First Horizon Corporation (FHN) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to our Morgan Stanley Financials Conference in 2021. I want to thank everyone for being here. We are very excited to have First Horizon as our next presentation. And we're honored to have Anthony Restel, who's Chief Operating Officer with us today. So Anthony, thank you very much for being here. Before we begin, I do need to let you know, for important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please feel free to reach out to your Morgan Stanley sales representative. All right. Anthony, thank you, again, for being here. I was hoping, if you don't mind, maybe just run through your -- sort of give an overview of your areas of responsibility and kind of maybe an update on how the integration is progressing.

All right. Thanks, Ken. Appreciate the opportunity to be here and talk to everyone this morning. My areas of responsibility at the bank cover all of technology, corporate security, project management, business transformation, which includes our virtual bank, the fintechs and our data and data strategy areas. So that's kind of the nutshell of what I'm responsible for at the bank. Obviously, today, most of our effort and energy is really centered around the upcoming, I'll call it, big bang for the big systems on the conversion, which is scheduled for the Columbus Day weekend. What I'll tell you is, relative to our progress on the merger itself, obviously, you've seen a lot of the numbers in terms of how we're doing against the cost saves. I think we're on target to deliver the $115 million run rate savings by the end of the year. Our revenue synergies continue to climb. I think we feel very confident we'll achieve numbers that are greater than kind of what we saw in the Capital Bank transaction. And then relative to how we're dealing with the systems and the conversion itself, as you can imagine, given the size of the banks that we're putting together, we've taken the opportunity to try to derisk where we can. And so we've already started some of the smaller system conversions. So for instance, our mortgage platform converted already. Our HR platform converted. Our retail brokerage system already converted. We have our wealth and trust system going at the end of this month. And then certainly, we'll roll into the, I'll call it, like the deposit and loan systems really kind of hit on that Columbus Day weekend. Overall, things have gone well. You never want to declare victory until you cross the finish line, but things are going very, very well in terms of our progress on the conversion and the merger-related work.

All right. No, that's good to hear. Maybe just jumping right into Q&A. Now both sort of legacy First Horizon and IBERIA, have a history of successful integrations. Can you just talk about how the approach to the MOE has differed sort of this time versus, say, other transactions?

Yes. Look, I think the biggest difference, let's put the side of the transactions off to the side for one second. The biggest challenge with this integration, quite honestly, was that we had COVID in the middle, right? So if you think about we're putting 2 fairly decent-sized organizations together, we're blending teams. We basically announced the transaction in November of '19. We got a good running start for 3 months, and then we basically told everybody we're going to be working remote for a period of time. So as you can imagine, right, trying to -- team building and all of that kind of rapport building that you'd love to have with people in the room. We had to do that remotely. And so it's interesting about that, as I tell you that, although, it was a unique and different challenge, it actually went fairly well. So clearly, today, we're back able to meet and get people back in the room and kind of push forward on that kind of, I'll call it, personal relationship building. But relative to having to work from a remote perspective, it really didn't create much of a drag relative to our ability to get things done. Some of the big differences, obviously, both companies have a history of integrations and converting systems. And what I'll tell you is we try to take a little bit of the best of both approaches, that both companies found successful, right? So at IBERIABANK, for instance, I was involved with 27 different system integrations, and I'll tell you that each one is a little bit different. And the reason I'd say that is our approach at First Horizon is also a little bit different, right? It's tailored specifically to what we're trying to do and how we want to bring people across. And so when you look at it, again, the big differences are derisking by doing some early conversions. A different approach of blending, I'll call it, the best of what work for both organizations in their prior conversions and learning experiences, bringing those to bear to make sure we kind of take advantage of what we've already learned. And then really trying to also simplify and enhance some of our products set along the way. So it's a little bit of a different mixture. We are doing probably more upgrades and shifting of technology than probably what I've done historically through integrations. And so one thing about this integration, which I think is really great, is not only are we just trying to push the 2 companies together, but we did take a step back in the go-to model perspectives and decide did we like or would the resulting end product kind of fit what we wanted. And in cases, not everywhere, but in a lot of cases where we thought there was a real opportunity to upgrade and make a difference from a consumer perspective, a commercial customer perspective or even an efficiency perspective, if there was an opportunity to swap in a card item instead of one of the original 2, we really took that as -- a deep look at that. And I'll say in a lot of cases, we are putting in some new things. So it is fairly exciting.

All right. Maybe I was hoping you could describe some of the First Horizon's specific technology investment plans? I mean -- and also just speak to the motivation behind why you're doing those technology investments? I mean, is customer satisfaction, efficiency, revenues, et cetera.

