First Horizon Corporation (FHN) Earnings Call Transcript & Summary

This is Jason Goldberg, and I cover the U.S. large-cap bank stocks here at Barclays. And this is our 19th Annual Global Financial Services Conference. Next up, very pleased to have First Horizon National Corporation. From the company, we have CEO, Bryan Jordan. Bryan, let me turn it over to you.

Thank you, Jason. Thanks for having us this afternoon. I'm sorry, we're doing this virtually again this year. I was hoping we get to be in person. A lot going on in the world right now. I'll spend the next 5, 10, 15 minutes sort of doing a rundown of our business. And if it's okay with you, Jason, I'll turn it back over, and we'll get into some Q&A. I'm really excited about how we're positioned as an organization. Our franchise is an outstanding franchise. We're positioned across the southern states and high-growth markets. We have an attractive presence in very strong markets. We're in 15 of the top 20 MSAs in the South. And I think we've got an outstanding footprint and dynamic for future growth as we look at the future of our business and the ability coming out of this pandemic to grow the business over the long term. In addition to that, we have very attractive specialty businesses, our specialty businesses overlay with our markets. We bring capabilities like asset-based lending, equipment finance, mortgage, our fixed income business, our mortgage warehouse lending business, restaurant franchise, finance. We're running them more vertically because they allow us to bring more specialization to those customers but they are fitting very, very nicely with our footprint. And we've seen a tremendous amount of revenue synergy between our franchise, as we brought them together, examples are asset-based lending capabilities on the IBERIABANK side. On the converse side, on the First Horizon side using the equipment finance capabilities that IBERIABANK had are just a couple of examples, mortgage, et cetera, we'll see a lot of revenue synergies come out of that. And we think our business model is uniquely positioned. We bring client differentiation through a customization of understanding our customers, bringing continuity and capability through our bankers. And we think we're uniquely positioned to continue to drive value in those markets. And at the same time, we have the capability to bring additional bankers onto the franchise, and we've seen some success in doing that. We have had like any company going through a merger of equals, we've seen some transition in people. But we have done, in my view, a very good job of retaining our key talent. And as I alluded a second or 2 ago, we have had very good success hiring very capable outstanding bankers, both as market leaders and as individual performers as relationship managers, portfolio managers and bringing them on to the franchise. So I'm very excited about how that positions us for coming out of this integration phase. I'll get into integration in a minute or 2, but I wanted to touch on sort of the recovery from Ida, which has had an impact on our integration. Ida was a bad storm that set over Southeast Louisiana for a couple of years -- couple of weeks, continued to blow and dump rain. It ended up being more of an issue with the capabilities of utilities, particularly electricity and the ability to get storm sewer water, those kinds of things. Over the last couple of weeks, most of the electricity has been restored. Our banking offices have been reopened. We are having a little bit of impact today with the storm and the weather being dumped on Southwest Louisiana by Nicholas, but we've had all of our banking offices open. We provided a $1 million contribution through the First Horizon Foundation to our communities and our markets to help support the recovery. We provided a tremendous amount of assistance to our associates both in food, shelter. We provided up to over 10,000 gallons of gasoline to help keep generators going and vehicles moving. And we were one of the first in the market to be reopened. So I'm really proud of what our associates, what our bankers have done to bring the organization back from this difficult period. It is a long-term event. It will take a while to completely recover. But history indicates that over time, these types of events as tragic as they are in the near term and as difficult as they are on people tend to provide an economic stimulus that we think will make for a much stronger and stronger growth economy in Louisiana, in particular, this case of Ida, as time progresses. I mentioned the impact a couple of weeks ago at a call we did. I mentioned a minute ago, the impact of Ida on our integration. We were confronted with a