Earnings Call Transcript - FHN Q2 2021

Operator, Operator

Hi, everyone. First, it’s Ellen Taylor. I have to do a little housekeeping. Thanks so much for joining us this morning. We greatly appreciate your support and interest. To start things off, our CEO, Bryan Jordan, and CFO, BJ Losch, will provide opening comments and an overview of our results. And then, of course, we will be happy to take your questions. We are also pleased to have with us today our Chief Operating Officer, Anthony Restel, 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 SEC filings. 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 will give it to Bryan.

Bryan Jordan, CEO

Thank you, Ellen. Good morning, everyone, and thank you for joining our call. I am proud of the First Horizon team as we continue to deliver solid performance. The economy continues to strengthen. Loan demand and activity are 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 opportunities, and compressing loan spreads. Our diversified business model, including mortgage banking, mortgage warehouse lending, and FHN Financial continue to provide an effective offset to some of these headwinds. 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%, 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 all bode extraordinarily strong first quarter levels. Our results this quarter were bolstered by the impact of continued rapid improvement in the overall economy and asset quality, which resulted in a provision credit of $115 million. We are encouraged by the uptick in activity across the franchise as markets and sectors reopen. Our associates are having constructive dialogue with clients and prospects, and we feel we are in a relatively strong position to benefit from further economic improvement. Loan pipelines certainly continue to reflect the strengthening economy in May and 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 pick up. All of this translates to a fiercely competitive landscape for loan outstandings. We are continuing to focus on controlling the things that we can control, driving toward completing our merger integration, 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 suite of products, services, and expertise, all instrumental in retaining and growing our client relationships. At the same time, we are committed to continuing to drive enhanced efficiency by delivering $200 million in cost savings and controlling costs while still making prudent investments in technology and products to drive future revenue growth. We also continue to opportunistically deploy capital through share repurchases. We bought back 3.1 million shares this quarter. Including dividends, we returned a total of $141 million of capital to our common shareholders. We continue to be optimistic about the path of the economic recovery and the increased activity levels we are seeing across our footprint as our markets continue to reopen. But like many, we are keeping a watchful eye on supply chain and labor constraints, as well as signs of inflation. I continue to be highly confident that our business model and the benefits of the merger of equals 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 Losch, CFO

Thanks, Bryan. Good morning, everybody. Let’s start off on Slide 6. As Bryan mentioned, we are 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 are 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 Bryan 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 perspective were 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 first quarter, and we delivered continued improvement in expenses with an incremental $4 million of merger-related cost savings. From a credit quality perspective, the combination of the improving macro environment and our own asset quality, including the benefit of upward grade migration in the loan portfolio, exceeded expectations and drove a provision credit of $115 million in the quarter with net recoveries – I repeat, net recoveries of $10 million. In fact, for the first half of the year, we have an aggregate net recovery of $2 million on a $57 billion loan portfolio outstanding performance. We remain on track for our final systems conversion in the fall and continue to make progress towards our $200 million net savings target, with $92 million 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 are on track for roughly $20 million of annualized revenue synergies across various commercial and consumer businesses with more to come across all those platforms. Turning to Slide 7, I will quickly review the notable and merger-related items in the quarter. As you can see, we had $26 million after-tax or $0.05 a share of merger-related notable items. And, as you know, in January, we raised our expected net merger cost savings from $170 million to $200 million, consisting of gross cost savings of $250 million and reinvestment of $50 million. We continue to be confident in achieving these savings. In addition, we expect our pre-tax merger cost to total about $500 million, and this increase is largely driven by three components. First is tied to more recent developments related to product and capability enhancements we have elected to make in connection with the integration. So, think of it as making the engine more durable and powerful 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 have 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 savings and the addition of the revenue synergies we are already seeing is 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 $321 million. As expected, revenues decreased 3% from strong Q1 levels given expected reductions in fixed income and mortgage banking fees, along with continued NII pressure. Adjusted expense of $465 million remained relatively stable linked quarter as the benefit of our incremental merger cost savings was muted by some higher long-term incentive costs. In this quarter, the provision credit, which we talked about at $115 million, was compared to $45 million in the first. 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. The pace of macroeconomic improvement is likely to be less pronounced than it was in Q2, but there is opportunity for further 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 Bryan 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.

