First Horizon Corporation (FHN) Earnings Call Transcript & Summary

All right. I think you're live. So good morning, and thank you all for joining us on day 2 of Bank of America's Future of Financials Conference. Before I introduce our next bank and management team, I just want to take this opportunity to thank our corporate events team. I know you always complain to them if some things go wrong, but it's a great effort over the last few days. I appreciate all the work from a corporate access and events team and our team with Brandon Berman, Chris Nardone, [ N. J. ], Ryan Morrison, who worked exceedingly higher for the last week, last month, all year to put this pretty face in front of you. So I'd like to just thank them all. And with that, I'd like to move to our first management team of the day. I'm actually very excited to introduce First Horizon. A year ago, I think the November 4th, Michael Brown just reminded me was the day -- a day when the First Horizon IBERIA merger was announced. And I remember them canceling from our conference. So I guess this is a payback. But joining us from First Horizon, we have Michael Brown, who's the President of Regional Banking. Michael, as many of you probably know, joined First Horizon as part of the IBERIA merger. In joining Michael, we have David Popwell, which I'm sure most of you know, who's the President of Specialty Banking, following the merger. David is a veteran of Southeast banking and has worked for the last few decades within the market. So there's a lot to talk about. And I think before, I guess, I get into the Q&A, I think both Michael and David have some opening remarks. So Mike, I'll hand it over to you.

Well, Ebrahim, thank you so much. I'd first say thank you for including us. We really appreciate the opportunity to talk to your investors. Your commentary about November 4 made me think about our experiences 12 months ago. David and I spent a tremendous amount of time together getting to know each other and understand each other's businesses and understand the benefit of the combination that was likely to occur. And if you think and step back, you look at the different things that we saw as positive in terms of efficiencies, in terms of combining the 2 companies, significant technology benefits, the markets. We have a dominant presence in the Southeast in terms of the MSAs in which we're in. Product capability was going to expand. And then one of the things that Dave and I spent a lot of time talking about was our similar cultures as organizations. 12 months on 6 -- 4, 5 months into the merger, but obviously, a longer time into the integration planning and discussion. All of those items are bearing out. And we're really seeing all of them sort of prove positive for us. And that's one of the really refreshing things about the combination. Despite the impact of COVID, we've been able to sort of identify the benefits that we originally had out there and are capturing them, which is a real strong positive. With respect to what I administer, which is the regional bank, that's basically the traditional banking business for both companies. And again, as I've alluded to, we've got a significant presence in all of the major MSAs in the Southeast. I think it's 15 out of 18. That, to us, is a very strong positive in terms of ultimately providing underlying growth to us. What we spent the first period of time doing is trying to determine the best go-to model relative to attacking that opportunity. And in individual markets, it could be different. We basically categorize markets based upon opportunity and investment basically will follow opportunity. So we have a significant number of those markets that I just talked about that are rapid growth, significant upside. We've got some that are more moderate growth, and then we've got some that will be more slow growth or no growth. Those are ones we will obviously spend a lot of time focused on generating efficiencies. And frankly, we're fairly far along even in terms of getting to the efficiencies, identifying them, in some cases, actually developing them. So the traditional bank we feel good about the opportunity underlying. We feel good about. We think there's significant opportunities available to us as we bring 2 organizations together. There is a lot of opportunity we're seeing relative to product referrals back and forth, in terms of introduction of new products to our clients, whether on the legacy First Horizon side or the legacy IBERIA side. A great example for the combined organization is our equipment finance business, which came to the organization from legacy IBERIA. That's a business that's already generating significant opportunities. On the other direction, the wealth business that's coming to the Regional Bank from the First Horizon side. IBERIA was underrepresented in that particular product offering. So there's significant opportunity with existing clients and prospects to introduce wealth products that didn't exist before. Great income stream, high-quality earnings from both particular products. You can go on into other product areas, just know that the opportunity there to generate improved income again from efficiencies as well as growth and cross-sell efforts into existing and new clients.