very difficult decision a couple of weeks ago. Essentially, we had to make a decision because we were about to drop mail with respect to the integration activities planned for the Columbus Day weekend. We basically had 2 things that drove our thinking or decision-making. Number one was the fact that our customers were impacted and that they were recovering from a storm, whether it's getting their businesses back up and going, whether it's getting roof or storm damage repaired, whatever it happens to be. Our customers we're going to be focused on recovering from the storm. And two, we had very tight time lines, and we had to do a lot of training, deploying equipment, things of that nature. And we made a short and quick decision that we were better off pushing back the integration as it relates to the Columbus Day weekend to early next year. We believe very strongly that it requires a 3-day weekend to complete the integration. The first available day would have been the Martin Luther King holiday in early 2022. But given that, that falls in the year-end for so many people, we actually pushed it back and took it to February of 2022. So the Presidents Day weekend. The net impact of that is it will delay or defer the full realization of our cost savings. We will continue to work on cost savings as time progresses, but it will defer. As we think about expenses over the remainder of this year, we expect that the delay will have about $20 million of impact on cost saves in the fourth quarter of this year. Essentially, we will have deferred because of the integration that realization in the fourth quarter. We expect by the time we get to the fourth quarter of next year to fully realize the $200 million of cost savings in the run rate. As you will probably recall, we initially or originally announced about $170 million of fully phased-in cost savings, we upped that $200 million. And I think we have the capability to go beyond that over time. In the near term, we expect the third quarter expenses to be a little bit higher than we had originally anticipated, probably about up to $15 or so million higher than we would have originally anticipated. That's a function of some seasonal costs. It's a function of costs we're layering in to upgrade systems and technologies, particularly around our merger and our merger integration. And really, we end up with some duplication of systems until we can get the integration done. We can't remove the second set of that cost base, so up to about $15 million in the third quarter in higher expenses. Overall the operating environment is encouraging. We are seeing the economy continue to recover. We are continuing to see what people sometimes refer to as green shoots, loan demand continues to pick up. We are seeing good growth and opportunity in our fee income businesses with areas like our private client wealth management fees, card fees and overall stability in our fixed income business. So we think fees will be a little bit stronger in the third quarter. So all in all we think the environment is really pretty strong. Our capital base continues to be strong. Capital and credit continue to look good. We feel good about reserve levels, and we think there's opportunity to bring reserve levels down as continued improvement in the economy occurs. And ultimately, we think we have the opportunity to manage our capital base a little bit further. We'll take up an action this year that will essentially will redeem about $115 million of trust preferred securities that were issued by Capital Bank in the purchase accounting, they were marked. So we'll take a $27 million noncash charge as we redeem those securities that will save us about $5 million a year in run rate and annualized interest expense. And then we've been active in repurchasing stock. We think that the decline or less in values of financial stocks. Ours, in particular, created a unique buying opportunity earlier this year we had authorized a $500 million buyback in the third quarter. To date we bought back about 8 million shares at just under $16 a share. So we've significantly increased our buyback activity over the first part of the third quarter. I expect we'll end the year with something in a CET1 ratio in that plus or minus 10% range. So we think we've got very strong capital base. And overall, the trends we see in credit, et cetera, we're fairly optimistic. So Jason, I'll turn it over to you with a final statement. I think our business is well positioned. I think we're uniquely positioned to drive and create shareholder value. We've got a unique footprint. A great opportunity to capitalize on the revenue synergies and the expense synergies of our integration in the early part of 2022.