Look, our model, when you kind of break it all the way down is, we like to talk about that we are a people-led technology-enabled organization, right? So we recognize that there is a limit to what we can spend from a technology perspective. And so as we think about our investments and where we want to put, I'll call it, place our chips on the financial table, we have a big focus about what can enhance the experience for our customers. So there is a customer experience angle to it. But there also is a product need in trying to, I'll call it, evolve and help our clients get better as well. And so we're not out chasing every shiny object in terms of, I'll call it, everything that you maybe could do. We're very focused about what can make a difference for our clients and support our business model. And so right now, some of the larger investments that we're doing, clearly, we're doing some level of, I'll call it, overhaul of the raw infrastructure to employ some new hardware within the environment. We are basically doing a fairly large upgrade to our complete treasury management systems. And so that's a fairly large upgrade. At the same time, we're pushing really hard to get the nCino application deployed across the First Horizon franchise. And then with that, we'll do everything from commercial onboarding through that as well as treasury management. Kind of servicing and onboarding through that platform as well. So those would be a few of the 2, I'll call it, bigger lifts. But if you want to even take a step back, you can look at what we're doing in our virtual event. We're taking the opportunity to migrate the virtual bank, I'll call it on to state of the art technology. So we're moving the virtual bank on to fintech, kind of headless core in the cloud, and we're basically building a complete fintech ecostructure around that virtual bank environment. And so what's really interesting about that from my perspective, is the ability to really, I'll call it, cut our keep and learn a little bit to understand how this new technology could be, I'll call it, rolled backwards, in certain cases, into the larger institution, once we are comfortable that it can scale and grow and do all the things that we need it to do. And so I'd say we've done more than a toe in the water there. Our virtual bank will be converted sometime before the end of the summer. And so it will pre-run the larger system conversions, but some pretty exciting stuff going on relative to embracing new technology, learning and understanding what can it do for us on the longer term? My perspective, personally, is that some of this new technology, particularly the new core, like fintech core. It's evolving. It's not -- I like to say it constantly continues to improve. It probably is not in a position that could support the broader First Horizon consumer franchise today. Whether or not it will get there over the next couple of years, we'll have to see. But to the extent that we can learn, we can understand the impact of the technology, what can it do from driving a lower cost to serve perspective from an efficiency ratio. And then if and when we feel like the time is right and the technologies evolve to where we're comfortable with it, we'll be in a great position to be able to move because we'll eliminate kind of that first -- like any change, that first step is always the hardest. So I think it will help us kind of clear that first step to get onto a different world.

Now, I believe you're the -- if I'm not mistaken, you're the second largest investor in Canopy. Can you just talk about a little bit about your approach to how you think about strategic technology investments? I mean, and like how do you decide how that gets allocated out to the business lines, but also like how do you sort of select, monitor those more strategic partnerships that you have?