Bryan Jordan, CEO

Moving to Slide 9, NII performed in line with expectations, declining $11 million 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 $12.7 billion, up from $10.8 billion in the first quarter. 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 outstandings decreased, and we saw increased pressure from premium amortization and lower LIBOR. In the face of these environmental pressures, we are 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, excluding purchase accounting. And as we look forward, we continue to believe we are well-positioned to benefit from an improving economy. 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 $1.4 million compared to the very strong first quarter of $1.9 million, reflecting continued favorable operating environment for the business given high levels of cash in the banking system and immediate loan demand. Mortgage banking and title fees came in at $38 million compared to higher first quarter levels. While fee income was lower in 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 sale spreads, and that intentional shift in origination mix towards 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 million lift in card and digital banking fees with the benefit of an increase in transaction volumes. And finally, I would note that you will see a $15 million increase in other income, which was driven by a nice $9 million securities gain, largely related to a legacy IBERIABANK equity investment.

BJ Losch, CFO

Slide 11, taking a look at expenses. Adjusted expense was $465 million and stable relative to the first quarter. Personnel expense decreased $7 million linked quarter, driven by a $6 million 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 million increase largely tied to more to the equipment line, which was related to some strategic software investments. Finally, increased activity levels given the reopening of markets post-pandemic caused about a $2 million increase in our outside services line. Slides 12 and 13, we take a look at our loan growth and our funding profile. You can see that our average loan balances were down about $1.4 billion in the quarter, with commercial down about $800 million and consumer down about $580 million. Commercial was impacted by about a $1.1 billion decrease in our loans to mortgage companies, partially offset by a $272 million increase in PPP balances. Last quarter, our mortgage warehouse volume was around 67% refi, and that moderated in the second quarter to 47%. 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. 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 Bryan 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 a continued inflow of deposits driven by a $2.1 billion average increase in non-interest-bearing deposits, with commercial balances, including benefits from the second 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 million or 7 basis points, down 13 basis points from last quarter, with non-performing loans decreasing $15 million. Given the large provision credit, the allowance to credit losses coverage ratio came in at 157 basis points compared to 170 last quarter, driven by the continued improvement in 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, our performance is among the best-in-class and we expect that to continue.

Bryan Jordan, CEO

Turning to capital on Slide 16, as Bryan mentioned, the CET1 ratio is at a healthy 10.3%, up about 30 basis points or so in the quarter, driven by growth in retained earnings and a reduction in risk-weighted assets. Increase was partially offset by the capital return Bryan talked about through repurchases and dividends. We expect capital levels to remain strong with flexibility to both deploy and optimize our capital structure. Moving on to merger integration on Slide 17, it’s been a little more than a year since we closed our merger with IBERIABANK, and we continue to make very good progress. We are focused on retaining and growing the client base with our expanded products and services. As we talked about, we achieved $92 million in annualized run-rate savings. In early July, you see we successfully converted virtual bank customers onto a new fully cloud-based Finxact core. And in the coming months, as we prepare for our fall 2021 core systems conversion, we plan to complete our wealth, trust, credit card conversions, as well as 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 to you in April, and we are providing an outlook for both the third quarter and the full year of 2021. You can see in the third quarter, we do expect NII to decrease 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 to 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 savings comes through. We expect charge-offs to be in the range of 0 to 10 basis points, and it’s reasonable to see continued reserve outflows. We expect our 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, and the CET1 10% to 10.5%. As Bryan 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 in our business model and franchise. Our fee income businesses are performing just as we would have expected. We are controlling expenses. We are driving down deposit costs. We are making good, prudent long-term investments in talent and technology. We are seeing good business activity as markets reopen. Credit quality is excellent, and we believe we will continue to deliver attractive returns in the near term and in the future.

