First Horizon Corp
NYSE:FHN
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First Horizon Corp
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Good morning, and welcome to the First Horizon Corporation First Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I'd now like to turn the conference over to Ellen Taylor, Head of Investor Relations. Please go ahead.
Thanks, Jason, and good morning, everybody. We really appreciate you joining us. We know this quarter has been quite a whirlwind. To start things off, our CEO, Bryan Jordan; and CFO, BJ Losch will provide some opening comments and overview of our results. And then, of course, we'll be happy to take your questions. Our Chief Credit Officer, Susan Springfield, is also with us today. Our remarks will reference the earnings presentation which is available at ir.fhnc.com.
I also need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and we ask you to review the factors that may cause our results to differ from our expectations, which you can find on Page 2 of our presentation and in our SEC filings. We also will address adjusted results which exclude the impact of notable items and these are non-GAAP measures, so it's important for you to review the GAAP information in our release and on Page 3 of our presentation. And last but not least, our comments reflect our current views and you should understand that we aren't obligated to update them.
With that, I'm going to turn things over to Bryan.
Thank you, Ellen. Good morning, everyone. Thank you for joining our call. I'm really proud of the great progress we've made over the last nine months and integrating our merger of equals is a great momentum I see building in the business. We're off to a strong start in the first quarter of 2021. We demonstrated solid performance in the quarter with good PPNR results reflecting the resiliency of our more diversified business model.
While loan demand continued to be muted as clients 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 remained strong with inflows from government stimulus and clients continuing to preserve cash. During the quarter, we generated impressive results in our fee income businesses and are gaining traction by capitalizing on additional revenue synergies tied to our merger of equals.
I'm also proud of the work we're doing to control the things that we can control, particularly around expenses and deposit pricing. Despite the seasonal headwinds, we reduced our linked-quarter adjusted expenses driven by our ongoing cost [ph]. We achieved annualized merger-related cost savings of $76 million in the quarter. The improving economic backdrop in January to March and our continued prudent risk management largely held for us a $53 million reserve release. The power of our diversified and counter-cyclical model, our strong risk profile along -- a strong risk profile along, and the benefits from our MOE helped us deliver a return on tangible common equity of 20%. Excluding the impact of a $53 million reserve release, we generated a return on tangible common equity of over 17.5%.
We are making great progress for our key merger milestones. We've completed early systems conversions included in 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 declined experience and improved productivity, we continue to leverage Fintech capabilities to enhance our product offerings, drive efficiency and improve the customer experience.
Our capital levels remain healthy with the common equity Tier 1 ratio of 9.96% and we grew our tangible book value per share to $10.30 at quarter-end. Given the relatively limited loan demand, we chose to opportunistically deploy capital through share repurchases and bought back about 4 million shares in the first quarter. So, including dividends we returned a total of $143 million of capital to our common shareholders.
I'm incredibly proud of our efforts to serve our clients, communities and associates throughout the pandemic with PPP loans, charitable contributions, and by offering our associates increased flexibility and benefits. Our team is also intensely focused on capturing revenue synergies across markets, product lines, leveraging our expanded suite of products, services, and expertise, all instrumental and retaining and growing our client relationships. We are increasingly optimistic about the economic recovery as we've seen improved rollout of the vaccine in our markets which is helping accelerate reopening. We are also mindful of the fact that past year had a number of unexpected turns and the path forward is unlikely to be a straight line with no surprises. So while we're prepared for recovering this year, we are also prepared for the unexpected.
We remain confident that strength of our highly attractive franchise, more diversified business model, and benefits of the merger of equal position us well to deliver top-quartile returns over the medium term.
With that, I'll hand it over to BJ for his comments.
Great. Thanks, Bryan. Good morning, everybody. Let's start off on Slide 6 and just do a flashback [ph] on some of the key highlights in the quarter.