Yes. So let's talk about Canopy just from a high level, and then I'll pull back and talk about how we invest and why we invest and where we find the opportunity. So clearly, both historic legacy banks were part of Canopy. As we come together, we've moved in to be a fairly large, as you mentioned, the second largest investor in Canopy. What Canopy really provides us. And for those that aren't familiar with the Canopy is a fund really that's put together, I'd say, by maybe 25 or so banks. I don't know how many banks specifically are in it, mostly midsized banks, Truist is the largest in the group. And the group really is focused on making investments in emerging fintechs that can be supportive and helpful to the broader challenges, I'll call it, that mid-sized banks have competing with the larger banks, right? So as you can imagine, there's tons of fintechs that are evolving every day and growing as a company. First Horizon doesn't have the opportunity necessarily to go out and beat the tires and do, I'll call it, take every random call that comes into the bank to understand the opportunities and what something might be. What the Canopy investment allows us to do is it really puts, I'll call it, a team on the front end to do that level of due diligence and understand where other banks that generally are all having the same issues that we may be having. Where have they found a good partner within the fintech environment? And then how has that really impacted that other bank? In most cases, the beauty for us is I look at that in some aspect of like almost like a part of our R&D kind of space, right? So there's constant evolution of new fintechs coming to the table, new products, things that can really make a difference for our customers. Some things are really, I'll call it, get me super excited. Some of them don't. I'd tell you today, we probably are actively engaged in doing work with about half of the companies, which are in the Canopy portfolio. Some of them are greater than others. For instance, Blend has been in both companies for an extended period of time. We see a great uplift and a great benefit from Blend that we use. A more recent fintech that we're starting to do some work with is Alloy, which we think can change some of our KYC AML type things on the back end and really drive some significant efficiencies and improvement which will translate into a better onboarding experience for our customers through the digital channel. So it's 2 -- I'll give you -- just gave you 2 names, both ends of the spectrum in terms of what we're doing. Overall, what we're really looking for, when we look at fintechs, and I'm going to talk about from a production standpoint using them to support what we want to do. We're really looking for something that can either drive and improve customer experience, can create either a different -- or bring a different product, a different look and feel or something that we're missing, and/or can drive some type of big efficiency play for us, right? So those are kind of the 3 things that we're really looking for. And then, of course, viability, right? So we don't want to partner up with a fintech, necessarily, who maybe has a great tool, but we don't think it's viable because we may be like only the 1 person who may find an interest to it. So we're looking for a few things from it. One of the beauties of the Canopy partnership, I like to call it, is that I have a lot of colleagues and peers and other banks that are in the same Canopy fund. And in most cases, they're using these fintechs, right? So I'm not having to take a flyer, have the ability to call people and kind of just get the real roll. How is it working for you? Did it deliver on what you expected? What were the challenges. And so it's really, really helpful from that perspective. Obviously, outside of Canopy, First Horizon has made some strategic investments where we believe there's a great opportunity for us to kind of realize some financial benefits as those fintechs grow. The opportunity there is real simple. As we engage with fintechs on an early on basis and help them support their business model and continue to grow. We are part of that story in helping to perpetuate and drive the growth. And so there is an opportunity in select cases where it makes sense to really, I'll call it, put money on the table to make sure that the fintechs have the financial resources continue to grow. But to the extent that, we're part of that success, is kind of getting on the train early, helping them drive that confidence and build their product. We think there's an opportunity to realize some financial reward at some later time from that. So very strategic in what we're doing. We're not taking kind of flyers on different fintechs. But for the extent that we're actually actively engaged and we have them in production and we see real value in the growth trend there. We want to make sure that we're part of that only because it's not only important to us in terms of the viability of the company, but to make sure that the company continues to evolve, and that takes, in a lot of cases, our capital to do that.

All right. And just on Canopy, how many core system platforms are you integrating between the 2 companies? And like also what's your primary deposit system that you use. But the more -- also a little broader picture, longer term. Like how could your approach to systems evolve over time?

Yes. So what I'll tell you is we're running, I'll say, I'm just going to talk about the primary core things systems that people talk about, right? So we're running Hogan from a deposit perspective, we're running ALS on the consumer loan side and HCBS on the commercial perspective, right? So for most people that recognize those systems, I'll call it the big horsepower systems that most of the large banks run. We like those systems today from a scalability perspective, they, I'll call it are tried and true. And so they're very core fundamental, stable platforms. What I'll tell you is, I think there's a lot of discussion around the limitations of, I'll call it, these legacy systems. And how do you -- how are you able to innovate and integrate and be nimble around those, right? So a lot of that has to do with your integration layers that you've got. I'll remind everybody on the call, although you hear those names, and you say, wow, that sounds like Bank of America or Chase infrastructure. We're not global. We don't have a product set that is a vigilant products. And so we do have the ability only because the size and the complexity of the organization just doesn't rival, I'll call it, a top 5 bank, right? If we have the ability to focus on the integration layer, tightly integrate things through APIs for our service bus, right? Be nimble where we want to be. But at the same time, evolve -- introduced these fintechs, plug them in, make them work, right? We have the ability to control our digital infrastructure at a pace that we want and innovate there. And so although a lot of people get nervous about it, is it the most efficient? Probably not. But if you go back to my comment earlier about fintech, right? We recognize that there is a future, I'll call it, a new state of core items or cores that are coming. We just don't think they're ready for prime time yet, right? And so our focus today is to make sure that we've got the ability to, I'll call it, interface, integrate and effectuate nimble change relative to items that plug into those, I'll call it, legacy core systems. And I think we have that, right? I'm not saying it's easy. But certainly, we've been doing it for a decade plus. And so we continue on that path up until a point where we believe there really is a more viable solution that can replace those.

Maybe a little bit bigger picture. Like where is First Horizon looking to invest across the franchise, whether it's people, products, et cetera?

