First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Good day, and welcome to the First Horizon Hurricane Ida Update Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ellen Taylor, Head of Investor Relations. Please go ahead.

Thanks, Fashnavi, and thanks to you all for joining us on such short notice. This afternoon, our CEO, Bryan Jordan; and Chief Operating Officer and Interim CFO, Anthony Restel, will provide some opening comments, and then we'll be happy to take your questions. I need to remind you that we will make some forward-looking statements today that are subject to risks and uncertainties, and we ask you to review the factors that may cause our results to differ from our expectations, which you can find in our SEC filings. And last but not least, our comments reflect our current views, and you should understand that we aren't obligated to update them. And with that, I'll turn things over to Bryan.

Thank you, Ellen. Good afternoon, and thank you all for joining us. Today, we provided an update on the impact of Hurricane Ida on a portion of our franchise. Our thoughts and prayers go out to those who are dealing with significant hardship and loss of loved ones and property. We are incredibly grateful to our associates who, despite extreme obstacles, continue to put the interest of their fellow associates, communities and clients ahead of their own. Initial estimates are that the storm left over 1 million businesses and homes without power with significant impacts to sewer and water access as well. The failure of the power grid and the downstream implications on gas supplies and communications networks continues to unfold. The expectation is that it may be several weeks before basic utilities are restored to a substantial portion of the impacted areas and that the infrastructure across the region will be extremely fragile. Our business resilience and risk management teams have been hard at work assessing the impacts and taking steps to provide aid to associates, clients and communities. The strain of the communication systems and roadways and crucial need to avoid disrupting rescue efforts has added challenges to our initial assessment. It is important to note that outside of banking center closures, our clients have experienced no disruptions to banking services, and we have no major system-wide outages. What we currently know is at this time, 100% of our approximately 600 associates in the impacted areas have been accounted for, and we are working to provide housing assistance, food, water, ice and fuel to associates in need. Financial assistance is available through our Associate Assistance Fund, which matches associate contributions. 33% of our banking centers in the impacted areas are open, with many of the remainder without power and water. Our statistical analysis of the loan portfolio indicates approximately 8,900 clients with $3 billion in outstanding loan balances are in areas impacted by the hurricane. However, it is important to note that historically, the impact of relief and insurance proceeds has helped mitigate credit losses following natural disasters and often lead to increased economic activity. We are currently focused on assisting our clients with recovery efforts. In addition to the significant outreach efforts of our frontline personnel, we have committed $1 million to relief efforts in the communities most heavily impacted by the storm. While we are very optimistic about the ultimate resiliency of affected communities, we've had to make some difficult decisions with regard to near-term realities of the impact of the storm on our timing of our upcoming systems conversion. With that, I'll hand it over to Anthony to provide more color. Anthony?

Thanks, Bryan. Given the disruption across a substantial portion of the legacy IBERIABANK franchise and the impacts that the storm has had on our clients and employee base, we have determined that our most prudent course of action from a risk management perspective is to postpone the final systems conversion until the first quarter of next year. We did not make this decision lightly. Our biggest concern beyond the safety and well-being of our associates and clients is the potential for prolonged delay in basic resources. While our associates are eager to do whatever is necessary to execute on the integration, they are now dealing with additional challenges, both personally and in terms of day-to-day operations of the company. While we are well prepared for the conversion-related activities, the next few weeks are crucial for training and communications and outreach with clients to ensure that they are well prepared for the system changes in order to minimize any surprises. Importantly, our clients are confronted with their own recovery efforts, and we certainly don't want to further complicate matters by changing their banking resources during this challenging time. Additionally, our plans to provide enhanced integration support by sending additional ambassadors from across our franchise to provide targeted customer systems simply cannot be safely executed given the disruption to a situation that's already more challenging given the spread of the Delta variant. As a result of this delay, we now expect our pretax merger cost to increase by approximately $20 million to $30 million to $520 million to $530 million and that we will achieve our $200 million net savings target in the fourth quarter of 2022. The increase in onetime cost is largely tied to the cost of running disparate systems for another 4 months, plus the need for the extension of third-party contractors and vendors as well as additional integration-related customer communication cost. We believe that ultimately, this decision is in the best interest of our associates, clients and shareholders. The delay will provide us more time to ensure that the team is well prepared to help clients navigate the change to the new banking platforms and experiences. Additionally, we believe this will serve to provide a strong foundation to deliver future growth and enhance efficiency. With that, operator, we'll open it up for questions.