As Bryan 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 position 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 could control with expense and deposit pricing, merger integration is on-track, credit trends are excellent, and our capital flexibility has allowed us to return capital to shareholders in a meaningful way. Due to the overall muted landscape for loan growth, we opportunistically repurchased 3.6 million shares in the quarter at an average price of $16.12, and including dividends as Bryan talked about a return to total of $143 million in capital to common shareholders.
Looking at Slide 8, on adjusted financials; we gave you an overview for the quarter. We generated PPNR of $343 million of 1% from 4Q '20. Revenues were down just slightly as impressive results in 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 and personnel. Given the very low net charge-offs of only $8 million or 6 basis points on a $58 billion loan portfolio, combined with an overall improvement in the macroeconomic outlook and reduction in our loan balances, we released $53 million in reserves this quarter resulting in a provision credit of $45 million. And as Bryan mentioned, these strong results helped drive our return on tangible common equity above 20%, and even if you adjust for the reserve release, our return on tangible common equity was over 17.5%.
Moving on to Slide 9; we'll talk a little bit about net interest income. We generated reported NII of $511 million, down $14 million linked-quarter, driven largely by a reduction in loan balances, fewer days in the quarter, and a further decline in the average LIBOR basis. As mentioned, we are focused on controlling what we can control in this environment and we continue to drive down our funding cost that somewhat mitigated these headwinds. We lowered our interest bearing deposit rate take another 6 basis points this quarter to 20 basis points overall, and we'll continue to look for opportunities to lower our overall funding costs further while we remain in this low rate environment. The reported first quarter NIM was 2.63% which decreased 8 basis points linked-quarter, driven by a 10 basis point impact of continued increasing levels of excess cash which ended the quarter at $10.8 billion [ph].
Moving on to Slide 10; at fee income, the benefit of our more diversified platform was clearly on display again this quarter with a $10 million linked-quarter increase driven by the great results in fixed income, along with nice momentum in brokerage and wealth as well. Linked-quarter fixed income average daily revenue was up 25% to $1.9 million a day, driven by favorable condition in the banks for increasing levels of excess cash to work in bonds along with the past and continued volatility rates. In particular, our mortgage and our government guaranteed debts were particularly active. While mortgage banking entitled [ph] decreased $4 million linked-quarter, our results remains relatively strong compared to historical levels, despite the in-depth of seasonality, higher interest rates, and limited housing inventory.
Moving on to expenses on Slide 11; you will see that adjusted expenses in the quarter were $464 million, down $10 million linked-quarter highlighting our commitment to continued expense discipline along with the benefit of an incremental $5 million reduction tied to merger cost saves. We held personnel costs overall relatively stable with 4Q '20 levels with additional benefits from merger cost saves and ongoing tight expense control, offsetting seasonal headwinds from FICA tax resets, and a $10 million increase in revenue-based incentives and commissions. In our ongoing efforts to control what we can control, we are intensely focused on not only capturing merger efficiencies but continuing to streamline processes across the platform to position us well to continue to drive investments in the future.
Turning to Slides 12 and 13; we give you a look at our loan growth and our funding profile. And as expected, we continue to see pressure on loan balances which were down $1.6 billion in the quarter driven by decreases in mortgage-related loans, both in the consumer portfolio and in our loans to mortgage companies business. Period-end loans were up slightly at 1%, largely due to a net $1 billion increase in PPP loans. As we look forward, our lending pipelines are showing really nice momentum. So we are optimistic that as the economy is continuing to improve, we will see increased levels of customer activity in the back half of the year. At year-end we saw a modest uptake 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 cost 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 and 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-offs to average loans improved 6 basis points, down 14 basis points from last quarter. Our nonperforming 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 million and a reserve release at $53 million.
And as you can see on Slide 15, the allowance to credit losses coverage ratio declined only modestly from 4Q '20 to 170 basis points in 1Q '21. And as a reminder, we use the [inaudible 14:54] February scenario and then incorporated other economic in portfolio factors to evaluate our overall reserve coverage. We continue to feel very comfortable with our risk profile and our reserve levels.