What I'll tell you is, I think the answer is probably everywhere. And so let me take a step back from that. If Michael Brown were on the call today or David Popwell, I'm sure that they would tell you they're always interested in recruiting and adding good and great talent to help move us forward, right? So believe it or not, talent is something, I think, both organizations have always looked at. You have to get talent and be chasing talent constantly. And it's not a, we want it today and don't want it tomorrow, right? And so I would tell you, people are always at the forefront, I'll call it, people are at the tip of the spear to our business model. Remember, people enable -- people are technology enabled, right? So always want more people, always looking for additions that can help us deliver grow the business. Keep in mind, we're across a very wide geography in the Southeast. So plenty of opportunity for growth. So I would say we're always on the lookout for people and people are number 1. Relative to our investments in technology, again, it goes back really to that statement, right? Where can we put technology that supports our people to help drive that growth and/or customer experience we want. So certainly, the the level of investment that goes to maintaining in keeping the systems at a current state. And then there's a layer on top about where do we want to push, right? Things that are apparent and important to us, real-time payments. We've got a B2C real-time payment that we piloted last year that we're starting to kind of rollout to some of our customers today. Certainly, the nCino deployment and the automation that goes with that in terms of taking the time to book alone and significantly compressing that to try to drive a distinction from a customer perspective in terms of how fast can we respond and deliver is real important to us. Obviously, some additional new treasury management products will come. And then clearly, you'll see some level of consistent upgrades to the digital platform. So again, doesn't sound sexy, but what I would tell you is it's more of a consistent philosophy around continuing to move the ball relative to technology where it matters to our customers, right, and/or can make our bankers better. At the same time, we'll continue to invest within our virtual bank. You'll see us continue to build that and evolve that platform. We will have -- we're not just spending money on that just as a test environment. Certainly, it is a test and learn, but I'd like to call it the test and learn where we're going to make some money. And so you should expect to see some growth from that. We're not into just spending money to be spending money. So I think you're going to see some nice growth from that, and we'll kind of take it from there.

All right. How -- 1 thing I don't think you've mentioned quite yet is cybersecurity. How is the heightened focus on cybersecurity changing your processes and your investment strategies?

Yes. So it's a great question, Ken. Unfortunately, what I'll tell you is it seems like everyday I get to talk about cybersecurity. What I will tell you is our company like most companies uses a particular framework to gauge it's cybersecurity preparedness, right? We happen to use, in this framework, to drive a maturity posture. And then from that, right, we're always looking at kind of how is the landscape from a cybersecurity's perspective changing? And then what does our response, our pivot, our investment need to be to offset, I'll call it, emerging threats, right? And so what I'll tell you is cybersecurity is a space that continues to evolve. We spend an increasing amount of money, I think Ellen is probably going to give me the eagle eye here. But we continue to spend a reasonable amount of money that's unfortunately always increasing to try to continue to build a layered approach to cybersecurity, right? So and the reason I say that layered approach, right, we've come to the conclusion there is not a single answer to every possible thing that could go wrong. And so our solution is all about how do we layer in more and more solutions and detective tools and things to help our customers not give up their credentials. For instance, how do we layer those in to create an effective, I'll call it, cybersecurity posture that works for the bank. I will tell you that it's challenging. The greatest issue that we face today, quite frankly, is phishing of our customers. And we see that a lot, I'll call it, phishing on the consumer side and then business e-mail compromise on the commercial side are really the biggest things that we are dealing with. And look, those are more, if anything, educational items. And so in addition to all the raw tools, right, we have an education obligation to help our customers understand the bad guys continue to look for opportunities. And unfortunately, it's becoming -- it's a good moneymaker for the criminals. And so unfortunately, I think it's only going to escalate, which means we have to continue to push along. So let me wrap it up with this, which -- when Brian asked me about, am I trying to get to a particular state or am I trying to achieve a particular target? The answer is no. The answer is, I think we'll constantly be investing and evolving where we invest and where we evolve is really going to be geared by where we think the threat, I'll call it the threat matrix is moving to, right? So clearly, if you think about ransomware today, right, we're doing a lot of study and to make sure that we feel extremely confident that we're good to prevent anything like that, as of, for instance. And then next month or next year, it will be something else. And then again. So you can see how it is constant. I'd like to call it internally, it's a game of whack-a-mole, right? We think we got one, and we feel really good about it. And then here's the next one, and then we keep moving on. So there is no steady state. It's a constant battle.

Understood. I'm sure you're all on that. You mentioned the digital bank previously. Can you just talk a little bit more like what's the strategy with the digital bank. And maybe provide some information about the types of customers that you serve and your product offerings at the digital bank.

