environment today, we'll likely be more in the 10% to 10.5
Okay, okay. Got it. And then on the M and A front, obviously, a pretty active environment still. Can you just give us some updated thoughts on First Horizon's appetite today?
Yes. I don't think very much has changed from our perspective. We're still very, very focused on getting our integration completed and then And really following that, delivering on what we think are the huge opportunities that exist in our existing franchise with the Significant growth markets that we have the opportunity to serve in our 12th state footprint, our combined banking footprint And what we think are the opportunities to just grow organically. So we don't We're not thinking that M and A is critical to our strategy. It's not built into our strategy.
Our strategy is designed around, let's execute in a very seamless and thoughtful and a very seamless and thoughtful way for our customers delivering the best products and technology So to capitalize on the huge growth opportunities that we have in our footprint and invest organically. And then if something comes up along the way, we will certainly But at the end of the day, it's not something that we're taking our eye off the ball in terms of execution today. We're really focused On delivering the promise of the Iberia Bank First Horizon merger of vehicles.
Excellent. BJ, it's been a pleasure. Miss you.
Thanks, Katie.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Brian Jordan for any closing remarks.
Thank you, Betsy. Thank you all for joining us this morning. We appreciate your time. We appreciate your interest If you have any further questions, please reach out to any of us. We'll be more than happy to try to gather the additional information.
Thank you all. Hope you all have a great weekend and thanks to all our associates for the great work you are doing. Have a great weekend. Bye bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.