Capital on Slide 16. As Bryan mentioned, tangible book value per share was $10.30 up 1%, reflecting strong earnings. And in addition to a reduction in RWA, helped drive a 20 basis -- 28 basis point improvement in our CET 1 ratio to 9.96%. Moving on to Slide 17, 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 for the full system conversion in early fall of 2021. We have achieved $76 million in annualized run rate savings against our net target of $200 million. We're still on track for an annualized $115 million by the end of the year. As a reminder, our gross savings are higher and is providing the flexibility to continue to make technology and other investments to drive continued improvement in processes and the overall customer experience.
Additionally, we're making solid traction on revenue synergies and thus far experienced roughly $10 million of annualized revenue synergies that are tied to about $400 million of commercial loan commitment. We see significant additional opportunities with revenue synergies across markets and product lines and as economic activity continues to pick up.
On Slide 18, we're really pleased with our performance just far through the First quarter of the year with all line items inline or better than the outlook we provided on our First quarter earnings call in January. We have therefore updated our expectations for both the second quarter and our full-year outlook based on the strength we are seeing in our business and the economy. For the second quarter in particular, for NII, we expect low single-digit decrease with average loans down modestly due to the outlook. And while we anticipate a continued relatively strong environment year term for our [Inaudible 17:25] fixed income business, our outlook reflects a high-single digit to low double-digit decrease from the First quarter.
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 well in the range of 5 basis points to 15 basis points and that we're likely to see continued reserve releases. We expect to see our CET1 ratio to remain in the 10% range for the second quarter. And in terms of full-year, given our strong fee income performance in the first quarter and continued improvement in credit quality, we provided an update for the full year, where we now expect only a mid to high single-digit increase in non-interest income, lower net charge-offs in the 10 basis points to 20 basis points [Inaudible 18:21] for the year and a CET target in the 9.5% to 10% range. Our business model is working.
Wrapping up on Slide 19. We're capitalizing on the opportunities of our more diversified business model and our highly attractive franchise. We demonstrated solid revenue trends through strength in our fee businesses, despite interest rate headwinds. We're controlling what we can control as evidenced by the cost expense reductions. We're benefiting from merger cost saves and revenue synergies. Our credit quality is excellent and we're delivering enhanced returns for shareholders.
Before I hand it back over to Bryan, I just wanted to acknowledge [Inaudible 19:09] all of you certainly have, this happens to be my Fiftieth 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 non-profit here in town and she's very excited about that. We're very excited for her about that and I'm equally thankful for everything that she's done for she has made us a better place and better Investor Relations Group and we will miss her.
So with that, I hand it back over to Bryan.
Thank you, BJ. I will [Inaudible 19:52] my thanks and appreciation for the great efforts [Inaudible 19:57] over the last 10 or 12 years and she certainly will be missed. I am exceptionally proud of our continued execution in 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 will now take questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brady Gailey from KBW. Please go ahead.
Hey, thanks, good morning guys.
Hey, Brady.
Good morning.
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 first your clients are flush with cash, when do you think you really start to see some decent loan growth? Is it this year or 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, 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 -- we're planning a little bit more activity as well. And we started to see a little bit of churn in some of our markets particularly in places like [ Inaudible 22:42] Middle Tennessee, Alabama on the specialty side, asset-base lending, equipment [Inaudible 21:51] 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 optimistic about what that means for balance sheet in the back half of the year.
Also to 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 refied and a lot of that has gone to secondary production. We did make some changes in our product set on the [Inaudible 23:36] side and then in certain areas around 17-year, 15-year fixed, where we believe that's going to change the trajectory of our portfolio growth on the consumer side and as a matter of fact, we have seen [Inaudible 23:56] pipelines increased significantly in the last 45 days as we made those changes. So all of that to say is we see a lot of activity starting to come on and we're optimistic about the back half of the year.