Thanks, Bryan. I think that's a good overview. There's something you touched on I want to delve more into and then some things you didn't touch on that I want to bring up. But maybe we could just start with expenses just because that's something that people seem to be focused on. I guess just given the delay in the core systems conversion, just how confident are you in the ability to achieve the merger cost savings? And just what are your thoughts about the company's overall efficiency ratio? Where would you like to see that over the next year or so?

Yes. I think expense is going to be a core competency for our organization. I think it's going to have to be for the industry. I think over the last 12, 15 years, we have done a fairly consistent job of demonstrating our ability to continue to take costs out of the organization. In the past year, our regional banking franchise, as an example, led by Michael Brown has done a really fantastic job of taking core expenses from underperforming areas in the organization and reallocating them to higher growth opportunities, higher return opportunities across the franchise. So we're working very hard to move from one area to another, which, in some ways, alleviates upward pressure on expenses. The second is, we think there are further opportunities to reduce overhead efficiency ratio. Part of what we are doing in our merger integration is we're layering it and technology and capability that we think will make us more efficient in the long run. So I think we have the opportunity, Jason, to bring down higher expenses. We can bring our overhead efficiency ratio down whether you would say, I think we're going to go beyond the $200 million in merger cost saves or whether there's more cost savings beyond that, that it just sort of every day event. I think we have the opportunity to very comfortably achieve our $200 million commitment plus, I think we can do more beyond that.

Helpful. And just a reminder for those listening in, on the upper right-hand corner of your screen, there's a button Ask-a-Question. Simply click on that, you have the ability to send in questions, there is a delay. So the earlier you do it the greater your chance is are that they get asked. I guess, in that being, you've recently talked about the fact that some of your decisions to upgrade technology are driving higher costs. Maybe can you talk more about what your expectations are for the technology state kind of once you get through this conversion process.

Yes. If I spin back about 3 years ago, 4 years ago, when we made the decision to integrate our Capital Bank merger, we put all of our technology changes in sort of lockdown mode, and we went through the integration. We got to the back side of that. And one, we had basically delayed deferred and upgrades that we wanted to make. And two, we had some product feature functionality gaps that at the end of the day were probably a mistake not to correct in the integration. So we've learned from that. And I think Anthony Restel and our merger integration leaders Yousef Valine and Randy Brian have done a really good job of trying to coordinate not only the integration, but how we invest in feature functionality instead of making it easier for our customers to access information and our customers to do business with us, and at the same time, to create efficiency. So they've made investments in technologies that ultimately will make us a better organization in terms of customer-facing that will make us more efficient. Examples are systems like nCino, a new treasury management system. So I think we'll be very well positioned for -- from a technology perspective when we get to the other side of this.

And then on the heels of that, maybe just remind us of the areas where you've been making kind of additional technology investments and what you hope to get out of those?

Yes. I touched on a couple of new treasury management system nCino. Both of those will give customers better access to treasury information. It will give us better information about pipelines and closing loans. nCino is a great workflow system. We've upgraded our mainframe system for enhanced capability. We're investing in small business online and things of that nature. So we're investing broadly speaking across the entire product set. So essentially, we're trying to close feature functionality gaps in what our associates use in serving their customers and also making it easy to access information from us, from our customers. So it's very broad-based, the work that's getting done in connection with this integration.

Got it. And then maybe more broadly on the overall landscape. What are you hearing from customers about how they're thinking about planning. And just what are you seeing across the franchise from a competitive perspective? And maybe we've been with that in terms of are you seeing any green shoots?

Yes. I think this is an extraordinary period of competition. It's no mystery that the fiscal and monetary policies that have been in place to get us through the pandemic and quite bluntly, I think, have done a good job of keeping the U.S. economy as stable as we could have and facilitated a strong return, have also created a tremendous amount of liquidity. And that liquidity is on -- in a lot of places, but it's especially on bank balance sheets. And it's creating quite a dynamic in my view, in terms of competition for loans. So I would say, on the whole, you can summarize in 2 things. One, that their pricing is under pressure and two, that structure is very competitive. That said, we've seen a very significant successes in our ability. We're competing taking bigger hold positions with our larger combined balance sheet. I mentioned earlier, bringing people onto our platform. We're seeing great opportunities from that to move business. And as I look at our pipelines and the great work that I see on the front end, I see a tremendous amount of momentum. The other side of liquidity is customers have a lot of liquidity. So they've continued to pay down debt where things have gone into the permanent market and commercial real estate, for example. So there's still a lot of activity on the back end that is taking production and making it look like it's a smaller impact. But overall, I think we're looking at a balance sheet that's going to show fairly attractive loan growth in the quarter and our prospects for the remainder of the year and the outlook for 2022 is favorable.

Interesting. I guess the industry is also continuing to see increasing levels of liquidity. What would you need to see in order to increase the level of your securities portfolio relative to interest-earning assets?

