First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Jon Arfstrom. And thank you for joining us again in afternoon session at our 25th Annual RBC Financial Institutions Conference. And we're fortunate enough to have Bryan Jordan here from First Horizon. Also, we have Aarti and Ellen joining as well. And Bryan became the CEO of First Horizon in 2008. And he's done great work. He's been through a lot as CEO. A lot of cleanup work, a lot of things to move the company forward, completed a few acquisitions, and now we're in integration mode with a recent merger with IBERIA. So a lot of work to do, but a lot of promise ahead as well. We've talked about this on a couple of other calls, but we've -- thankfully, we have more generalist interest in the banking space. So for those of you that are new to First Horizon, we're going to have Bryan give just a 30,000-foot overview of the company, a little bit about the geographies, and then we'll get into some of the nuances in Q&A as well. So Bryan we'll just let you take it away.

Thank you, Jon, Thanks for having us. It's great to be back. We, as you said, have been through a tremendous transformation since the great financial crisis. At that time, we were in 3 businesses, most significantly, a mortgage business, our fixed income business and our banking business, which was in the state of Tennessee. We basically sold the origination and servicing platform in late midyear, really, of 2008, and we've been transforming the business ever since. We've refocused on our core banking business. We've restructured the way we approach credit, the way we lend. We have significantly grown our fixed income business. Over the last several years, we've expanded our footprint in the banking business, first, through the merger with Capital Bank in North Carolina, which gave us the Carolinas and Florida. We picked up this summer, 30 branches from SunTrust in their divestiture in the merger with Truist, mostly in the Carolinas, a little bit Virginia and Georgia. And then we've completed what we're still working on today, which is our merger of equals with IBERIA Bank. All said, we have a franchise that covers about 12 states in the southeast. We're in 15 of the top 20 MSAs. In the south, we have what we believe are really good fundamentals in the market we serve with great taxation, labor and economic trends as well as growth characteristics. And we have a tremendous platform of bankers and products that will allow us to grow. So we think we're well positioned to grow attractively. At the same time, we have the tailwind of cost saves. I mentioned the fixed income business a minute ago. It has served in the last several cycles as a very good countercyclical offset to declining spread income in the loan origination and the lending businesses and has set a pretty high bar in terms of our ability to produce a countercyclical revenue set compared that with our fixed income -- excuse me, with our mortgage warehouse lending business. We think we're very well balanced in all parts of the cycle, and we're focused on driving consistency of earnings. We're focused on driving strong returns on equity, and we think we're well positioned to do that. So I think we're in a very unique position. We have the tailwind of cost saves to be realized. We're in a position, where, we believe, we can execute completion of our integration by the early fall of this year. And we think we're well positioned with geographic markets as well as teams of bankers and set of products that will give us outsized growth as we move into 2022 and beyond. So all in all, we're pretty optimistic.

Okay. Good. I know we're both CPAs or former CPAs. So we like precision in the numbers, but you provided some guidance in the fourth quarter. I know it hasn't been easy, putting all the numbers together for the company. But we appreciate the guidance. Can you just step back and think about some of the guidance that you gave. Are you -- generally, any areas where you're feeling a little bit better or a little bit more challenged in some of those areas that you laid out?

Yes. It's still early and those sort of broad outlines of where we thought 2021 would play out are still largely in effect. I think if I had to fine-tune anything, I would say that, broadly speaking, our fixed income business and our mortgage businesses are continuing to do well. They might be slightly better than we might have thought a couple of months ago. I think credit has the potential to be a little bit better. The environments around lending, I think, are extraordinarily competitive right now. We're not seeing a whole lot of new loan growth activity, but we are starting to see more borrowers get active in moving relationships around and repositioning and people starting to lean more forward for the back half of the year. So I think if the markets are as competitive as they're likely to be, you're in all likelihood going to see a little bit more compression on spreads, on loans, throughout the course of this year. But all in all, I think our broad outline is still looks pretty good and we'll know more as the year unfolds. But credit quality continues to be good. Fixed income, mortgage warehouse lending continue to be pretty strong. And we're seeing the signs that we expected of a planned recovery in the back half of this year.