Great. That's good to hear. And then my follow-up is just on the buyback. If you look at your CET1, it's now 10%. You were active in the buyback. You have a $500 million buyback out there. That's a big number, I think you can repurchase about 5% of the company over the next couple of years. Is the right way to think about it that you guys will utilize the $400 million, $500 million 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 can [Inaudible 24:56] this quarter at an average price that's fixed well. So we felt pretty good about that. We want to put our capital in the loan growth, we would have thought that CET1 would have been more towards the 9.5% range, obviously floated up on lower [Inaudible 25:15]. We just talked about the fact that we think we'll [00:24:05] growth coming back, all of that 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 [Inaudible 25:44]. So [Inaudible 25:45] you will be missed and congrats on the new spot. It was great working with you over the years. Good luck.
Next question is from Michael Rose from Raymond James. 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 kind of the near-term expectation? Thanks.
Hey, Michael. Good morning it's BJ. So I'll start. I'll give you kind of the overall view of our PPP trajectory that may help. So it turns around one, we expect that 90% of those will be forgiven by sometime in the third quarter of this year. So I think we originated something on the lines of $4 million to 90% [Inaudible 26:56] by the third quarter and therefore all the fees associated with that [Inaudible 27:04] by that. On round two we're at $1.3 billion or so and we'll probably climb a little bit more of that. We assume that those fees will be accretive over the next 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, they are based on my commentary earlier right on a little bit more optimism on loan growth in the back half of the year. Our continued focus on driving down the target cost where we can, where we have a little bit more opportunity, and that LIBOR basis hopefully flattening [Ph] half-year, tell us [Ph] knocking on wood. We expect that our NII, as we said on Slide 18 might be down honestly, 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 estimated anywhere between 30 and 40 basis points of drag on the margin today is coming from the excess cash. We certainly want to put that to work in loan growth. We do expect that deposit growth will continue to remain elevated, but over time, start to come back out. But it's going to be here for a while. So we're focused less on the margin and more on stabilizing and starting to improve the NII trajectory.
That's great color. Very helpful and maybe just as my follow-up. We've seen a bunch of deals announced here lately in the industry. You guys are well on your way with IBERIA. What's the appetite as we move forward for additional deals? If you can update us and have those priorities may be changed just given the recent activity. Thanks.
Hey, Michael, this is Bryan. Our focus really hasn't changed. As you point out, we're making good progress on the integration of our merger of equals, IBERIA Bank, and First Horizon. We feel an outstanding opportunity exists in our existing franchise. We see great demographics in our Southern footprint, great growth opportunities. And so our focus is clearly on getting the merger integrated. And then as we come out of the integration in the fall, really start to build momentum and capitalize in these growth markets that we see out there. So our priorities haven't changed. It really is trying to capitalize and deliver the benefits we believe that it just and the work we're doing today with our merger of equals.
All right. Great. Thanks for taking my questions and congrats on the new role [00:30:21].
The next question is from Steven Alexopoulos from JPMorgan. Please go ahead.
Good morning, everyone. I wanted to start, so nice start out of the gate on revenue synergies. Could you give more color on the $400 million of commercial loans you're calling out from the synergies and how are you seeing the bigger picture now for revenue synergies?
So Steven its Susan. As it relates to revenue synergies and BJ alluded to we're seeing few areas specifically early on really benefiting from merger of equals. One is the legacy IBERIA specialty business which is equipment finance, we're seeing great opportunity across all of our markets, and even within some of our other specialty lines we had equipment needs. So that's going to continue to build. Just as a side note to think during this COVID environment that we've already seen $400 million and that's related to revenue synergies, I think is great. And also asset based lending, which as you know, First Horizon has been in that business for many, many years and we're seeing great results from our legacy IBERIA market and relationship managers.
We also believe there is an opportunity to continue to expand specific banking within those two. Also we 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 or secondary portfolio mortgage synergy is [00:30:35] together. So we're very, very pleased. The bankers doing the great thing and our bankers are so excited to have additional things that they can talk to clients about and not have those go to another institution. So I feel very, very confident that we'll continue to see that build as the economy continues to open.
