First Horizon Corporation (FHN) Earnings Call Transcript & Summary

All right. Ramping up the conference for me, we are excited to once again have First Horizon Corporation joined us. It's been a busy year for the bank, as they've been working on the integration of its transformation with IBERIABANK, which is off to a solid start and has benefited from the strength of several of its countercyclical businesses, including mortgage and capital markets. The year ahead is likely to be another busy one as the bank works towards its conversion later in the year and delivers on many of the goals that it has laid out. Here to tell us more about the path to getting there is Chairman and Chief Executive Officer, Bryan Jordan. Bryan is going to make some opening remarks. For those of you who have seen the slides that came out a little while ago and then him and I are going to have a fireside chat. So with that, I'm going to turn it over to Bryan.

Thank you, Ryan. Good afternoon. Thanks for having us with you. Appreciate you including us in the conference again this year. As Ryan said, we have a handful of slides out. Hopefully, you've had a chance to pull them up. They're on our website. And I think Ryan and Goldman Sachs have posted them as well. I'll go through them relatively quickly so that we can get to the Q&A. The first slide is the perfunctory disclaimer with respect to forward-looking information, if you will, please take a look at that. On Page 3 or Slide 3, just highlights the significant strength we see in our business in terms of a diversified business model. We've got a great footprint, I think is -- footprint that is going to do very well post the pandemic. As you see, we're in 11 of the top 15 MSAs in the south. And -- but if you look at those MSAs and projected growth rates, they grow significantly faster, both in income and household growth rate than the U.S. economy as a whole. We've had a significant history in both organizations of merging and integrating firms, and we feel like we can leverage that. And I'll touch on it in a minute, but I think we're making great progress in bringing the 2 companies together. And we have a strong balance sheet, a diversified balance sheet and strong deposit funding as well. If you flip to Page 4, it's sort of a summary of some of the major headwinds that are facing the industry, clearly, uncertainty around the pandemic, really the difficulty and sort of operating in an environment like this with low-margin and low rates. We feel very, very good about how we're positioned. We have, as I said, very strong market positioning in the south, we'll do very well. Post the pandemic, we have the ability to realize $170 million plus in cost savings, and we're making very good progress on that. We'll see end the year at about $48 million of cost savings this year that will grow to a little over $100 million next year and then over $170 million in 2022. Again, earnings -- excuse me, our earnings tailwind or a benefit for each of the next 2 calendar years in terms of just realizing cost saves for the merger that we're already working on. We feel good about the countercyclical businesses and the balance in the business. And I feel very good about our credit quality, the diversification in the portfolio, the strong performance that I think we're likely to see on a relative basis and further solid capital and liquidity position and as we deal with the turn into 2021. Page 5 is sort of a little chart showing you where we are in the integration of the 2 firms. We closed the merger in July of 2019. The integration process has started. We've converted some systems like payroll systems and things like that. Our major system conversions will occur in all likelihood in the third quarter of 2020. We'll have some additional conversion activities between now and then. And clearly, that's how cost savings build throughout 2021. It is a heavy lift to get the 2 firms integrated. We're using the time between now and the final conversion to bring our systems together in a way that minimizes impact on customers. It closes any product gaps that exist and allows us to make some investments in uplifting systems and technology between now and the conversion process. So feel very good about the planning and process there. Clearly, a lot of work to do between now and the third quarter of 2021, but very good progress being made today. And then I'll wrap up with the slides on Slide 6. Just sort of a summary of the things that I've touched on, well positioned to capitalize on the benefits of a diversified business model, a diversified and high-growth geographic footprint and the ability to leverage cost savings and merger synergies on the revenue side as well to provide very strong shareholder returns over the long term. So Ryan, I'll stop there, and we'll just drift into the Q&A, if that's okay with you.

Yes. That will be great. And thank you very much for the prepared remarks. So Bryan, maybe to start big picture. Can you maybe just talk about how you're managing the bank to deal with the challenges of a low growth, low interest rate environment? And maybe second, how is your footprint performing relative to the broader U.S.? And can you maybe talk about some of the levers that you have to manage in this environment?