Okay. Good. It seems like a common theme among your peers is the second half recovery. And I guess you're seeing -- you can see it. I know it's not with great visibility today, but it feels like that's plausible for your company.

It does feel plausible and probably more so today, Jon, than even when we thought we might have that in January, the efficacy or the rollout of vaccinations, the ability to get shots in people's arms is gaining momentum. The J&J vaccine is there and they should accelerate it. And there's another -- I don't know if the House has acted today. I assume that they will and the President will sign it. There's another $1.9 trillion of stimulus that will be applied to the economy over the next year or so. So it does feel more probable that by the middle of the year when most Americans in all likelihood, will have the opportunity to get a jab, we think that the economy should start to pick up, and you're starting to see some of the markets in the South Texas and Mississippi are 2 that have got reasonable variety of opening back up. Florida has been open. Tennessee is at sort of a mixture. We think the economy is going to open up pretty rapidly around the middle of this year.

Okay. Good. I did want to -- that's a good segue. I wanted to touch on 2 of your markets. It feels like all of the Northeast is moving to either East Tennessee or Florida. And I'm just curious, are those standout markets in your view, are you seeing that in the migration patterns? Just talk a little bit about the health of those 2 markets?

Yes, those markets have continued to be very good. Florida has been a tremendous beneficiary of the pandemic and people moving to the Sunshine state. The weather, the climate is clearly a draw. Tax policy is a draw. And the fact that they kept that economy open has been a positive. And we think that trend will continue. Tennessee is very similar in terms of tax policy, labor law. Climate is not quite as warm, but very favorable. And we're seeing companies move into Nashville and the rest of the state. Atlanta has been a beneficiary. Texas will be a beneficiary. So I firmly believe that to the extent that we had attractive markets and demographics 2 years ago when we announced a combination of IBERIA Bank and First Horizon, that the demographic trends are tilted more to our advantage today than they were pre pandemic in the markets that you've mentioned as well as others are going to see extraordinarily attractive environment over the next several years.

Yes, it does. It feels that way. That's good. On the merger, Bryan, I'm assuming you've had a number of investor meetings today, and you've had a number over the past quarter. What would you say are maybe some of the most misunderstood or underappreciated parts of that merger that you'd like to highlight?

Yes. I think there's a few around the merger. And I think there's just a few around the way people have looked at First Horizon historically. So since I started with a great financial crisis, if you don't mind, I'll start there. I think very simply, early on, people looked at how credit played out in the great financial crisis and assume that, that's the way it would play out in a pandemic world. And so I'll reemphasize what I said in my opening preamble, I suppose, is that we've completely restructured the way that we have structured our portfolios, the way we lend and I think we're going to be at or better performance than most when it comes to way credit plays out in this environment. And that overhang as much as anything has influenced the way people have looked at the combined organization. And looking at the combined organization, I don't think people really do fully appreciate how close the cultures of the 2 organizations were. They weren't the same organization. So there are always differences that we have to work through. But I think we've taken a pretty good effort and made good progress in taking the best of both organizations, being the -- ultimately the entrepreneurial and go-to-market strategy that IBERIA Bank had as well as the product overlays that we have at First Horizon. And I think we've created something that is very, very unique. And while we've gone through this integration, we will have improved our systems and our processes and our product. We have the opportunity for a tremendous amount of cost savings. And then there is a fair amount of revenue opportunity that we're starting to realize in terms of revenue synergies. And I know nobody claims it in deal metrics or deal economics. But this is a transaction that ended up being accretive to tangible book in very short order. It has very strong overlap and cost takeout opportunities, and it has very good revenue growth opportunities with the overlay of some of these specialty areas that both organizations have. So I think there's this sort of this time period, where you announce a deal, we go into a pandemic, everybody says, how's this going to come together? How's it going to -- how do you integrate in that environment? I think we're making good progress. And clearly, the pandemic has played out better than most of us would have feared, call it, 12 months ago, 11 months ago. And so I think we're very well positioned to come out of this environment as one of the strongest players in the Southeast.