BJ Losch, CFO

Just a quick note, as many of you know, today is my 51st and final earnings call with First Horizon. The fact is it is exactly 12.5 years since my first 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 am proud to say confidently I am leaving here when it’s at its strongest. I 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 am forever grateful for that. I want to thank Bryan, the Board, my executive team colleagues, my finance, accounting, procurement, properties groups, and all my friends and colleagues at 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’ll turn it back over to Bryan.

Bryan Jordan, CEO

Thank you, BJ. 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 our merger integration while making prudent investments to position us well for the future. Our strong risk management posture is showcased by our asset quality metrics. I am grateful to our associates for their diligence around serving our customers and our communities, and I continue to be confident in our continued progress towards becoming a top regional bank and our ability to drive long-term shareholder value. And now, before I open it up for questions, I will also make a couple of comments about BJ. As BJ just stated, he did join us in 2009 in the midst of the financial crisis. Over the past 12, 12.5 years, he has been a key leader in helping us reposition and position our business. He has been critical to developing our strategies, controlling our costs, and many of the great accomplishments that we have 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 in his new endeavors. He will be missed. So with that, Betsy, we will now take questions.

Operator, Operator

Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Jared Shaw, Analyst

Hi, good morning, everybody.

Bryan Jordan, CEO

Good morning, Jared.

Jared Shaw, Analyst

Maybe just starting on the expense side, with the additional $40 million investment, is there an opportunity to see that $200 million ultimate cost save level increase from there, or is that really more just the cost to get there has gone up and that we should – that we will probably see some additional negative operating leverage here in the next few quarters as that gets rolled in?

BJ Losch, CFO

Hi, Jared, it’s BJ. I will take that one. As you know, since you have known us for quite some time and followed us, we are never done with cost saves and expense efficiencies. And so we started at $170 million, we are up to $200 million. And in an environment like what we are operating in, I think we will 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 million is to be expected to be out of the run rate by the first half of 2022. And between now and then, we will continue building on additional expense opportunities beyond that to continue to find more efficiencies in the expense line.

Bryan Jordan, CEO

Jared, this is Bryan. I will piggyback on BJ’s comments. We feel very, very good about our ability to hit the $200 million. And we think, if anything, there is very little, if any, downside to it. And we think potential upside, as BJ said, we consistently look for opportunities to drive efficiency. And I think the nature of the business is such that we have continually got to look for opportunities to reduce costs and change our non-value-added areas, and put that into areas that require future investment in technology and infrastructure. So, we continue to use all of our levers around expense control to make sure we position the business for the long term.

Jared Shaw, Analyst

Okay, great. Thanks. And then as my – as I 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?

BJ Losch, CFO

So, I think what you will see from us is a continued shift to on-balance sheet portfolio originations. I do expect that you will see net increases in originations, maybe not as high as the 20% that we had seen, but the secondary volume that we are seeing is still strong, and we are capturing many opportunities. Our clients have seen more opportunity in our portfolio originations, particularly around 7-year arms or 15-year fixed, which we have seen quite a bit of interest in. So, I think you will 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.

Jared Shaw, Analyst

Okay, thanks and congratulations, BJ, on your next step. It’s been great working with you.

BJ Losch, CFO

Thank you as well.

Operator, Operator

The next question comes from Jennifer Demba with Truist Securities. Please go ahead.

Jennifer Demba, Analyst

Thank you. Good morning.

BJ Losch, CFO

Hi Jennifer.

Jennifer Demba, Analyst

Hi, could you just talk about the revenue synergies you have seen to date with IBERIA, and what’s been kind of better than expected 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?

Bryan Jordan, CEO

Hi Jennifer, this is Bryan. 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 are concerned about lagging at this point. As you might expect, there are some 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 infrastructure 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 continue to multiply. And at this point, we feel very, very good that we are on track to exceed the $35 million that I have talked about in the past. We think we are in that $20 million annualized area today and building momentum. Once we get through this integration, we think it will pick up further momentum in the first and second quarters of next year.

Jennifer Demba, Analyst

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 below the day one CECL level?

