First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Good afternoon. I'm Jason Goldberg, and I cover the U.S. large-cap banks here at Barclays. Continue with our afternoon session, very pleased to have First Horizon, a name which now kind of breaks into our large-cap kind of designation with this recent merger-of-equals with IBERIA. Before we get into First Horizon, let me just remind you on the left-hand side of your screen, you'll see audience response polling questions, please feel free to answer those during the course of the presentations. So if we have time at the end, we can maybe review those. Once you answer a question, just go back towards the top of the screen and hit the next button. And it will bring up the next question, there should be about 4 or so of those. Also, on the top left-hand side of your screen, you can click on the question tab and submit a question. And if we have time, we could ask management that as well. Very pleased First Horizon to have today, Bryan Jordan, Chairman and -- Bryan Jordan, CEO; and also on the line, BJ Losch, Chief Financial Officer. Bryan, anything you want to say to kick it off?

Yes. Thank you, Jason. And thanks for having us. It's great to be back with you again this year. I was trying to use my imagination how a virtual fireside chat works without a fireplace. So I thought about trying to get the Zoom background and put a fireplace in there, but in September doesn't really seem appropriate for some reason. We're excited to be here. We've got a tremendous amount going on in our organization. We're very excited about the transformation that we're seeing in our company. Clearly, the merger-of-equals with IBERIABANK has been very, very significant. And I'll be happy to spend time on that, and I'll touch on the integration progress in a second. And then secondly, we had the opportunity to acquire 30 branches from Truist in their mandatory branch divestiture, which really strengthened our presence in the Carolinas that helped us in Virginia and a couple of places in Georgia. So we feel very, very good about the footprint that is coming together. We think our business, our business footprint will give us the opportunity to produce higher growth just due to the demographics of the marketplace that we serve. We feel a tremendous amount of excitement about the team that we have on the field and are really encouraged by what we think when we get to the other side of this pandemic and pandemic-related slowdown. The integration of IBERIABANK and First Horizon is moving along very well. Very few people would say, well, let's do that in the midst of a pandemic and a shutdown, but we had the opportunity prior to mid-March to get a lot of work done. We have built a lot of team and cultural integration during that period of time. And so I'm encouraged by the way the integration is working. I'm excited to see the teamwork that is going on. And I would say we're probably ahead of where I thought we might be at this point in time. So I'm excited about that. We're starting to see the revenue synergy opportunities that we thought would exist. We're seeing deals that we wouldn't have had an opportunity to do based on the product set that one or the other of us brought to the table. And I feel good about our ability to deliver on our cost saves. We've got much greater clarity on our cost saves today. We committed to $170 million of net savings. We feel like we've got substantially all of that sort of in our sights, and we feel good about the detail and locked in on over 60% of it. So I feel good about our ability to deliver on our cost saves, and in all likelihood, I hope there's some upside to that. So I think we've got a lot of good things going on with the transformation of the business. We have a business model that we've argued for a number of years is balanced. We have a couple of fairly significant countercyclical businesses. I'm excited about the benefits we're seeing in those businesses, they help offset the impact on net interest margins of lower interest rates and higher credit costs. And so I'm encouraged by the benefit of the countercyclical businesses and our ability to sort of navigate through this environment with strong pretax, pre-provision net revenue. So I'm excited about how we're positioned. I think we've got a lot of good things going on in the business. We've got a tailwind at our back with the ability to take out costs in the merger and realize revenue synergies. So it's going to be an exciting time for First Horizon.

Great. That's a good overview. I guess maybe to delve deeper into some of the areas you mentioned. Maybe just start with kind of PPNR. And I guess if I look at First Horizon and IBERIA's results in the second quarter, solid income performance, particularly in some of your countercyclical fixed income and mortgage businesses, really talk to your ability to drive the income outside of these businesses and the overall sustainability of the PPNR results to the benign company, particularly as you begin to think about next year?

Yes. So there are 2 big drivers that I think about. One is, as I mentioned, we have an outstanding footprint. If you look at dev opportunities for demographic growth in the South, we're going to have really good footprint. It's going to drive great growth, whether it be in some of the larger metro areas like a Dallas or in Atlanta, South Florida, the Carolinas, we're going to see good growth drivers. And those will be consistent, I think, even in a recovery from the pandemic. So I think we have great opportunities there. The countercyclical businesses, I think, will continue to do very well. Our fixed income business benefits from absence of loan growth, and I think this is a period where loan growth is going to be much more muted for the industry in broad terms. And as an outcome of that, I think we'll see very good fixed income activity. The mortgage warehouse finance activity, the mortgage origination business continue to do very well based on the lower level of interest rates. And ultimately, the refinance activity will slow down, but it doesn't seem to be in the near term. So we see outlook being pretty good for a balanced revenue stream through the next several quarters. And as the economy starts to pick up, we think the growth engines and the revenue synergies associated with the combined footprint will give us a great opportunity to produce good, strong pretax, pre-provision growth.