Yes. So the digital bank in and of itself, believe it or not, it's about 20 years old. And so the brand itself is about 20 years old. Today, it's -- we have shrunk it intentionally in size. It's got about, I'll call it, $300-or-so million worth of deposit roughly, and that will move up and down. Historically, been highly rate-driven, very limited product set today. And so as we think forward, what you're going to see in the virtual bank is we will stand up a marketing campaign, a digital marketing campaign around the digital bank. We will have a, I'll call it, a distinct purpose for the digital bank. If you think about most neobanks, they're driven by a specific purpose, that really creates that customer engagement, right? And so we will have a purpose. I'm not going to disclose what that is right here, but we will have a purpose that goes along with the digital marketing side of that and the rollout to it. And then if you -- and then relative to the product set, right, we'll be evolving that with the checking product and a credit card rate. So the goals that I have for the bank quite simply is to have what I would call, be a standard vanilla consumer bank with a complete product set stood up fairly quickly. And then have a purpose defined for the bank that's laid out in digital marketing moving fairly quickly, call it any of the year-ish. And then from there growing, and we will continue to move the virtual bank loan in a stairstep fashion, right? We want to see some growth, and then we'll probably put some more money into it and kind of keep moving it along at that pace.

All right. No, I know First Horizon IBERIA, the deal was sort of at the beginning wave of this sort of current M&A wave that we've seen across the industry over the last year. So can you just talk about how scale sort of plays into your ability to compete with the larger banks?

Yes. What I'll -- Ken, I think it's always important to recognize it. Certainly scale is important, right? I mean you have the ability to reduce or eliminate redundant systems, right? Be more focused in terms of back-office duplication, right? So you see all that in the merger synergies, in the numbers, how they come from all these deals, right? So certainly, scale is very important. Relative to investment, right? If you think about it, both companies, First Horizon and IBERIABANK, both had to spend money to support digital evolution, where we want them to go. And so today, just in a very simplified fashion, right? Those 2 buckets of money now become 1 big bucket of money. And we're able to only have to pull with 1 system, right? And so our dollars, not only in the aggregate come together, but our ability to deploy those, we've got more opportunities just because we've only got to move to a 1 system. Relative to competing with the large banks, Our goal is not necessarily to try to line up and match every product. We can't, right? And so we recognize that. And so again, I come back to -- we've got a very targeted focus from an investment standpoint, right? We want to spend money where we think it really helps drive our business model and what's important to us, right? So that middle market commercial focus, those treasury management products, right, that private client wealth experience and products, right? All those things that really are intertwined deeply into what provides the growth for our company is really where we're focused about what can I do from a technology perspective that can set us apart, make us different than other people that we're competing with day in and day out in the Southeast, right? The great thing about where we operate in the Southeast, a very dynamic geography, we're in a lot of the fast-growing MSAs in the South. And so we see a great opportunity really for our business model to be deployed, be super effective. And we think if we can try to find ways, I'll call it, 1 up, some other people in terms of servicing capability, I think we'll do extremely well. One of the ways we compete very effectively with the large banks, quite honestly, is our service model, right? So that people-led, right? So where people-led, not necessarily technology-led, doesn't mean we don't have a good technology, but putting people at the front, and I'll call it the tip of the spear in terms of how we grow the company is something, I think, that really gives us a unique ability to compete with the larger banks who have to maybe fly people in from different markets and other things, right? That's not our model. We're invested in the communities, right? We are very apparent and obvious that we're in the communities, right? Our people live there, work there. Our people have significant, a meaningful credit authority that they have with them in the market. And so we can react and be extremely quick. So I think that's our model, and I think it's going to be really good. Relative to that, my goal is to listen to what the business model is and where we can grow and what we're thinking about and then figure out what can I do, technology-wise, to help push that forward, right? The goal is not for me to go off and do something on the side because it feels cool and sounds sexy. It's really about supporting and help driving the growth that's embedded within our business model.

All right. Now we have about 1 minute left. If I can squeeze 1 last question in for you. How has the pandemic changed your deposit -- sorry, your branch network strategy? Within 1 minute.

Yes, 1 minute. So long story short, right? The trend that had started prior to the pandemic with branch traffic going down, digital traffic moving up really kind of got exacerbated. I think you'll see less branches, more technology, is the nutshell. And that clearly, we're closing some branches as part of the merger. But I think it's really -- if you had to ask me, I think it just helped push along the trends, the historical trends that have been apparent within the industry just kind of, I'll call it, hyper flex those in the right -- in the appropriate ways.

All right. Perfect. Well, I think we're right at time. So Anthony, I want to thank you and First Horizon for being with us today at the Morgan Stanley Financials Conference. So thank you very much.

Thank you, Ken