Yes. We always have, Jason, a preference to put it in customer-facing activities. And we've done a lot of work, examples of where we've had success. Our mortgage warehouse lending business, we've had a pricing strategy there. I think our mortgage warehouse business is likely to be up $4.5 billion or so on average. I think this morning, it was about $4.9 billion in outstanding. So we're always looking for how we can improve customer activity. And if we put fixed rate assets on the balance sheet, I'd rather it be in the loan portfolio or customer-facing activity as opposed to the securities portfolio. That said, with the significant amount of liquidity that's available in the balance sheet, we're probably going to add something like $1 billion or so to the securities portfolio over the remainder of this year. If I had a guess, it'd be largely a mortgage or commercial mortgage-oriented product, probably in the 5-year duration area in the 150 kind of yield area. We're not going to take real long bets. But ultimately, we believe that our asset sensitivity profile and the strength of our liquidity today probably makes sense for us to increase the size of that securities portfolio a bit.

Got it. When kind of preparing for the conference, one thing that surprised me that came across is your cost of interest-bearing deposits was 20 basis points, which I think is higher than I would have expected. Is there an opportunity to bring that number down? And is it a focus of yours?

It's a tremendous focus of ours. We've spent a lot of time on that. Our interest-bearing deposit cost is higher than peers, and we think there's an opportunity to bring that down. We have something in the area of $7 billion of what we would consider bonus or premium price deposits, and they run about 30 basis points in cost, and we're actively pursuing strategies to bring that down to about half of that. So the net effect of that is if we move our deposit pricing on average to that of peers it's probably a $40 million annual opportunity for us or, call it, $0.06 a share. So it's not an insignificant effort, and it's not an insignificant opportunity, and I think we're going to capitalize on that. I would guess that between now and the end of the year, if you look at the balance sheet, you see a tremendous amount of progress in that regard.

Are you guys, I guess, worried all about the impact on customers. And at the same time, you have this integration going on. So how does that play into your thought process?

Yes. You always worry about the impact on customers. But if you take the bonus price deposits and take them from 30 basis points to 15, essentially that's a breakeven deposit for us if it's sitting at the Fed. So those are not unattractive rates in today's environment from a customer. Our proposition always is and always will be that we differentiate on service and we don't want to compete long term on price. So our bankers are doing a very good job, in my view, communicating with their customers, working through a process that we'll do this over time. But I think at the end of the day, we're going to capture that excess deposit cost opportunity back into earnings.

Got it. And you mentioned earlier that you're seeing better traction in some of the fee income businesses. Can you maybe provide some color on what you're seeing in fixed income and mortgage banking as well as your other countercyclical businesses like mortgage warehousing.

Yes. I mentioned mortgage warehouse. Those balances are doing a little bit better. We'll probably be up in the $4.5 billion average balances and approaching probably $5 billion or so at quarter end. And our bankers have done a lot of work on the pricing strategy there to ensure and capitalize on market share gains. Our fixed income business continues to be very, very good. It's a countercyclical business, and it has performed very, very well. I would guess that our average daily revenues will probably end up somewhere between $1.2 million and $1.3 million in ADR. So that business has held up very, very well. Our mortgage business, originations have slowed a bit. We'll probably see fewer of those, we will see some more of it going into our balance sheet. It doesn't change the earnings over time. It just changes the timing of the earnings in some sense. But at the end of the day, we see continued good impact from our countercyclical businesses. I think it's important to note how important that is in our business model. If you look at our business over the past, call it, 18 to 22 months since the beginning of 2020, we had those businesses that really offset a fairly severe decline in net interest margin, they provided a lot of stability. And I think what it's done is, in addition to provide stability has reduced the risk profile of our earnings stream. And I think through any number of cycles, we will be more steady as a result of having these countercyclical businesses, which offset. So I think that stability, those high-return businesses have been an attractive feature. And I think they will continue to perform very, very well over the next couple of quarters.