Helpful. I guess, kind of when I think about PPNR, we talked about the revenue side. Just maybe talk about managing expenses. Clearly, in this operating environment, that's going to be a key driver to profitability. First Horizon is somewhat unique in any situation, given the merger saves you have to you. Maybe think about what to expect kind of from normalized expenses, and just how you're managing expenses in the current environment?

Yes. Yes. I think expenses is going to be key for the industry. And I think it's true in the current environment, I think it's likely to be true for the foreseeable future. And I don't mean just pandemic-related because of the need to invest in different aspects of the business, technology, in particular. As I pointed out and you indirectly pointed out, we have a bit of a tailwind in that we've got the ability to realize our committed merger cost saves, and we think that there are opportunities to build on that. I think the demonstrated ability of both IBERIABANK and First Horizon now on a joint basis to take costs out of the organization over an extended period of time says that we have the ability not only to get our merger cost saves but, as we think about the future, to control our costs, to drive higher revenue growth and, at the same time, transform the way we're spending money and keep our cost structure down so that we invest in technology. So I think as I look at cost saves, and the opportunity associated not only with the merger, but going forward, I think we'll do a very, very good job, and it's something that we're spending a lot of time thinking about particularly as the pandemic is sort of highlighting some of the different customer behaviors that we'll have going forward. So I'm encouraged by the progress we're making. A lot of work to be done, but we're getting there.

If I look, both First Horizon and IBERIA have considerable acquisition experience, but still investors seem concerned about, I guess, the ability to execute on an MOE transaction, generally speaking, I think, more so just in the face of this COVID-19 pandemic. Maybe just help us better understand the framework you've put in place? And what gives you confidence in your ability to execute?

Yes. I think that MOEs have sort of a mix history. And I think that's a fair question to be asked. I think at the end of the day, the ability to execute or execute effectively on a merger-of-equals is having similar cultures. And I mean more than just how you think about associates and how you think about compensation, but how you go to market, what the product capabilities are, how you view credit risk in the balance sheet. And I would say on the front end of this deal, not only did Daryl and I spend a lot of time on it, but our due diligence teams, our leadership teams spent a lot of time on the culture of the combined organization to make sure that we weren't going to cause half of the organization to seize up because of our go-to-market strategy, our risk profile or the way we did things. That's not to say there are no differences. But we've got that managed to a very low level. And I think in many ways, a lot of that is in the rearview mirror. So I have a high degree of confidence. And as I said in my opening comments, I think we're ahead of where I thought we might be, particularly given the pandemic and the difficulty getting people in the same room. But I think the combined culture -- the culture of the 2 organizations together will be a better culture, and we'll be in a position to move forward and hit the ground running once we get these systems integrated sometime in 2021 and probably in the summer time frame. And then between then, we will continue to serve our customers and transition things and grow the business.

I guess the biggest topic on investors' minds right now for the industry is obviously credit quality. And many are looking at last cycle data as an indicator of future performance. Maybe help us better understand how you feel or why you feel well positioned in the current environment. And just how we should think about through the cycle of losses when we look at the combined entity?

Yes. I think I think that's a reasonable question for the industry in broad terms. We, on the First Horizon side, spent the early part of 2009 to 2012, '13, really transforming the risk we had in our balance sheet, and we got out of a lot of risk. And we've really seen the benefits of that over the last 4, 5, 6 years as we led into or ran into the pandemic. And it's really a function of the kind of risk we embed in the balance sheet, the way we look at borrower commitment to deals, the leverage we put on them. And as I mentioned, that, coupled with what we did in terms of making sure we had a good go-to-market strategy and our risk profile with IBERIABANK before we completed the merger, we spent a lot of time on each other's balance sheet because how you go-to-market, the kind of risk you'll do for customers is what ultimately shows up in your credit risk. So I think the 2 fit together very, very well. And IBERIABANK has had a very strong history in terms of managing its credit and managing its credit risk. We look at a pandemic and know that the economy has turned down and that very few, if anybody, are going to be immune from the ups and downs of credit, particularly in an environment like this. But we think on the whole that we'll perform as well or better than many. We have spent a lot of time working on the purchase accounting. We're going to have 40-plus percent, almost 50% of our balance sheet mark-to-market through the purchase accounting. We think on the First Horizon side through the CECL work done in the first quarter and the second quarter, we've got very strong levels of reserves. So I think we'll perform well in the upcoming quarters. One of the topics that has come up and we talk about a lot is deferrals. Clearly, there were a lot of deferrals taken in the March time frame, early April time frame, on both commercial and the consumer side. And I would argue that much of that is or has been prophylactic in the sense that nobody knew really what the next several months or quarters was going to look like. Those deferrals have come down significantly. In round numbers, we had something like 14% of loans on deferral at the high point to date on a combined basis today, that number is closer to 4%. So those loans -- those deferrals have come down a good bit. And invariably, it's going to be where there's still deferrals. They're going to be in those areas that are somewhat counter -- or excuse me, not counter, but intuitive. Intuitive in the sense that is most impacted by the shutdown of the economy, whether it be hospitality, some cases, restaurants, some cases, retail, things of that nature. So it's going to look much more intuitive in connection with what's going on in the economy and how things are playing out. So all that's a real long answer to a simple question. I feel good about our credit positioning. And while it's an economic downturn, and there's some losses that will be taken, I think we're pretty well positioned to handle it.