Got it. I think that was extremely helpful overview, Michael. Thank you. I guess, turning it over to you, David.

Sure. Thank you, Ebrahim. First of all, thanks to all who have joined us today. We appreciate you taking the time to let us tell our story and answer questions. I'm responsible for the specialty banking lines of business and support areas. We have 7 lending businesses, characterized by being nationwide in scope, a little bit faster-growing, a little bit higher margins than traditional banking. Six fee income businesses. The most notable is FHN Financial, our fixed income business; and then four, support organizations, which are very important in the environment that we're in today: Digital banking, treasury management, customer experience and marketing. When I look at the environment today, and particularly this year, our countercyclical businesses, 3 of which are included in specialty areas have done quite well: Mortgage warehouse, FHN Financials and our mortgage business. Most of our growth in the specialty businesses has come from these businesses this year. The leaders of these businesses have done a great job growing revenue and continuing to manage expenses. And we look at, again, the environment: digital banking, treasury management, customer experience. We're making significant investments in our digital platform. Consumer digital, we're very fortunate there. NCR acquired D3, our platform provider, between now and the time that we integrate with IBERIA. We'll make substantial improvements to this platform. In the treasury space, we're making significant investments as well. We'll be putting in the bottom line digital platform, which will help us diversify our product suite, upgrade the customer experience and give us the ability long-term to move faster as we need to innovate. And then finally, marketing and CS. We did a very good job as a combined company, taking care of our existing customers during the post-COVID crisis response. We believe that this is going to be a big opportunity for us as things open up to continue to grow our business. So the marketing function will be extraordinarily important as well our communications as we work with the IBERIA customers to plan the integration. As we look to the future, we do see areas of opportunity and growth. As Michael said, we see significant areas of growth in the cross-sell space with the fee income and lending products, some of which Michael mentioned. And then within all of these businesses, there are industries that have done well or sectors that have done well in the COVID environment, and we believe that we will continue to grow those growth strategies. Ebrahim that's all of my remarks, and so I'll turn it back to you.

Thanks, David. And I think a lot of things that I'd like to follow up with both of you around the bank, around how the bank structure and specific strategies. But before I get to that, and I think I would have asked you this even before yesterday, the announcement of the vaccine, some clarity around elections. But just talk to us around what's the level of pickup that you're seeing in the economy, if you had to do -- like what as a bounce back, where do you think the customer sentiment is in terms of borrowing appetite, investing? And what is that set up for in terms of -- when you think about 2021? We could start with you, David?

Okay. A couple of areas that we're seeing. And again, I'll stay more on being specialty line of business area. In the franchise finance space, quick-serve restaurants, revenue already has bounced back prior to -- to be greater than pre-COVID levels. Many of these businesses are doing very well because they've reduced their inside expense, and they've increased their average ticket sizes on their drive-through capabilities. And so your Taco Bells, your Wendy's, your Dunkin', your Domino's are doing very, very well. Those names represent about 40% of the franchisees in our portfolio. So we've done well in these verticals. They're riskier businesses compared to many others. But coming out of adverse economic cycles, we've typically grown these verticals. So franchisees that own their own real estate, we would see those as opportunities to loan money. And our asset-based lending vertical; consumer finance, warehouse lending and trucking. The trucking industry has done quite well. So we would see opportunities to continue to grow there. Even in the commercial real estate space; industrial, multifamily, grocery-anchored retail are doing well. Build-to-suit, some build-to-suit office is attractive. And so if you ask me the question, where is the money going? Where is profit capital willing to invest? Those are some examples. Michael mentioned the equipment leasing business. It's something that IBERIA had for about 3 years, but a veteran team left another regional competitor and joined IBERIA. And now this team has a much bigger platform, much bigger geographic footprint to work with as well as the specialty vertical. And so we see a significant overlap in the trucking transportation industries. And so as we emerge from the COVID environment, and we look for places where we would be front-footed, those would be some examples.