Hi Steve, this is Bryan. I'll add to that. I think this is one of the more underappreciated opportunities in our merger. I think there is a lot of revenue synergies that we will generate, some of it is the obvious stuff, a bigger balance sheet, some of it is the product set that Susan just described and take it for example, the private client and wealth business, that's an area that IBERIA BANK are 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 track $30 million 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 product set, bigger balance sheet, the opportunity to do more for our customers. We think we're going well to see the $30 million of revenue synergies over the next couple of years we predated in our Capital Bank merger.
Okay, that's helpful. Bryan, a big picture question for you. So you guys are delivering on the cost saves from IBERIA. The revenue synergies are starting to come through. Countercyclical businesses are doing their job. I know 2021 is a bit of an odd year given the pandemic and you have PPP program stimulus 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 or is this a high single-digit grower? What do you see for us? Thanks.
Yes, that's a good question. You didn't stipulate what you think your economies going to do when we come out of all this stimulus. I think, we are going to have a footprint and the 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 Atlanta, Houston, Dallas, Miami, we're in 15 of the top 20 MSAs in the side. Pre-pandemic this out we are growing faster than the US 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 [00:35:34] that I think over time that the growth in the US economy is going to return back to that 2% to 2.5% area. So I think that would dictate that we 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 [00:36:04] as well. Thanks guys.
Thanks, Steve.
The next question is from John Pancari from Evercore ISI. Please go ahead.
Good morning.
Hi John.
And first off, best of luck to RD [0:36:19] as well in your new [0:36:20]. On the excess cash side and I believe you're sitting on about $10.8 billion in excess and sort of, if you can give us a little more color on how you're thinking about the deployment there. I know you indicated in the 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 bond portfolio purchases or areas like that? Thanks.
Hey John. So I see it in a couple different ways. One is we are optimistic that loan growth is going to come back and [00:37:06] some of this excess cash, so that's priority number one. Number two, I think over time, there is 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, so I think there is enough activity to see a little bit of both of that, but I think deposit levels will come down because of that as well. On the securities portfolio, we did modestly decrease it this quarter, but 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 as deploying it on the loan growth side. So as I said before, yes, of course, we'd like to put excess cash to work, but this is a high-class problem to have. It's really just [00:38:23] hurting our NII. So to me, deploying it is all of that.
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 you saw $1.9 million ADR this quarter, certainly a high level. Where do you see that going, just given the backdrop here on the rate side. And then separately, I guess also on the mortgage warehouse business, if you can give us an outlook there as well, given the rate dynamics? Thanks.
Sure. So starting on the fixed income $1.9 million was very, very strong in the quarter. We expect continued strength maybe not there, but maybe more in the $1.5 million, somewhere between the $1.5 million and $1.9 million where we're at this quarter, 90% plus of the business days last quarter, had $1 million [0:39:39] 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 $1.9 million level that we saw this quarter.
On loans to mortgage companies as you would know, you see seasonal declines in the first quarter, we do expect some tick up in the second [0:40:12] into the third as well. So we do expect a little bit of a pickup from first quarter levels. So that would help drive some of the loan growth that we see in the back half of the year.
John also with, in mortgage warehouse we [00:40:34] a great job of continuing to add buyers. So just in the last two years call it about 8%. So we've got more clients that were working with us and obviously the business [00:40:52] from mortgage lending. We think we're well positioned because of the [00:41:01] as well.
Great, thank you.
The next question is from Brock Vandervliet from UBS. Please go ahead.
Thank you. Just following up on John's question, BJ, it sounds like you're relatively cautious given the rate environment on securities which I understand. We are seeing some of your peers, particularly those with mortgage banking operations simply retain more on the residential side in this environment especially if they can avail themselves to jumbo or non-QM something with the stepped-up rate, is that part of your strategy here?