Helpful. I guess maybe shifting gears a minute to kind of the opportunities and challenges against this COVID-19 backdrop. There's obviously interest rate and macroeconomic headwinds that all banks currently face. But I guess, looking out, how do you think about the challenges and opportunities that exist for the combined company?

Yes. I think you're right. The pandemic is maybe accelerating some of the structural challenges that I believe that the industry was going to face over a period of time anyway, most particularly the compression of margins. And that happened because of lower rates. But I think competitive dynamics, we're going to compress those margins over time. So I think we, as an industry, had to continue to adjust not only how we're serving customers and the cost of that delivery, but who we target, how we target those relationships and be much more focused. In terms of how the combined organization is doing that, we're spending a lot of time this fall working on a combined 3-year strategic plan for the organization. Anthony Restel is leading that effort, and we're doing a lot of work about our go-to-market long-term strategy. And we're spending time as we look at that plan, thinking about how do we simplify our business, how do we adjust our business to deal with the different economic and/or market realities that exist. In all likelihood, customers will continue to use at a much higher level, mobile and online banking, less use of the branch, more use of the old technology like drive-ins but, ultimately, those things that are shifting customer behavior, and that will ultimately affect what our branching footprint looks like. It will affect how we staff our call centers and how we use our technology and where we invest in our technology. And then finally, in terms of this environment, we do think that our ability to not only invest in a broader set of technologies, but to leverage the tools that the combined organization has as a result of the merger, like the equipment finance capability that IBERIABANK had. I think of transactions in Middle Tennessee that we've done with existing customers that we wouldn't have had the opportunity to do without equipment finance from IBERIABANK. And asset-based lending deals that are getting done in the old IBERIABANK footprint. And so there's a lot of opportunities for us to leverage the capabilities to build on the better footprint, more dynamic and growthier footprint as well as to leverage the changing realities of the banking industry over the next several years.

All right. And just a reminder to those listening in on the left-hand side of your screen of the audience polling questions, and also to submit a question, simply click on the top left-hand side of your screen. I would point out, it looks like the queue got washed. So if you submitted the question earlier, I asked that you resubmit it, so we have those back in the queue. Bryan, it's going to be another question from me. Just what are you hearing from customers about how they're thinking about planning? And what are you seeing across the franchise maybe from a competitive perspective?

Yes. I think -- so sort of answering it in a backward way. I think the competitive landscape has shifted. And I think there are a number of factors for that. And it's -- I'd say it's more a pause or a slowdown simply because there's so much uncertainty. As I've said, a couple of different ways in different times over the last several quarters, there are more known unknowns than I've ever seen in my career. And it's a time where I think people are being cautious. We have spent a tremendous amount of time going through our credit portfolios, our loan portfolios, and we've done that by talking to our customers a tremendous amount about how they're dealing with the pandemic, how they're using the tools and the programs that are out there. And I came away with 2 major takeaways from these deep-dive reviews that we've done on both sides. One is how well our people know their relationships, their customers and how close they are to their businesses. And it's really impressive how they know the innermost details on how businesses are adapting to the pandemic. And the second and maybe the most important about the resiliency of our customer base, but the U.S. economy. People are extraordinarily creative, and they're doing an awful lot to be thoughtful about how they go-to-market, how they adapt to a changing market reality or an economic reality. And so when I step back, I'm encouraged by sort of the resiliency, the creativity, the recovery that people are exhibiting as they sort of work through what is, at a minimum, a memorable year, but a whole series of things including the pandemic and election cycles, but hurricanes and tornadoes and everything else that sort of hit, a civil unrest. And people are just being real creative and persistent and staying generally upbeat about things.