BJ Losch, CFO

Hey Jennifer, it’s BJ. Likely not. I think day one 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 have got of 60 basis points or 70 basis points from where we are 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 have managed both portfolios, both legacy portfolios are really starting to shine now. So we do believe there are very healthy reserve releases to come over the next several quarters.

Bryan Jordan, CEO

Jennifer, I will pick up on BJ’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 in the country reduced losses across the industry, we do believe very strongly that our portfolios, both the legacy IBERIABANK portfolio and the First Horizon portfolio, now the combined portfolio, have performed in a very strong fashion. And we believe while its 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 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.

Jennifer Demba, Analyst

Okay. Thank you. Look forward to continuing to work with you, BJ.

BJ Losch, CFO

Thanks, Jennifer.

Operator, Operator

The next question comes from Brett Rabatin with Hovde Group. Please go ahead.

Brett Rabatin, Analyst

Hi, good morning, everyone, and congrats, BJ, in your role.

BJ Losch, CFO

You bet.

Bryan Jordan, CEO

Good morning, Brett.

Brett Rabatin, Analyst

Wanted to just talk about the liquidity on the balance sheet. If you think about the cash balances, they are 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?

BJ Losch, CFO

Yes, it’s BJ. So, we are actively thinking about that. And we are seeing accelerated levels of cash that we are reinvesting in the securities portfolio. In aggregate, we have not materially increased it at this point. We are 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 are 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 are going to go. We have 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 are looking to try to build upon. I think we are 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 will have these deposit excess cash balances for a while. But to your point, we are much more focused on NII. And I think we are 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 are planning on and executing upon.

Brett Rabatin, Analyst

Okay. I appreciate the color, BJ, 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?

BJ Losch, CFO

Brett, 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 are at, maybe $100,000, $200,000 plus or minus where we are at. But it’s mostly on the mortgage side.

Brett Rabatin, Analyst

Okay, mostly on mortgage. Okay. Great. Appreciate all the color.

BJ Losch, CFO

Thanks, Brett.

Operator, Operator

The next question comes from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala, Analyst

Good morning.

BJ Losch, CFO

Good morning.

Bryan Jordan, CEO

Good morning.

Ebrahim Poonawala, Analyst

I guess first, just around loan growth, Bryan. 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 third-quarter event, fourth-quarter event, or most likely a first half ‘22 event that you actually see net loan growth coming in a meaningful way?

Bryan Jordan, CEO

Yes. So, you used the term meaningful a couple of times. That’s a term of art, so I am 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 and 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 also, we see very strong pipelines in our specialty businesses, particularly those specialty businesses like asset-based lending, franchise finance, and equipment finance, which in many ways lead or are early signs of a strengthening economy. We are encouraged by that. The other specialty businesses, our mortgage warehouse lending business, our balances came down a bit this quarter. We expect that that will strengthen in the third quarter and the fourth 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 is 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 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.

Susan Springfield, Chief Credit Officer

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 obviously the PPP is contributing to runoff, we have got really good feedback across our markets in some of our specialty areas about the ability, and we are working on all of these to pick up additional business where we were able to service both clients and prospects and help them with PPP when their existing bank could not. And what we are seeing is that could really be an additional benefit for us later this year and into 2022 as well.

Ebrahim Poonawala, Analyst

Got it. And just as a follow-up, you talked about revenue synergies. In particular, Bryan, 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 had one 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?

Bryan Jordan, CEO

Yes. So, if you take the mortgage business as an example, our team and his team have done a really good job of taking the mortgage product. We have integrated our systems. We are rolling out the expanded capability across the First Horizon footprint. And I would say that over 12 years, if we developed a bad habit, a bad habit will be that we didn’t really and the 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 have got it insourced, we are 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 BJ 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 am optimistic that our FHN business will continue to see opportunities to grow. We have added debt capital markets capabilities in our fixed income business, which we are seeing significant momentum building over the last two quarters or three quarters. So, I am optimistic that on the revenue synergy side, that the goals we set, which I think based on Capital Bank integration, were relatively modest will lead to significant revenue growth down the road.