Yes, absolutely. Yes. we're like everybody else trying to manage remotely and deal with the pandemic. And clearly, the pandemic has had a tremendous impact on our customers, and has had an impact on our associates. And I think our people are doing a really good job sort of adapting to the reality of the pandemic. The southern footprint that we operate in is clearly, by virtue of history, got different political dynamics. And so some of the impact of shutdowns have been less restrictive in businesses and unemployment trends have continued to be better in the southern footprint. And so it's -- we think demographically positioned to be a higher growth sector of the economy. And I think in many ways, we could see that enhanced by the impact of people relocating into this southern footprint over the last several quarters and into the next year or 2 as we deal with sort of the aftermath or the impact of the pandemic. So all in all, we're managing the franchise to sort of adapt in all aspects to a pandemic and sort of a high-growth footprint. We're working really hard to control our costs and make sure that we're allocating resources in a world where low interest rates are likely to be the predominant factor in most of the financial services industries in terms of a headwind over the not-too-distant future. Clearly, I'm not ruling out credit quality. But I think on the whole, people set up very strong levels and I believe we did, too, set up very high levels of loss-taking capacity under CECL, et cetera. So I think it's incumbent upon us as an organization to make sure we're allocating resources to those products and lines of businesses and geographies that have the ability to deliver profitable customer experience is differentiated and continue to try to reallocate resources in a way that we can drive outsized growth with a footprint and a reallocation of resources in our organization.

And you originally laid out a target of $170 million of cost savings. And the recent message has been that we could see some upside. I see the pluses in the slide, given the acceleration of digital from the pandemic, maybe that's changed how you need physical space and maybe just overall, the way you do business. So can you maybe just talk about some of the drivers from upside from cost savings? Any sense or how big they could be over time?

Yes. I think there are a number of drivers. And some of it is just the creativity and the ingenuity of my associates here in the organization. Clearly, the impact of the pandemic has changed, the trend line in customer behaviors. And I think everybody would readily acknowledge the customers were going to move to more of a mobile online environment. We're going to see more remote use of call centers and things of that nature to facilitate customer activity. Clearly, that has accelerated probably many years of acceleration in the pandemic. And our belief is that's not going to revert back to where it was or revert back to the old trend line that, that's likely to be a long term. So that's a perfect example of where -- if originally, we saw a 40% drop in transactions, it sort of stabilized in our financial centers, you call it down 10% to 15%. That, in all likelihood, it allows us to rethink our branch footprint over time and achieve some consolidation of footprint leverage opportunities. There are other areas in terms of the way we all work, how we use office space. We've been in an environment where our bankers have been about half in the office and the banking center and the other half are sort of working remotely. There are opportunities for leverage and that will probably change our dynamics around travel -- change in dynamics around travel. As you know, when you're on the road, you lose a lot of time in airports and cars and buses and trains. And now if you can do it on Webex, you can be a lot faster and a more efficient with your time. That's true of bankers as well. So there are a number of those things. And then we think, finally, just the use of technology will allow us to leverage processes to be more effective and efficient over time, robotic automation, tools, Box, for example, where we set up repetitive task with technology, which essentially functions is artificial intelligence. And -- so there are just a number of those areas that we think will allow us to achieve more than the $170 million. We're still working on it. We've got a lot to do to flush that out. We'll have greater clarity as we get into next year. But I think in all likelihood, I have a growing sense of confidence that we'll be able to get to the $200 million of annual savings level.

Got it. And then I think on the third quarter earnings call, you laid out expectations for expenses, which incorporated the amount of savings you're expecting for 2021? And I think it's declined low single digits off of the base ex incentives and commissions, which obviously are good expenses. Can you maybe just talk about on the core bank, your ability to hold the line on cost and also make the necessary investments in the franchise. And I guess related to that, how should we think about positive operating leverage as a goal for the company? And is it achievable in the short-to-intermediate time frame?

