First Horizon National Corp., which now includes the former Lafayette-based IberiaBank, has stopped underwriting energy sector loans for now as the oil and gas industry struggles to regain its footing.
Memphis, Tennessee-based First Horizon, which absorbed IberiaBank in a $3.9 billion deal that closed in the second quarter, told investors and analysts about its pull back on energy loans during a Friday conference call for its first earnings report since the two banks combined.
The oil and gas industry, one of the major sectors underpinning the Lafayette area's and Louisiana's economies, has been pummeled by low oil prices in recent years and over the past six months by a storage glut and cut-back on business and leisure travel and work commutes triggered by lockdowns related to the coronavirus pandemic.
"There's not a lot of new business (in oil and gas) activity anyway given the (market) environment," BJ Losch, chief financial officer at First Horizon, said in an interview. "We're not looking to add to our energy (loan portfolio) given the uncertainty in the market, but we're actively working with existing clients and borrowers. We are going to be very cautious until we see more daylight."
In Louisiana, the oil and gas industry accounts for about 19% of the state economy and while several companies have filed for bankruptcy in recent months and major players have slashed corporate jobs, the sector is still an economic driver. Before the pandemic, it employed 72,000 people and accounted for 3.6% of jobs statewide and 6.2% of all wages. Since then, oil and gas sector employment has dropped to 64,000, according to the LSU Center for Energy Studies.
Bank leaders told investors and analysts on Friday that third-quarter net income for the combined bank was $523 million, or 95 cents per share, compared to $110 million, or 35 cents per share, in September 2019.
"We also delivered strong results despite continued macroeconomic and interest rate headwinds tied to the pandemic," Bryan Jordan, First Horizon's CEO, said in a news release.
The combined bank has $1.8 billion in energy sector loans. About $1 billion of that is related to extraction and production of oil and gas, while another $300 million is tied to oil field services and the remainder related to midstream businesses and similar companies.
The newly combined bank had $447 million of nonperforming loans on its books as of Sept. 30, up from $172 million a year earlier. The majority of those nonperforming loans are in the energy industry.
First Horizon is keen on keeping its schedule to cut $170 million in expenses by 2022, one of the benefits it touted during the merger. The cuts don't appear to have impacted employee ranks, with the banks citing a 97% retention rate after the deal closed, but could mean a consolidation of its real estate portfolio in the coming years.
"We're going through all the states we operate in and evaluating where we overlap," Losch said, adding that in Louisiana, "we didn't have (overlap) in terms of operations, but now we're looking at how to consolidate office space for both the merger itself and a post-pandemic world."
That potential move is prompted by changing customer and employee behavior as individuals are staying home or at least closer to their primary residence to reduce the risk of being exposed to the coronavirus. The combined bank has 5.5 million square feet of real estate between corporate offices and retail branches. It's likely that will shrink to meet customer demands and changing work culture, executives told investors on Friday.
"We want to be thoughtful and not to damage the customer franchise; we think that we will do more than $170 million" in cost reduction, Jordan told investors. "It's a work in progress."
One goal of the combination between IberiaBank and First Horizon was to reduce operating costs and streamline operations.
Since January, the bank found $18 million in cost reductions related to the IberiaBank deal and also its acquisition of more than two dozen Truist branches, formerly SunTrust and BB&T. About $8 million of those savings happened during the third quarter.
A total of $32 million was estimated as cost savings by third quarter overall. Another $48 million in cost reduction is projected by the end of 2020, then another $100 million shaved off by the end of 2021.
If the potential reduction of the bank's real estate portfolio is factored in, the $170 million in cost savings is a minimum rather than a maximum.
As a result of the IberiaBank deal, personnel expenses were cut by $6 million tied to fewer incentive payments for employees related to revenue goals. However, there was a $7 million increase in salaries and benefits overall, driven by the integration of IberiaBank employees' benefits, higher health care costs and branch acquisitions.
Salaries and benefits at the combined banks increased to $195 million as of Sept. 30 from $193 million during third-quarter 2019. Likewise, total incentives and commissions paid to workers increased to $79 million from $77 million during the same time frame.
Some of the combined banks' borrowers have sought help during the pandemic's economic downturn through loan payment deferrals. There had been 5,696 consumer loans worth $1.3 billion under deferral, but with the phased reopening of economies that has dropped to 1,348 consumer loans worth $427 million under deferral.
There were 4,724 commercial loans worth $5.8 billion in payment deferral, but as of late September that had dropped to 519 commercial loans worth $911 million.
"Customers are being more resilient than originally feared," Losch said.
The bank also was very active in the Paycheck Protection Program, a federal forgivable loan program designed to keep businesses' workforces on the payroll and in tact for a recovery. The bank has $4.2 billion in federally-backed PPP loans on its books — split almost evenly between IberiaBank and First Horizon across more than 4,100 loans.
In Louisiana, the bank is seeing some gains as the pandemic has prompted some competitors to cut back on new loans since the combined bank has a bigger balance sheet and is able to make larger loans to businesses, such as food service manufacturers or other growing companies.
"We're already seeing a number of opportunities, … new clients in the (New Orleans) market where we couldn't handle their business," before the merger, said Hunter Hill, the New Orleans market president for First Horizon. "It's like having more arrows in your quiver, and a lot of other banks are distracted right now."
Increasingly, the bank has seen Louisiana business customers, who had put plans on the back burner to deal with the coronavirus pandemic and navigate its myriad restrictions, start to move on projects again, especially capital expansions after the presidential election and as consumers gain more confidence in the overall economy.
Hill said the bank also is seeing opportunities with family owned businesses it's been calling on since helping them with the paycheck protection loan process, especially those that weren't handled well by other banks that shut off their lending spigot.
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