Ebrahim Poonawala, Analyst

Got it. Thanks. And BJ, congratulations on the move. Thank you.

BJ Losch, CFO

Thanks, Ebrahim.

Operator, Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

Hi. Thanks. Good morning. Just wanted to go back on, again, giving 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 the third quarter and fourth quarter or will that kind of implementation post conversion kind of be seen more next year?

Bryan Jordan, CEO

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. IBERIABANK used it. We are putting in a new installation, and the momentum and technological drivers of speed will really start to show up in the fourth quarter and into the first and second quarters of next year.

Christopher Marinac, Analyst

Got it. And then as you think about the continued build-out of the digital bank and what you talked about with Fintech, will you do more public announcements on that or even have more visible examples of additional cost saves kind of beyond what you have already pledged on the $200 million? I am just sort of curious if we will see some signs of that as you continue to go forward.

Bryan Jordan, CEO

Yes. Anthony is on the line. Anthony, do you want to take that one?

Anthony Restel, COO

Sure, Bryan. So Chris, what I will 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 will call it the shifting preference of our customer base. We should be able to drive more efficiency and leverage the technology moving forward. So, I think you will see that kind of bleed in continuously as we cross the conversion period into next year and then hopefully continue thereafter.

Christopher Marinac, Analyst

Great. Thanks for the color. I appreciate it. And BJ, best of luck to you as well.

Operator, Operator

The next question comes from John Pancari with Evercore ISI. Please go ahead.

John Pancari, Analyst

Good morning.

Bryan Jordan, CEO

Good morning, John.

John Pancari, Analyst

BJ, congrats. All the best in the future and really enjoy working with you. On the margin, I just wanted to see if you can give us your thoughts on the outlook for the margin from here. I know you saw the impact of the liquidity drive a portion of the 16 basis point 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.

BJ Losch, CFO

Sure. It’s a slippery slope trying to forecast the margin at this point, right. We have just seen continued buildup of excess cash here and across the industry. And with a $3.5 trillion infrastructure program and more job tax credit payments come in, I mean, I think that buildup is going to continue. So, that’s why we are 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 have got some exception price deposits that are still at higher levels than we would want. And we will continue to move those down. We do expect that we are 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 are going to see some growth there. In terms of what kind of loan yields we are seeing right now, from a commercial perspective, we are 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.

John Pancari, Analyst

Yes. And then secondly, on the capital spend, I wanted to get your thoughts on your CET1 target. I know your internal target is about 9.5% to 10%. And I know you mentioned some flexibility to optimize your capital structure. Any consideration around the potential reduction in internal target as you look out?

Bryan Jordan, CEO

Yes. John, for some reason, you were breaking up a bit, but I think you were asking about CET1 target and that we are a little bit above where we have said 9.5% to 10%. We’re not uncomfortable seeing 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-à-vis our long-term value. We are, as you know, and one of the great legacies that BJ will leave is the bonefish and 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 program.

John Pancari, Analyst

Got it. Alright. Thanks, Bryan.

Bryan Jordan, CEO

Sure, thanks.

Operator, Operator

The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.

Ken Zerbe, Analyst

Alright. Great, thanks.

Bryan Jordan, CEO

Hi, Ken.

Ken Zerbe, Analyst

Just wanted to go back to the net interest income guidance just a little bit. If I take your third quarter guidance and sort of put it in 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 of sort of that mid-single-digit decline. I’m using 5% as sort of the midpoint. But it just feels like that’s a big contradiction to your more optimistic outlook around – I think BJ 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 all that. Thank you.

BJ Losch, CFO

Hi, Ken. Thanks. Yes, it’s BJ. So we 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.

Ken Zerbe, Analyst

Got it. Okay. No, that is helpful. And just to go back to a prior question on loan growth in the back half of the year, I think, Bryan, 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 that – I know you said you’re optimistic about pipelines improving. But as we all know, pipeline imbalances are sort of two 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.