Yes. Yes. I think, clearly, the greatest lever for profitable operating leverage would be interest rates going up, but that seems unlikely in the short run. We, both on the First Horizon side and the IBERIABANK side have shown a tremendous amount of ability to leverage the cost base. And I think in addition to what we're doing around the merger, I think the sort of the fresh eyes perspective of combining 2 management teams together to look at how we're doing things, then it will give us an opportunity to leverage costs. Very early on in the process, the leadership team sat down and we said, in addition to dealing with the fallout of the pandemic, how do we use this as an opportunity to rethink, simplifying our business, making it more effective and efficient for our customers, but also more effective and efficient for our shareholder base. So we're spending a lot of time at a very detailed level, Michael Brown, who's leading our regional banking franchise, is spending a tremendous amount of time in the market, working through the -- really the opportunity. What is the growth opportunity here? What is our density? What are the resource needs here? What the outlook for the market look like? And looking at how we restructure our cost base to make sure that we have our cost structure rate against the greatest opportunities for return for shareholders. We're looking at technologies in the same sense, which sense that what systems and reports can we sense that so we can invest in new technology and infrastructure. Our view, Ryan, is ultimately that we don't have the opportunity to grow cost an awful lot that we've got to be thoughtful about how we invest every dollar and make sure it's invested in those segments where we truly can be differentiated and get paid for. And it's in those markets where we have the opportunity -- markets and/or products where we have the opportunity to grow for the long term.

When you and I met back in September, we talked a bit about some of the revenue synergies you hope to achieve. And I know you didn't include any in your projections, but you talked about already seeing them in areas like ABL and equipment finance. And I think you highlighted wealth is another area of growth. Can you maybe just talk about the area -- how you expect these areas to evolve over the next 12 to 24 months? And any sense for how material revenue synergies could be the when the deal is -- once the deal is fully integrated?

Yes. That is an area that I would describe as a real bright spot at this point in the integration. We're like everybody else. We're not able to get our bankers traveling a whole lot, but it is amazing to me the number of deals and/or opportunities, where we've had the opportunity to leverage the product set across a bigger, broader franchise. Great examples and really intuitive examples are the mortgage business that IBERIABANK had, we're leveraging that across the old First Horizon footprint. You mentioned wealth and private client. Our equipment finance business, we're doing deals in Middle Tennessee that we wouldn't have an opportunity to do. FX and asset-based lending in the old IBERIABANK footprint. So I think that is one of the real opportunities for upside for us in 2021 and beyond. There's some of those size related ones that are fairly obvious. It doesn't cost any more to hold $20 million of a loan than it does, $15 million or $10 million. So I think there's those opportunities. But leveraging our syndication capability to -- with our bigger whole position to lead some transactions and be more proactive on the banking side. So at the end of the day, I think those are meaningful revenue opportunities to not try to put a pin on the tail of the donkey per se. But we said in the Capital Bank merger that we felt like we could achieve $30 million of revenue synergies. I think we actually said it at your conference that year. And I feel very certain that we have the ability to blow $30 million of revenue synergies away with what we're seeing in terms of opportunity on the Iberia Bank and First Horizon merger of equals.

Bryan, you laid out on Slide 5, a plan for the integration sort of a time line, some of the key milestones. And I was wondering if you could just give us a high level update, how is the integration progressing? Have there been any -- if there's been any major challenges along the way? What obstacles have you had? And I guess, what are the main goals for -- without the obvious of getting through the core conversion, what are some of the main goals for 2021 related to the merger?