Hey Brock. Yes. So go back to a couple of questions, we kind of talking about loan growth out [00:42:05] consumer side, you're exactly right, we did make some changes. So, some of the portfolio of 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 [00:42:26] pipeline in the last 45 days for portfolio production is up pretty significantly. So yes, we are looking to put a little bit more on the portfolio. On the security side, just to give you a little bit more color, I mean, the yields that we're seeing right now coming out of the portfolio would be in the 1.25 range with a five year duration. So we're trying to pick our spots there, but we'd rather do what we just talked about which is increase 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.
This is Bryan, Brock. And as you think about the alternatives for investing this excess cash, if you're doing anything, securities portfolio or mortgages or you're adding duration and so our preference is always to use our balance sheet for building customer relationship, at least in the mortgage products which you have the relationship opportunity either to expand it or solidify, you don't get that securities portfolio. So we will always look for opportunities if we're going to add duration that added through our loan book.
Got it. And just as a follow-up. I think the only thing it's rebounded more than bank stocks in the last year has been oil prices. I didn't hear you mention that has 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 award here or other concerns or how are you thinking about energy?
Yes, this is Bryan. That's an important business. I mentioned in the growth markets that we're in. I mentioned, Dallas and Houston. Clearly, Texas, it is an important product set and we are all likelihood going to have continued presence and energy lending, all likelihood with that exposure will be flat to down-ish. 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, [00:45:19] and so on and so forth, but we also think it's a very volatile place to land. And so we're not going to increase our exposures in all likelihood. We're going to focus it much more on how do we support the commercial businesses in both of those markets.
Got it. Okay, thank you. Good color.
The next question is from Jennifer Demba from Truist Securities. Please go ahead.
Thank you. Good morning. Most of mine have been asked, but Bryan I have two questions. I assume that when loan demand does return more, 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 will know what the real estate simplifications are going to be from the shift to more working from home for the banking industry employees? Thanks.
Yes. Thanks, Jennifer. First on loan demand. You're absolutely right. It is a very competitive environment and 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 the transaction-by-transaction basis and we're trying not to draw a whole bunch of bright lines other than let's make sure that we're booking assets and serving our customers in a way that will be good for our customers through the long-term, it will be good for our balance sheet through the long-term.
With respect to real estate and Susan will have probably some additional comments. I think that's an area 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 three or four months and we expect that we will be bringing the vast majority of those that are working from home by. Just keep in mind that [00:48:14] our people are 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 is going to be some short-term impact on commercial real estate, and our focus on it today, is more focused on, can we see the return to opening in some of the businesses that like hospitality and restaurant services where we need to get workers back to come back to full capacity.
So I think more of the short-term stress in commercial real estate is are we going to be able to get properties open, because we can get housekeeping and food servers and so on and so forth back to work. I think the commercial real estate sector will probably level out over time as more people come back to the office. I think there are tremendous amount of benefits for people being together at least, if not more flexibility, but more together so that you get the communication, the collaboration, the culture, all those things go along with interacting with one other. Susan I don't know if you want add anything?
I'll add a few things. Around office in general, as Bryan and BJ [00:49:43] earlier, we are in very attractive markets in the south and we have seen even during the pandemic [00:49:52] emerging out of it interested in companies that since relocating into some of the markets that we're in places like Raleigh, South Florida, Atlanta, Birmingham, Eastern Dallas, to name a few. So even if office space is in a big picture does become somewhat of an issue where we were well positioned in the market that we are in. The other thing I would say Jennifer is that we remain very consistent improvement in our underwriting across office and average price equity in our office portfolio [00:50:35] 38%.
We always have huge funds to one office buildings, our average loan size in that portfolio is about $12 million and then we’re diversified across our own geography, Florida, North Carolina, Tennessee, Texas, Georgia, Louisiana would be our top six markets, which is what you would expect based on our footprint. So based on our underwriting potential for good things in our portfolio, I think is greater than others because of the market we're in and a way that we underwrite those loans [00:51:17].