Bryan Jordan, CEO

Yes, Ken, I did. I spoke about pipeline, but I also spoke about the outlook for payoffs and the significant liquidity, and the short answer is we’re 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 market, 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, but we don’t control what we don’t control, which is payoffs. The PPP balances are clearly going to come down with forgiveness, etcetera. So depending on what part is a little bit like the net interest margin question that BJ, it really depends on what line or what sector of the line item you’re looking at. But I think on the core business, we’re reasonably optimistic about our ability to grow if we can retain the balances that sit out there today.

Susan Springfield, Chief Credit Officer

And Ken, we did, if you look at May and June in terms of new commitment production, now granted, to your point, it doesn’t necessarily translate into the balances yet, but very strong new commitment production in both May and June and really across many of the areas that Bryan mentioned in the earlier question. It was a number of our specialty areas, IBL in the finance, franchise finance, healthcare, and then in the regional bank, Alabama, Texas, Louisiana, East Tennessee, North Carolina, etcetera. So we – I know the credit team is busy working with the mine on looking at these opportunities to increase both our existing clients but also opportunities that we have with prospects. So the activity level has definitely picked up.

Ebrahim Poonawala, Analyst

Bryan Jordan, CEO

Yes. So, if you take the mortgage business as an example, our team and his team have done a really good job of taking the mortgage product. We have integrated our systems. We are rolling out the expanded capability across the First Horizon footprint. And I would say that over 12 years, if we developed a bad habit, a bad habit will be that we didn’t really 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 have got it insourced, we are 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 BJ 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 am optimistic that our FHN business will continue to see opportunities to grow. We have added debt capital markets capabilities in our fixed income business, which we are seeing significant momentum building over the last two quarters or threequarters. So, I am optimistic that on the revenue synergy side that the goals we set, which I think based on Capital Bank integration, were relatively modest will lead to significant revenue growth down the road.

Ebrahim Poonawala, Analyst

Got it. Thanks. And BJ, congratulations on the move. Thank you.

BJ Losch, CFO

Thanks, Ebrahim.

Operator, Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

Bryan Jordan, CEO

Yes. From a systems perspective, you will see that principally next year.

Christopher Marinac, Analyst

Got it. And then as you think about the continued build-out of the digital bank and what you talked about with Fintech, will you do kind of more public announcements on that or even have more visible examples of sort of additional cost saves kind of beyond what you have already pledged on the $200 million? I am just sort of curious if we will see some signs of that as you continue to go forward.

Bryan Jordan, CEO

Yes. Anthony is on the line. Anthony, do you want to take that one?

Anthony Restel, COO

Sure, Bryan. So Chris, what I will tell you is, certainly, we are a big believer in technology being able to drive overall efficiency for the corporation. 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 the shifting preference of our customer base. We should be able to drive more efficiency and leverage the technology moving forward.

Christopher Marinac, Analyst

Great. Thanks for the color. I appreciate it. And BJ, best of luck to you as well.

Operator, Operator

The next question comes from John Pancari with Evercore ISI. Please go ahead.

John Pancari, Analyst

Good morning.

Bryan Jordan, CEO

Good morning, John.

John Pancari, Analyst

BJ Losch, CFO

Ken Zerbe, Analyst

Alright. Great, thanks.

Bryan Jordan, CEO

Hi, Ken.

Ken Zerbe, Analyst

Just wanted to go back to the net interest income guidance just a little bit, if I take your third quarter 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 of sort of that mid-single-digit decline. I’m using 5% as sort of the midpoint. But it just feels like that’s a big contradiction to your more optimistic outlook around – I think BJ 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 all that. Thank you.

BJ Losch, CFO

Ken Zerbe, Analyst

Got it. Okay. No, that is helpful. And just to go back to a prior question on loan growth in the back half of the year, I think, Bryan, when you mentioned – when you were answering the question, it feels like you spoke a lot about pipelines. 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.