Yes. I'll start with the most obvious obstacle or difficulty, and that's dealing with everything in a COVID-based world. We're like everybody else. We're working on a 2-dimensional frame of the world and Webex and Zoom and meetings of that nature. I think the integration is going very, very well. And I think about it across a number of fronts. The first front is, do we have disagreements or areas where we don't feel really good about the go-to-market strategy. And we work that all out very, very early on. And I think that's a testament to what Darryl and I were saying in November of 2019, which is we feel very good about the common culture of the organization and that our ability to combine and not miss a beat from a going to market strategy would be good. That worked out well. We took advantage of the time between November and March to put our organizational structure in place. And so we had our leadership structure. When we closed the merger on July 1, we hit the ground running. And we've been on track there, and I think that is working very well. And the culture of the 2 organizations have come together. We're using the technology like we're using today to bring people together as best we can and to communicate and to train and to talk about the -- really the combined organization and how we're most effective for our customers. Our integration planning is going very, very well. That effort is really a joint effort. Randy Brian from the IBERIABANK side and Yousef Valine from the First Horizon side are leading the actual integration process. Anthony Restel, our Chief Operating Officer, is heavily involved in making sure that with our technology and operations and back office we're getting that done in a seamless fashion. We -- as you know, we pushed back our integration timeline a little bit. That was really a recommendation from our integration leadership and Anthony that we take a little slower approach to the final conversion, call it, third quarter Labor Day area of 2021 and use that time to make some investment in systems and technology and do some remedial things as well as to close some gaps that we saw that we're going to be difficult on converting customers. So we're taking a little bit more time in this environment to make sure we provide a seamless and hopefully painless integration for our customers. And hopefully, we'll end up with a better set of systems and processes for the long term. So that seems to be going well. And the key thing that flows from our ability to achieve all that is our cost savings, as we've talked, we feel good about our original commitment and the ability to upsize that.

Bryan, before we get into some the operational aspects of the business, given most banks the opportunity to give us some broad stroke update in terms of how the quarter is progressing. You guys obviously had a fair amount of guidance up there. Any kind of broad stroke views of how things are progressing in the short term.

Yes. And so I'll set aside what I said earlier. I think credit is going to perform reasonably well, and it's performing better than many of us thought in the darkest hours of April and July. We're first adapting to CECL. We came into the quarter with a high expectation in our fixed income and our mortgage and then our mortgage warehouse businesses. Those businesses tend to be impacted by the seasonal effect of the holidays. But I would tell you, at this point, I feel very, very good and not seeing a lot of impact of the holiday seasonality. So I think we're going to be reasonably good in those businesses this quarter. And I feel looking as far into 2021, as I can see, that those businesses will continue to do pretty well in the first to middle part of 2021, given what sets up to be an interesting dynamic in the market for us.

Got it. Maybe to dig in a little bit, Bryan. So one of the themes we've heard across the conference has just been that the expectation of loan growth being very slow for the near-to-intermediate term. And you guys, I don't think any different, you talked about modest at best growth. And it does -- as I said, it does seem much a lot of growth out there. However, you do have some idiosyncratic levers. You talked about loans to mortgage companies that have driven growth. And maybe just high level, as you're out speaking with corporates, like what is the mindset of them right now in terms of borrowing? Is there any pockets of growth into the next year? And how important is things like further stimulus for what it could mean for your borrowing a customer base?