Okay. Michael, just in terms of the markets, because it seems like, obviously COVID has had a very different impact depending on whether you in Atlanta or New Orleans or where are you. Can you give us a sense of just where things are? And is there a lot more cautious optimism? Or is there still a lot of concern around lockdowns and restrictions as businesses think about investments and the outlook?

Yes, it's a great question. I mean, I think if you step back and you were to say 12 months ago that we were going to deal with the worldwide pandemic, you would think that industry and business would shut down. And that's really not the case, Ebrahim. I mean it depends upon industry, as David just outlined, relative to our specialty. Same applies within the regional bank. If you look at our particular businesses we focus on, general C&I is doing really well. Most companies are active, unless they tie to specific industries that have been hurt significantly. Then you mentioned geography. I mean we're seeing by individual market communities come back quicker based upon their general economies like in Atlanta, for example, where I am today. The Atlanta market is very active. A market that's dependent upon the tourism business like New Orleans is going to come back at a slower pace. Carry that into industries, as we've talked before, the energy business has obviously been severely impacted based upon a drop in demand and the drop in the commodity prices. Yet on the other end of the scale, we've got companies that are dealing with the health care industry that are doing extraordinarily well. So again, it depends upon the industry. The consumer is spending, but also not spending as much as they normally do. They tend to be fairly targeted. Our mortgage business is doing incredibly well as an organization. It's doing better than it ever has, frankly. And that's just a function of refinance activity as well as new purchase. And we're seeing that carry over to our title business as well. So again, it depends upon the individual sector that you're in. As a general rule, the economy is significantly better across our entire franchise than I would ever have expected considering the circumstances we're dealing with.

Got it. I guess just moving over and looking at the bank postmerger, talk to us in terms of how these banks -- like when I talk to investors is always a question in terms of is the bank structured by market, for line of business. Just talk to us in terms of how both banks were structured? What changes both David and you have had to make in terms of putting this together and the benefits of the larger balance sheet? I think David talked about it earlier so I would love to get both of your perspectives on this. Maybe starting with David?

Sure. So I'll talk about -- primarily about the specialty businesses. So prior to the merger, First Horizon had already segregated out the specialty lines of business. Mortgage and FHN Financial did not report at that time into the specialty areas. But we had one individual, Steve Hawkins, a long-term veteran in First Horizon that ran all of these lending verticals. And so when we structured the organization, it was very easy to take the leasing business, the mortgage business, the title business and FHN Financial and just couple them with the specialty windy verticals. And those are the organizations within our organization that report up to me. Prior to the merger, First Horizon had a Head of Wholesale Banking and Head of Consumer Banking. They reported to me as well as 9 regional presidents. And so that part of the organization has shifted over to Michael and became part of his organization. And Michael, with that, I'll turn it to you to talk about the regional banks.

Yes. Thanks, David. So Ebrahim, it's actually been a lot smoother than I would expect it to be. We do have some level of overlap, as you know, as we brought the 2 companies together geographically, south Florida, Houston, Memphis, principally. Beyond that, the overlap was fairly limited. So we were able to bring the 2 companies together, retain the regional structure that both organizations had. We've complemented that with a line of business support group. So commercial, business banking, private client and retail support from the individual markets. Again, as I emphasized earlier, individual markets are structured differently, depending upon the opportunity that exists. If you think specifically, again, I'll use Atlanta as the example because of the community I'm in, we have opted to focus here just on commercial and private client and small business. We're not a retail player. It wouldn't make sense for us to be a retail player. We see significant upside potential by investing in the businesses that we've chopped to focus in are on. We've done the same analysis across the footprint. And at this particular juncture, we have every single market with a strategic plan in terms of what they're actually going to do business with or focus on.

So I guess just talking a little bit about the verticals. David, you talked about capital markets, mortgage warehouse, both have done wonderfully well in terms of being countercyclical this year. One, I guess, just talk to us in terms of your outlook. It does feel like both of them may see some moderation next year. And within the 6 key businesses or any industry verticals that you see today, where you see some of that offsetting any slowdown that we see in the mortgage of the capital markets business?