Bryan Jordan, CEO

Susan Springfield, Chief Credit Officer

And Ken, we did, if you looking at May and June in terms of new commitment production, now granted, to your point, it doesn’t necessarily translate into the balances yet, but very strong new commitment production in both May and June and really across many of the areas that Bryan mentioned in the earlier question. It was a number of our specialty areas, IBL in finance, franchise finance, healthcare, and then in the regional bank, Alabama, Texas, Louisiana, East Tennessee, North Carolina, etcetera. So the activity level has definitely picked up.

Ebrahim Poonawala, Analyst

Bryan Jordan, CEO

Yes. So, if you take the mortgage business as an example, our team and his team have done a really good job of taking the mortgage product. We have integrated our systems.

Ebrahim Poonawala, Analyst

Got it. Thanks. And BJ, congratulations on the move. Thank you.

BJ Losch, CFO

Thanks, Ebrahim.

Operator, Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

Bryan Jordan, CEO

Yes. From a systems perspective, you will see that principally next year. We are implementing the Encino system, for example. We are putting in a new installation, and the momentum and technological drivers of speed will really start to show up in the fourth quarter and into the first and second quarters of next year.

Christopher Marinac, Analyst

Got it. And then as you think about the continued build-out of the digital bank and what you talked about with Fintech, will you do more public announcements?

Bryan Jordan, CEO

Yes. Anthony is on the line. Anthony, do you want to take that one?

Anthony Restel, COO

Sure, Bryan. So Chris, what I will tell you is, certainly, we are big believers in technology being able to drive overall efficiency for the corporation as we move forward. Our expectation would be as we continue to invest in technology, we should be able to drive more efficiency and leverage the technology moving forward.

Christopher Marinac, Analyst

Great. Thanks for the color. I appreciate it. And BJ, best of luck to you as well.

Operator, Operator

The next question is from John Pancari with Evercore ISI. Please go ahead.

John Pancari, Analyst

Good morning.

Bryan Jordan, CEO

Good morning, John.

John Pancari, Analyst

BJ Losch, CFO

Sure. It’s a slippery slope trying to forecast the margin at this point.

Ken Zerbe, Analyst

Alright. Great, thanks.

Bryan Jordan, CEO

Hi, Ken.

Ken Zerbe, Analyst

Just wanted to go back to the net interest income guidance just a little bit, if I take your third quarter guidance and sort of put it in 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 further in 4Q to get to your full year guidance of sort of that mid-single-digit decline.

BJ Losch, CFO

Hi, Ken. Thanks. Yes, it’s BJ.

Ken Zerbe, Analyst

Got it. Okay. No, that is helpful. And just to go back to a prior question on loan growth in the back half of the year, I think, Bryan, when you mentioned – when you were answering the question, it feels like you spoke a lot about pipelines. Are you also optimistic that loan balances actually improve in the back half of the year? Or is it just pipelines?

Bryan Jordan, CEO

Yes, Ken, I did. I spoke about pipeline, but I also spoke about the outlook for payoffs and the significant liquidity, and the short answer is we’re optimistic about loan growth.

Susan Springfield, Chief Credit Officer

Ebrahim Poonawala, Analyst

Bryan Jordan, CEO

Yes. So, if you take the mortgage business as an example, our team and his team have done a really good job of taking the mortgage product. We have integrated our systems.

Ebrahim Poonawala, Analyst

Got it. Thanks. And BJ, congratulations on the move. Thank you.

BJ Losch, CFO

Thanks, Ebrahim.

Operator, Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

Hi. Thanks. Good morning. Just wanted to go back on, again, giving some more color on green shoots and the loan business.

Bryan Jordan, CEO

Yes. From a systems perspective, you will see that principally next year.

Christopher Marinac, Analyst

Got it. And then as you think about the continued build-out of the digital bank and what you talked about with Fintech, will you do more public announcements?

Bryan Jordan, CEO

Yes. Anthony is on the line. Anthony, do you want to take that one?

Anthony Restel, COO

Sure, Bryan. So Chris, what I will tell you is, certainly, we are big believers in technology being able to drive overall efficiency for the corporation.

Christopher Marinac, Analyst

Great. Thanks for the color. I appreciate it. And BJ, best of luck to you as well.