Okay. Good. I do have a question about that in a bit coming out of the pandemic. But just on -- you talked about revenue synergies in the revenue front. You laid out your guidance. There's obviously some seasonality and some accounting and things like that, that impacted. But when you sit in your chair today, how do you get back to core sequential revenue growth for the company? How long does that take? And what are some of the guideposts that you have to hit there?

Yes. I think in terms of -- well, let me step back from your question for a minute because I alluded to a point earlier that I think is an important one. We have the countercyclical businesses. I mentioned 2. There are 3 of them really, our mortgage lending business, our mortgage warehouse finance business and our fixed income business. When the spread income is trending down for the entire industry, us included, these businesses were ramping up. So we kept our revenue at a higher level throughout in 2020. And as I've alluded to, we feel good about their ability to contribute through the low spread portions of 2021 as well. So when we get back into a more growthy environment, we will see our C&I lending pickup, we will see growth in the loan portfolios, and then it will be partially offset by declining mortgage warehouse lending and these countercyclical businesses. So while we focus on the growth aspect, we know that we keep a higher level in the low periods and then it levels off and then it starts to move up from there. So I think by -- sometime in 2022, you'll see more of the normalization of some of the countercyclical businesses and the growth in the C&I and the loan portfolios and hopefully, improving spreads, although we're now optimistic rates are going to go up in the near term. We'll start to show some growth. If you think about it in terms of net interest margin, and BJ always reminds me, don't focus so much on the NIM, focus on net interest income. And don't lose sight of the fact that excess cash, the Fed depresses it down, but it doesn't hurt your net interest income. At the end of the day, I think we'll probably bottom out sometime in this area, call it, between the fourth quarter and the first -- end of the first quarter and move up excess cash, Fed may affect it. But at the end of the day, I think we should start to see growth and our stabilization in our margins as loan growth picks up.

Okay. Good. And I want to keep this more strategic, but the question that comes up as well is the steeper curve. How do you think through that? You may have just answered a lot of it. But good for the company, neutral to the company headwind? What's your answer on that?

I think it's good for the company in many ways. Clearly, it's good for our fixed income business and particularly the volatility around it. I think that we'll make what I said earlier, more likely, which is we see pretty good average daily revenues for the for the near-term just because of the steepness in the curve and the excess cash in the environment. It will help us in terms of reinvestment rates in our securities portfolio. And to the extent that customers have interest in duration, it will help us in terms of the yields on fixed rate assets, whether it's owner-occupied real estate or 5, 7, 15, 30-year mortgages that get done in our private client business, for example. So all of those will be positive. Jon, from time to time about the securities portfolio and the ability to take excess cash. My view of the securities portfolio is manage interest rate risk, with it manage liquidity risk and then manage any collateral needs that you have for your state county municipal deposits, that it's economically impossible to create value other than taking bets on interest rates there. So we tend to minimize any interest rate bets. So I wouldn't expect that we would take a lot of cash and just pour it in there. We'll work on the other aspects of our balance sheet. Clearly, if we want to do something with a fixed asset -- excuse me, a fixed rate, I'd might rather deal with a customer because of relationship value there. And if you're going to take duration risk, do it on customer value, customer acquisition basis where you're creating relationship, securities are just transactions.

Okay. Fair enough. Before I move to expenses, you touched a little bit on the fixed income business, and I think we all understand that. Anything else you'd like to call out on your noninterest income businesses that you're particularly optimistic about?