Thank you.
The next question is from Christopher Marinac from Janney Montgomery Scott. Please go ahead.
Thanks. You may have mentioned this earlier this morning, I just wanted to go back to the loan yields and compare in kind of new business going forward compared to what the core yield was. I'm just looking at the details on Slide 12.
Yes, hey it's BJ, Chris. So our 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 certainly higher than that in the low 3s but that's what we're seeing today. So repositioning of the book in terms of new production is going to be a little bit less. And what we see, which obviously is going to put pressure on the margin. Again, I think as volume starts to pick up in the back half of the year or so, hopefully we can mitigate some of that. But hopefully that [00:52:38].
Hey Chris, this is Bryan. With respect to coming out of a pandemic and all of the uncertainties that that created, you wouldn't expect to see spreads compressing at the pace that they are and as suggested in my response to Jennifer's question a minute ago, there is a lot of competition and a lot of that competition is manifesting itself in spreads and unfortunately, we think that we and the industry are looking at tighter spreads for some period of time of the year as there is so much excess liquidity out there trying to get deployed in loan growth.
No. I appreciate that. Thank you for the additional color. And then just BJ, just a follow-up on the gain on sale spread in the mortgage business. Are there any technology improvements that essentially help too on the cost side that as time evolves, that the gain on sale spread may not come back as much as it historically did?
Chris when you say come back as much what do you mean?
Well I mean, just comparing where we are today at 3.70 compared to being in the 3s or 2s a year ago?
Yes, I mean, I think there are significant process improvements that we're working on in the mortgage business. It's kind of hard to do a lot right now when you have so much volume, but we have a lot of things that we're trying to do to keep those spreads at higher, but as you think that our expectation is we'll continue to moderate more towards the 3.5% range this year. But, it remains to be seen, because you know there's a lot of moving parts that go into that gain on sale spreads, but [00:54:30] pretty healthy over the last three quarters at least and so we expect that to be above some of the historical levels for another couple of quarters.
Great. BJ. Thanks again.
Thank you.
The next question is from Jared Shaw from Wells Fargo. Please go ahead.
Hi, good morning. This is actually [00:54:57] filling in for Jared. 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 toward normalized level or do you foresee that being a quicker process?
So, yes, we had to do that analysis in terms of how much of [00:55:44] 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 $700 million to $1 billion range in any given quarter, [00:56:04]. So I don't think that $10 billion of excess cash comes out over the next couple of quarters. I think it is going to take some period of time for it to be [00:56:20]. 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 expanding in that level. I expect it to continue to fall based on increased loan growth, increased usage of those excess cash balances particularly on 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 a while.
Okay. And then as a follow-up maybe switching gears and looking at credit and the reserve position. So credit obviously was very clean this quarter. To what extent or qualitative overlay 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 [00:57:30] coming out of the pandemic in talking with clients and with bankers really starting to see a lot of great activity come back to that 2018 levels. So we're optimistic, although again, we are still waiting to see how additional vaccinations, etcetera in some states [00:57:55] completely. But we do based on what we know now, but I think the portfolios, I would expect that we'll see additional reserve release throughout the remainder of the year.
Yes, I agree. As I said in my earlier comment that based on what we're seeing and the economic outlook and, I mean we have said for quite some time that we significantly reposition credit portfolio since the financial crisis and this is showing up in the very low levels of charge-offs we've got. So all of that said [00:58:40] coverage ratios and pre-pandemic on a combined basis we would [00:58:45] that applies -- shouldn't be 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 you'll get back closer to maybe first or second quarter models, 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 Bryan Jordan, President and CEO for closing remarks.
Thank you, Jason. Thank you all for joining our call this morning. We appreciate your time and interest. We're excited about the momentum we're seeing in our company. Please feel free to reach out to us if you have any further questions or need additional information. I wish you all have a great day. Thank you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.