Yes. So let me start, Ryan, with stimulus, and I'll give you sort of my view and broadly what I hear. I think targeted support for the economy is going to be really, really important. And I recognize how difficult it is to be targeted. The one thing that is clear in talking to our borrowers and following our loan portfolios is there are disparate outcomes in terms of how the epidemic or the pandemic has impacted sectors of the economy. So if you're in sectors of the hotel and motel business, you can be very negatively impacted or you can see your numbers be hardly at all impacted. Restaurants, if you're in quick-serve or delivery of fast food, probably a pretty good year if you're in a sit-down dining environment. So I think the ability to be targeted is probably an important thing. I think as we talk to our borrowers, we're seeing from them the same things that we largely feel right now, which is, clearly, there is a fair number of known unknowns. That list has been limited some. The vaccinations appear to have very high efficacy. There are questions about rollout and how soon that you will be vaccinated. I tried the New York Times website, it looked like there'd be about 8 people after me. So how those things roll out is going to be pretty important. And I think there's this period of uncertainty in the sense that we're going through an administration change in Washington, and the pandemic numbers are getting worse. We're starting to see more stay-at-home orders. And I think people are a little bit uncertain about how all of that plays out over the next 2 or 3 months. I think beyond that and the efficacy what the vaccine people generally see, there's a light at the end of the tunnel, and nobody really believes it's a train, people believe that we're getting to the end here. So I think people on the whole look to be more optimistic. I think that will upturn or optimism will turn into action probably sometime in the first quarter once we get through the Thanksgiving spike and the year-end holiday spike, and we see how sort of the Biden administration is going to play things through the vaccination process. So my expectation is not a whole lot more optimistic than what you have stated from other presenters at the conference. I think loan growth is going to be reasonably muted in the half of the year. It's a function of people not feeling like I'm leaning on today versus wait a few weeks and then -- or a few months. And then second, there are certain sectors that have sort of a natural dynamic like a commercial real estate business, where things continue to do what you want them to do, which is to move into the capital markets, but the pipeline for new deals has really kind of gotten locked up. So once you get some of that uncertainty, that will start to build back again. That's why, again, I think it's so important that we have the countercyclical opportunity to leverage the mortgage and particularly the mortgage warehouse business. I think I'm not a whole lot more constructive. I think it will be fairly muted for this far into 2021, as I can see right now.

If we had this conference 6 months ago, we probably would have asked 10-questions on credit, but maybe just 1 question on credit. You've built reserves and other loss-absorbing capacity to over 2%, I think, 2.15%. When you think about the high-risk areas, you've talked about energy, hotels and restaurants have been your areas of focus. One, can you maybe just talk about how these portfolios are performing relative to your expectations? One of the themes that we've heard consistently is that credit does seem to be outperforming, I think, has been the big buzzword. And where do we need to get to for you to start digging into some of the reserves that you've built over the last 2 or 3 quarters?

Yes. Yes. So the -- I think credit on the whole for the industry is performing better than I certainly would have thought and many would have thought in the darkest hours when we built these reserves. I think the data is a little bit hard to understand from the outside. The effect of government stimulus, transfer payments, deferral programs, inability to report consumer credit to the FICO scores, there's going to be a lag in the data. And so it's a little bit hard to understand from the outside. I suspect we're no different than anybody else. We're digging deep with our customers and understanding our relationships in a great deal of granularity. I've said before, and I'll repeat again, it's amazing to me how well our bankers know their customers and know what's going on in their business. And it's also very amazing to me of how creative our customers are and adapting to sort of the adversity of the pandemic and figuring out a way to minimize costs, maximize profitability and operate in as normal a fashion as they can. So that's worked reasonably well. You mentioned a couple of industries, which I had mentioned earlier as well. Early on, we saw deferral request in the 15% area. And those numbers have dropped down into the 2% and 3% area of loans still on deferral. They tend to largely be concentrated around sectors of hospitality, sectors of energy, sectors of the economy that are most adversely impacted. So that's where I expect that the continued difficulty will be. The consumer continues to be very strong. I don't want to minimize that there is a huge subset of consumers that maybe many of them are outside the banking framework that are in lower wage jobs that have really been impacted like restaurants and hotels and things like that. But what we can see the customer on our balance sheet, balances continued to be strong and our customers have more cash today than they had. Given the consumer drives 70% of the economy, that's a reasonably positive sign. In terms of setting reserves and the timing there, I think January is going to be an interesting time for people because I think most everybody will look into the first quarter and say, it's going to be slower than it was in the fourth quarter. And if these spikes are as real as we all think over the next few weeks, unemployment is likely to trend up, particularly in areas where you see greater lockdowns or stay-at-home orders. And so I think we'll have a little bit of difficulty and -- but look behind that or look beyond that. So that's a long way of getting around, too. I think we will have a reserve level that will, at the end of the day, proved to be higher than is necessary for the losses in the portfolio. I'm not sure when you'll be able to objectively reach that conclusion. That's really a matter for the accountants to work out. We went into this pandemic and people would ask the question, well, First Horizon, how did it perform in the great financial crisis? And I felt like we would perform significantly better than the great financial crisis. And I think on a relative basis, we'll perform well as well or better than most. And I think at the end of the day, that's likely still to be true. So at some point, over the next, call it, 2 or 3 quarter reporting periods, you start -- should start to see loan loss reserve come back down. They're not going anywhere. I'd prefer to be on the side of conservatism and not get into rising and lowering and making all sorts of adjustments to it. But they're not going anywhere. If they're not used for losses, we're going to have a return to shareholders. The one thing I'll throw out is this is a time where the accounting is going to be different than we've ever experienced. You're likely to see delinquencies and losses going up in the first half of 2021 and loan loss reserves coming down. And that's different than it's ever been before, and that has an impact with regulators that has an impact with investors and bank management team. So we've got a few interesting dynamics. But I think at the end of the day, credit is going to hold up better than we feared.