And just a reminder, for those listening in, upper right-hand corner is Ask-the-Question, simply click on that. And we'll try to get to those. I guess given the hurricane impact you talked about, we've obviously had the recent increases in COVID cases in some of your markets. Should investors expect any change in your views around credit quality or loan loss provisioning?

Yes. Well, credit quality has been rather unique in this cycle. And you'd have to say that the fiscal and monetary policies that I referred to earlier, have also done a great job of nationalizing the cost of the pandemic and the shutdown of the U.S. economy on to the collective national balance sheet. Even in that backdrop, I was really pleased with the way our credit performed in a fairly low or benign loss environment we tended to be at the lowest end in terms of peer group performance. So I think our portfolio has continued pretty well. I think as we went into booking CECL reserves as we went into setting up the combined balance sheet, you have to sort of remember we closed the books on June 30, 2020, trying to be in our second quarter of CECL with a pandemic and an unmerged company we didn't actually merge until early July. So we took at the end of the day, may prove to be a more conservative view of credit. But over time, we brought those reserves down. We have healthy reserves today, and I expect just given the recovery in the economy that we will see those reserves come down over time and get back to more normalized areas in the low 1-plus percent range. I had to -- at this point, I don't expect to have a huge impact on losses or credit reserves. It may have some, but I think it's largely going to be a bit of an unnoticeable blip in terms of losses. We've had very few requests for deferrals at this point. I think it's like 10 or 15 and at this point, and they've been very, very small. We've talked to our commercial customers in the footprint and all of them seem to be doing reasonably well in terms of recovery. As I mentioned earlier, the economic impacts on the economy while short-term painful tend to be longer term, very, very positive, and that's exactly what we saw in New Orleans following Katrina. So at this point, I expect that we will continue to see reserve levels come down if growth in the economy continues and we maintain this sort of stable position dealing with the Delta variant and the COVID sort of pandemic that still exists out there. But my view is that reserves are likely to be improving or coming down over time.

Got it. That's helpful. Is there any particular areas of the portfolio that you're maybe keeping an extra closer eye on, just given kind of losses have to go up at some point?

Yes. We've talked a lot about energy, Jason, and that's an area that it's hard to imagine how oil prices have been volatile from, call it, last spring to today, we have reduced our outstandings a bit, but our bankers have done a really nice job of up-tiering our exposure in energy. So I feel much better about that. So that's much less of a concern than it was a year ago today. As I look at the credit profile of the organization, I'm less concerned about what the balance sheet looks today and making sure that we in the face of competition this competitive environment that I discussed earlier, do a good job of maintaining structure and risk discipline in what we do and how we do it. And so I'm more focused on the forward leaning aspect of it, which is how do we compete on a day in, day out basis and make sure that we don't adversely impact our risk profile in a way that when the economy hits it's invariably a speed bump or air pocket figure analogy in the future that we still have a very strong high-performing portfolio that allows our shareholders to get paid for the risk that we've taken in putting that portfolio together.

Makes sense. We have some questions from the audience. So maybe we'll call up there and look at those. First, Bryan, you sounded relatively more optimistic on the near-term loan growth trends than some of your peers. Maybe just expand upon which area you're seeing some strength and conversely which areas have been more subdued and kind of low expectations.

Yes, yes. So it's a good question because it allows me to clarify. PPP, we've had -- we did more on a pro rata basis than many of our peers in PPP, and that continues to pay off. And I know on a headline loan growth number that looks like a negative. But at the end of the day, I think what we did in PPP was good for our customers. It's opened up new customer opportunities, and it was good for our communities. So that will mask the loan growth. I'd say underlying our portfolios, if you pull out PPP you will see that we will have okay growth, low single-digit percentage kind of point growth in the loan portfolio. So I think that's reasonably positive. And it's fairly broad-based. The places that we're seeing a lot more transition in and out, commercial real estate, I mentioned earlier, we still have very strong pipelines, but we're still getting a lot of prepayments. There's a lot of transactions. Real estate is very -- is transacting a lot in terms of sales and a lot of things go into the permanent market. So we're paddling very, very hard to make a little bit of progress there. C&I continues to look pretty good. Customer demand, particularly for our own balance sheet products and our private client wealth management continues to look good. So all in all, it's fairly broad-based. It helps to be in very attractive and high-growth markets, Dallas, Houston, Louisiana all are doing very, very well. We're seeing good growth opportunities in Florida, particularly in South Florida. So broadly speaking, I'm reasonably encouraged if we can get the recent liquidity absorbed in the economy, I think we have the ability to continue to build some traction. So the headline will be loans will likely be down because of the significant runoff of PPP. But below that, you'd be able to see reasonably widely dispersed growth in the other sectors of our portfolio.