[Operator Instructions] Our first question comes from John Pancari with Evercore ISI.

Just want to see if you had any comments around the potential impact to reserves at all. Have you assessed the impact to your borrowers and if there's any need to address the reserve given the view on credit impact?

John, this is Bryan, and Anthony can throw in his two cents as well. Our early view is that it's likely to have very significant impact to reserve levels. As we had talked in our second quarter call, if the economy continues to recover as it appears to continue doing, we expect a significant reserve release. So I think any impact would be maybe a slight variation to reserves that might otherwise have been released. Our sense of the exposure in our historical experience in these types of storms are that you might have some timing differences, but you don't incur significant additional losses as a result en masse. You might have some around the fringes, but we don't think it will be significant at this point.

Right. Okay. All right. That's helpful, Bryan. And then in terms of -- on the lending side, are you seeing any impact to the timing of loan closures -- loan closings just given the disruption from the storm that you -- that's noteworthy at all?

Well, not significant at this point. We've had some closings and things that sort of carried over from late last week that have been booked and closed. We're reassessing anything that was scheduled to be closed here immediately, both from our perspective and the borrowers' to make sure there's no impact to collateral and things of that nature. So I'd say there'd be a little bit of short-term disruption, but I don't think it will be significant and/or long term.

Got it. And then just one more for me. The -- I believe you indicated in the client assistance that you've waived some fees. And so have you been able to size up the impact of the related fee waivers?

It will be a handful of million dollars, I would guess, at the outside. I don't think it's going to be anything larger than that. It's making sure we have availability at ATMs and anything that might impact by stuff being caught up in a lockbox over the weekend that didn't get processed, things like that. We don't think it will be very much money at all, but we want to make sure that our customers have the ability to bank freely quickly and we provide full support for helping them get through this difficult period.

[Operator Instructions] Our next question comes from Ken Zerbe with Morgan Stanley.

I just have a question in terms of the systems conversion delay. Like I totally understand, and I would -- kind of what people are going through. But if the systems conversion was supposed to be in 3Q and let's say, I don't know, things take a couple of weeks, maybe a month, to get back to normal, why does that push the systems conversion 4 months into the future?

Yes. Ken, it's Anthony. Right. We need a 3-day weekend to effectively complete all the processes in a seamless kind of way. So this -- the Columbus Day was the last 3-day weekend of this year. The next one pops up actually on Martin Luther King Day. Unfortunately, for a lot of our clients, that drops right into the middle of their year-end, so it's not good, which then defaults us to Presidents' Day.

Our next question comes from Christopher Marinac with Janney.

Just a quick one. As you determine the $20 million to $30 million incremental number, does that tie back to costs for the hurricane? Or is it more just the cost to delay this out to 4 -- or in February of 2022?

No. Yes, Chris, this is more of the cost to kind of push the conversion date out 4 months, right? So if you think about it, we've got a lot of contractors and vendors and third-party people assisting us through the conversion. And so there's a lot of knowledge that's been gained from that -- from those individuals that help us prepare. And so we can't let that knowledge kind of walk away. And so there is some level of expense to keep them current and ready to go when we're ready to go.

Got it. That's helpful. And then, Anthony, just a quick one. What has been the progress on the building of the digital bank? And any update there just in the big picture, separate from the issues this week?

Yes. Look, the digital bank was moved on to the new fintech stack platform that happened in July. It went very successful. And so Chris, I'd say the first step is complete, and there will be more to come on that probably early next year. But first half was very -- went very well. We're very pleased in terms of the performance of the system, in terms of what we wanted to see happen and what occurred once we went live. So all things good so far.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for any closing remarks.

Thank you, operator. The resiliency of the regions impacted by Hurricane Ida is without question. I am awed by the commitment of our associates to serving our clients, communities and shareholders even during this time of significant disruption. As history has shown, following natural disasters such as Hurricane Ida, the increased economic activity associated with the rebuilding effort should provide significant opportunities for reinvestment and growth in our markets. We made the decision to delay the systems conversion out of an abundance of caution and to avoid creating additional disruption for our clients. We believe this will ultimately result in better outcomes for our clients and our shareholders. I continue to be confident in our progress toward becoming a top-performing regional bank and our ability to drive strong shareholder value. Thank you all for joining us this afternoon. If you have further questions, please reach out to any of us. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.