I haven't talked much about the mortgage business. The mortgage business continues to be pretty good. People are still buying a lot of homes, and that business is good. We will see the refi activity trend down some, we think, over the course of the year. But our gains have held up reasonably well. So we think that business will be good. Customer fees have been soft throughout the pandemic, and that's not to be unexpected with the amount of cash in the system. I actually think that's probably a good thing for the long term. So I think our fee income businesses will be pretty good performers this year. I think we're well positioned for the environment.

Okay. Ellen told me not to ask you to promise to more expense control. But you did recently upped the expense control. And I think it's been one of the highlights of your company for a long period of time. BJ strikes me as a really nice guy, but there must be more to him behind the scenes. But how have you been able to do that? And when you think longer-term about the business banking model, I'm not asking you to promise anything, but is there room for more efficiencies over time?

Yes. Yes. So BJ is a really nice guy, but he can squeeze nickels into dimes. He's done a really nice job of helping us realize efficiencies. And I think that's important. As I step back and think about the business, I'll come back and brag on our people in a minute. But as I think about the business long term, I think it's endemic to our industry that you've got to take costs and you've got to pull them out of here and allocate them over here. And then partly that's changing patterns in branch network, for example. Our branch transactions are down about 14%. Our mobile is up 25% or 26%. Customers are going to be migrated. That's just an acceleration of a starting trend. So we'll need less branch network over time. We'll need more investment in technology. So I think that's endemic to our industry. Back to bragging about our people. I think over the last 6 months, 9 months since we've closed the merger, we have done an awful lot of good work. Michael Brown and our market leadership have done a tremendous amount of work. And we're taking money and reallocating it into places, where, we think, we need to invest and where there's lower productivity, we're taking costs out of those areas. So we're always looking at how we move this cost structure down and around. It's important if you -- to bring your cost structure down, you also -- you have to understand it, but also it presents opportunities to invest. We say to ourselves quite often, Jon, that you can't cut your way to greatness. Ultimately, you have to spend money in this business to make money. But we want to spend it in the right way. So BJ does a good job, helping us focus on good costs and bad costs. We try to take the bad costs out or allocate them to higher growth opportunities. So I think we will do as good a job or most -- or better than most when it comes to controlling our costs, allocating those. And to the extent that there's upward pressure on cost, we'll control that cost better than most. And where there's opportunity to take it out, we will.

Okay. A couple more topics to cover. But just one on M&A. Does the pandemic change your thinking on M&A and the value of acquisition candidates? It feels like maybe there's a potential for more cost takeouts and more combinations going forward. Just any thoughts on that?

Yes. I think the point I made earlier about changing customer trends, branch networks are going to be affected by customer trends. I think the pandemic has highlighted the need for investment in infrastructure and technology. Another way to do that is in large measures to get that existing costs. And clearly, the pandemic had a significant impact on net interest margins across the industry with the Fed essentially moving rates to 0. I think, clearly, the regulatory environment is probably going to drive some of the M&A environment simply because with the change in administrations, you're going to have different leadership or different views over the longer-term about how regulation and consolidation. So I think that might be a catalyst as well. As we think about M&A, we think M&A is a viable alternative for use of capital. If, one, it's a good cultural fit, that's most important. Two, it's a good geographic fit, and that's very important, but it's less important than the cultural. And then the third and always overriding is, can you do it on deal terms that makes sense from a shareholder perspective because we're here to drive our shareholder value in addition to value for our customers and our community. So I think it's always possible. But we don't -- when you look at what we've done in our strategic planning for the next 2 or 3 years, there's not a page or a paragraph in there about how we have to do or think about more M&A in the context of what we execute on the next 2 or 3 years. We're focused on driving the business because M&A doesn't make sense if you don't have a good model to put it home. So that's a long way of saying, we may or may not have opportunities to participate in further consolidation, but we don't see it as core to our strategy. What we see is core to our strategy is going out there and be extraordinarily good at delivering differentiated value to our customers and our communities and investing in the technology needed to do that. And if we can do those things, we will drive a lot of value and allocate a tremendous amount of capital from our existing businesses into organic growth.