Sure. So I'll start with mortgage warehouse and the mortgage business. And so today, the mix that we are seeing is about 60% purchase, about 40% refi. And that's just a function of the way that on the mortgage warehouse side, how our customers run their businesses. As long as the 10-year stays below 1%. Those businesses are going to continue to do well. Given average balances year-over-year in the current rate environment and where we are from a limit standpoint, I believe that from '20 to '21, we very well could see growth in the mortgage warehouse business. It's just a function of the environment in max. On the mortgage business itself, however, that might be a little bit harder to see growth given the level of volume and given the fact that we do have somewhat of a limited footprint and a limited base of production. On the mortgage warehouse side, we do have the ability to grow the business because we can add new customers, and in today's environment, there's still a lot of demand for this capability. And so we believe that we can continue to incrementally add customers and increase limits and grow the business year-over-year. The fixed income business is having the second best year in history -- in the history of that organization, and it's been around for a long, long time. Volatility and rates, again, are the drivers there. If we see slightly increasing upticks in rates, not rapid, but we have volatility in the business could continue to do well. If we have gradually increasing rates without volatility, then that business will face headwinds, no doubt. But I will say that they have a great brand, they have great people, and they execute extraordinarily well. They do a good job at advising customers in turbulent times as we've been through. And so there's a lot of strong franchise value there. The offsets. The offsets would be asset based lending. That is an area, again, coming out of a recession or coming out of a difficult environment. Historically, we've shown that we can grow that business. And it's because of our knowledge and expertise and our consistency in that -- in those verticals and in those industries within ABL over a very long period of time. I mentioned the real estate back quick-serve restaurant area. Again, this is a place where I think you'll see capital flow in. And we'll have opportunities there. And again, [ Craig ], industrial, multifamily, grocery-anchored and certain select build-to-suit office will be opportunities along with the equipment leasing business. Those are the areas where we'll lean in. Those are the areas where we're focused.

Right. And in terms of the mortgage business, David, I believe IBERIA had a very strong mortgage origination capabilities. Is there any plan to kind of extend that? You mentioned it has a limited footprint today, we expand that into the legacy. Just wondering if you could talk about that.

Yes. And that -- I would call that it is a growth opportunity. There is some ramp time associated with it. So yes, IBERIA had a strong mortgage origination business led by a very capable management team. We're in the process now of building out the mortgage loan officer network in the state of Tennessee and in North and South Carolina. As Michael mentioned, IBERIA had a strong presence in Memphis. They had a very strong mortgage presence in Memphis. But we'll build out the rest of Tennessee. We'll add on to what IBERIA had in middle Tennessee, and we'll add in, in North and South Carolina. In North Carolina, where we picked up the SunTrust branches or Truist branches, those are very formidable large deposit branches. The employees in those branches have been well-trained to cross-sell mortgage. And so again, it's a very top priority to plug-in new mortgage loan officers in those markets. And so yes, that is a -- it's a growth opportunity. It's probably more of an offset to a slower environment that we could see as rates rise.

Got it. And just on capital markets, we are all kind of trained, I guess, at this point, to look at volatility and think about capital markets revenue. Does the merger create any opportunities in terms of having a bigger platform, bigger -- like, are there solutions?

Yes. We're -- we have a very small debt capital markets team today. And what we're in the process of doing is recruiting. And I will say we will start smallish and build. But we are going to bolster our ability in the debt capital markets area. We added the syndications team about 2 years ago. And with the combination of the bank and the bigger balance sheet and the existing customer base that we have today that accesses the debt capital markets. We will increase that team and try to build that out.

I guess turning over to you, Michael. I mean, I think the one thing that gets overshadowed because how acquisitive IBERIA was just strong organic loan growth. And you mentioned the presence in 15 out of 18 high-growth southeast markets. Talk to us in terms of when you look at the opportunity set, what are the 2 or 3 markets that excite you the most? And is there a certain industry that within these markets that's driving the growth?