That's helpful. We have another question, with the increased regulatory focus on ESG, how are you thinking about the impact to your business model and your need for scale?

Yes. Yes. There are -- ESG is a lot of things. The G is getting much less focused today, the governance aspects of it, but it's not that important. Environmental and social are getting a tremendous amount of attention. We have actually set it up as a separate function for one of our Board committees. So we're dealing with it a lot at the Board. We are on the environmental side, spending a lot more time understanding the environmental risks in our portfolio and the exposures to the environment in our portfolio. Ida is a perfect example of exposure to weather events. And we've -- as a coastal franchise as South tends to be, we have a fair amount of information that we're gathering there. So we're spending a lot of time understanding what our exposures are and then trying to develop plans for how we manage through that, how we measure risk particularly in the context of modeling for regulatory purposes down the road, the implications of environment and environmental change. I think we're making good progress there, and we just put out a corporate social responsibility report that describes a lot of that work. On the Social side, so the E -- S is getting a lot of attention well. We have basically 2 prongs. We have about a year ago, brought in a new director of diversity equity inclusion, Anthony Hood is doing a fantastic job where he is helping us not only focus internally in how we drive opportunities for growth, development and enhancement and making sure all of our associates have great opportunities. But at the same time, how we do a better job of serving our customers and communities. So we're investing as many others are in CDFIs and minority-owned institutions. We're trying to make our products and services and financial empowerment through training and communication available to the broader community to make sure that minority-owned businesses, in particular, have a better chance of success survival and most importantly, growth down the road. So we're spending a lot of time organizationally, Jason, on those 2 areas. And I think that's time well invested. I think it's going to be an important part of sort of our growing and change in economy across the U.S. And I think we're well positioned on that. I don't think in the short run, it has impact on the outlook for scale. I've become more convinced that whether it's technology or ESG, it's hard to compete, you can't win a scale game. That's almost virtually impossible to win. So you focus your energies and your efforts on those places that you can be successful and you continue to execute with the great opportunities we have.

Got it. And then another question from the audience. On the expense increase in the quarter, can you clarify what you expect expenses to do on a linked quarter basis versus $465 million last quarter.

On a linked quarter basis, I expect that they'll be up a little bit from our guidance, I think we had originally said they'd be down. I expect that they'll be up a little bit from where we thought they would be on long-haul linked quarter basis.

Yes. Got it. And then we have about 2 minutes remaining. General question, just kind of what is your biggest concern for the industry as you think about the next few years?

I think the big concern for the industry is probably multipronged, but I think it is the need to adapt to changing customer dynamics and demands in terms of the way they act to systems that we provide as an industry, the way we provide those services, I think, continuing to maintain our relevance and focus in the face of a changing technology environment and expectations. I think the second element of that is how we continue to adapt to a change in economy. We talked a minute ago about environmental, environmental is going to change the nature of banking over time. It's going to change our economy, the places that are impacted by more use of renewable energy, is going to change the way we think about energy lending, for example. So all of those things together are creating a lot of change. And change is not bad in my view. I think there's a - I think it's a Ben Franklin quote something about when you're done, changing your finished or something like that. I think change is a good thing. But I think in terms of the industry, we got to be prepared to adapt to an increasing pace of change. And I think that's something that I think is going to separate winners from losers.

Bryan, very much appreciate your time this afternoon. And as you kick it off, I definitely hope we could do this next year live. So be well, and we'll speak again soon.

All right. Thanks for having us, Jason.