Okay. I want to touch on credit as well, but we're on the capital topic. How do you want us to think about repurchasing shares in the time line that we should think about there?

Yes. We -- I've mentioned in a couple of different ways. We have a tremendous focus on driving risk-adjusted returns. We talk a lot about returns on equity. Most often, we talk about it in terms of tangible common ROTCE. We believe in capital efficiency. And clearly, if we have opportunities to invest capital in our core businesses through customer relationships, we're excited about that. So that's priority #1. #2 is to repatriate that capital to shareholders. We don't think we need to warehouse it for some potential transaction down the road. If you have an attractive transaction, you shouldn't have trouble raising the capital for it. So we look at repurchase and dividend policy as a way to manage excess capital out of the business to get back in shareholders' hands, so they can deploy it effectively. Our repurchase activity is by far the most flexible. We think, given our valuation dynamics today, both on an absolute and a relative basis, we think repurchasing our shares is an attractive use of our capital. We have roughly a $500 million program that was approved in January. We've started to use a little bit and we'll continue to use as an effective lever to get excess capital back in the hands of shareholders. We can turn it on, turn it off based on the organic growth opportunities that we see in our loan portfolios and our customer activity.

Okay. Good. And then just to wrap things up on credit, speaking of excesses. You have merger accounting and marks and CECL come through. And you don't have to say you're over reserved, but I can say, I think you have a lot of reserves. It sounds like you feel better on credit. Is that a fair statement? And you have some visibility on that, you feel good about credit?

Yes. So earlier in the call, you reported that I was a recovering accountant. So you get a recovering accountant talking about loan loss reserves and the implied. The implied precision in a model like CECL versus the real-world reality of it, you can get me going forever on that. I think CECL was a very procyclical accounting model, but it is what we're having to deal with now. I think when you look at reserves at the end of the year, Jon, you were in a situation, where you were sort of between -- twisted between the development of a vaccine, unemployment spiking because of rising COVID cases, setting reserves in a world where you didn't know what rollout would look like and how the economy would recover. I mentioned a bit ago, clearly today, vaccine rollout is a whole lot better than we would have anticipated even 1.5 months, 2 months ago. The stimulus will be additive to that. And so we feel much better about credit outlook today than we would have even 60 days ago when we were setting our reserve levels at year-end. I think at the end of the day, you will see some of those overlays that have maintained those reserves at higher levels start to burn, all -- or come down some as the economy continues to show signs of improvement. So I think over time, our reserves will migrate down as a percentage of loans. We still have fairly substantial marks that we took in connection with the IBERIA Bank merger. And it's important to note that in addition to all the loan loss reserves we have, we've got probably today, 45% or so of our loan portfolio was mark-to-market on June 30 or July 1 of 2020. So we've got tremendous loss taking capacity in the balance sheet. We think we're on the side of conservatism, but not intentionally. It's just we've taken approach which is fairly cautious around managing credit.

Okay. So high reserves, the marks, fair amount of capital, expense saves on the way and thinking that possibly we're going to get a second half rebound is what it feels like. Is that the message?

I think that's -- yes, that's pretty attractive. Yes.

Yes. Okay. Okay. Got a little less than a minute left. Any other final points you'd like to make before we wrap it up? Or do you think we covered it all?

No. I think you covered it all. I think the only thing I would add to that, if any, was we've got very strong dynamics in our countercyclical business. I think we're uniquely positioned with an opportunity to grow a footprint that lends itself towards growth organically. I think we're uniquely positioned. And I think we create a tremendous amount of value for our shareholders, our customers and our communities over the next several years.

Okay. Great. Great way to sum it up. Thank you, Bryan, Ellen, Aarti, we really appreciate it.

Thanks for having us.

All right. Good day.

Bye.