And 2 more questions for us to get through. So maybe I'll start with the first one on capital. You've built the capital above 9%. Clearly, the focus today is on the integration. But as you look out, do you foresee further M&A in FHN's future for greater scale? Are there fee-based areas that you could look to expenditure? Can you maybe just talk about what the priorities are for capital and capital repatriation? And where do we need to get to on the and integration to begin returning more capital?

Yes. I feel very good about our ability to manage the organization on that 9% to 9.25% CET1 ratio. We're not going to swim upstream in terms of capital repatriation against the Fed and the CCAR or organizations. But I think it's not too far down the road that the industry will start releasing some of that capital. We continue to do our stress testing, and we'll release those results in the not-too-distant future. We think that ultimately has a test of a good test to how your balance sheet performed. I think in terms of capital deployment, we're no different than we've ever really been. We think organic growth is by far the best use of capital. And then it comes down to repatriation, or is there some alternative in terms of a market or business line expansion. I don't -- if you took our strategic plan that we put together, Ryan, this fall on a combined basis, there's nothing in there about M&A. It's about operating an organization that delivers differentiated experience in customer service and does it in a way that delivers a significant amount of customer value, shareholder value and drives higher returns. That's not to say that we won't find some product area where we don't have offering today that we need to get into. It's not to say that if we had the right MOE or merger opportunity at a low-to-no premium basis that we wouldn't consider. But that's not what we're focused on. So I would largely look at organic and capital repatriation is the vehicles over the not-too-distant future.

Maybe we're running out of time here. So maybe one last question.

Sure.

Bryan, you mentioned returns. I think when you originally announced the deal. You were targeting returns in the 18% range, but that obviously shifted given that we're in a 0 rate environment. Maybe as you move through the integration, what type of returns do you think you could put up in this environment? And then once we hopefully get to a better rate backdrop, what do you think the returns look like? And can we get back to those returns that you originally targeted?

Yes. I think we're going to have good relative ROTCs. I think we'll be top tier. I will look into 2021, and I think we can be in the low double-digit return levels, and I'm optimistic about our ability to deliver that. Clearly, when rates move up, we will move higher. And I think we do have the opportunity, if you get back to not the 1.5% Fed funds was particularly normalized interest rates, but it is significantly better than 0. As you move back up, we're going to drive higher returns. As you know, we've been focused on driving ROE and capital efficiency. And we're still focused on that. We think we can create a tremendous amount of value there.

I'd love to continue to ask questions. But unfortunately, we're out of time. But I just want to say on behalf of myself and all the investors, we really appreciate you attending and participating in the conference. And hopefully, have a nice holiday season. Send my regards to Ellen on the other side of the room and look forward to engaging with you in January and also hopefully back live at the conference next year.

Well, thanks for having us. I appreciate it, and hope you and everybody else has great holiday season as well. Thank you.

Awesome.

Thanks, Ryan.

Thanks.