First Horizon Corporation (FHN) Earnings Call Transcript & Summary

All right. Up next, we are excited to have First Horizon joining us once again. Over the last year, FHN has made substantial progress integrating its MOA with IBERIA Bank, despite environmental headwinds that have obviously made it a lot more challenging. As we look ahead and as it gets through the rest of the integration, we should see a franchise that is capable of top quartile returns and a high-growth footprint in the Southeast. Here to tell us more about the path to getting there is Chairman and Chief Executive Officer, Bryan Jordan. Bryan is going to walk us through some several slides, and then we'll have a fireside chat.

Thank you, Ryan. Good afternoon, everybody. It's good to be back in person. As Ryan said, it will take about 15, 20 minutes, and walk through a series of slides, which have a number of updates on them. And then I'd be happy to open up to any questions that you have, Ryan or anybody else has for that matter. We've got a slide in your decks, if you look at the hard copy that shows our forward-looking statements, we will make some forward-looking statements in all likelihood in the course of the next 45 minutes or so, 35 minutes. We put that material in there to make sure you know we're not obligated to update those results. You'll also note that we've got a lot of non-GAAP financial information in here and in the appendices to the deck that we've posted has a tremendous amount of reconciliation information. So with that, I will move into what is Page 4 in my deck. I think we're extraordinarily well positioned to deliver a tremendous amount of shareholder value. We have a very diversified business model. We have a great geographic footprint, which I'll show you a picture of in a few minutes. I think as Ryan said, we have the ability to deliver a differentiated customer experience and differentiated results that will drive strong shareholder value over time. We have a number of things -- they've come out of the merger of equals that are very positive. We have the ability to realize the rest of our cost savings. In addition, we are realizing very significant revenue synergies as we take the combined product set and deliver it to the other side of the organization, which I'll touch on in a few minutes. There's also a couple of slides in the back where we update you on the work that we're doing around our ESG, in particular, we've done a tremendous amount of work over the course of the last 12 to 18 months as it relates to the environment and social issues. So I'll touch on those in a few minutes. On Page 5, you'll see a picture of our footprint. We have a tremendous footprint, 12 Southern states in our banking business. We are in 12 of -- we're in 15 of the top 20 MSAs in the South, and we have a top 12 -- top 5 position in 12 of the 20 MSAs. So in the markets that we're in -- and more than half of them, we have a top 5 position. If you look at where these are geographically located, these are a tremendous number of growth markets and growth opportunities, take Texas, where we're in Dallas and Houston, across the South, all through Florida, Tampa, St. Pete, Orlando, Jacksonville, Miami, South Florida, Atlanta, up the coast to Atlanta, Greenville, South Carolina, Charlotte, Raleigh-Durham, Chapel Hill, to Nashville. We think we have a tremendous footprint. One of the things that I think is key the focus on the organization and what's different about First Horizon today than it was 5 years ago. 5 years ago, First Horizon was a one-state banking organization, the old First Tennessee, today, where we had a very strong market share and leading market share in the 5 major MSAs in the state of Tennessee. Today, we have expanded that footprint into a much broader Southern franchise where we have relatively small share and the opportunity to grow in very attractive markets that, one, produce a tremendous amount of organic growth just through population and household, and our ability to take or pick up share. The Southern franchise is projected to grow significantly faster than the U.S. as a whole in terms of population growth, and in all likelihood will grow faster rate in a number of the other demographic measures. You can see we have a very diverse revenue stream, good fee income businesses. I'll come back to the separation between our regional banking and our specialty businesses. And we are very focused on how we grow that business in a diverse and measured way. Slide 6 gives you a couple of data points on our regional and our specialty banking businesses. Our regional banking business is focused principally on middle market, commercial customers, consumers, particularly in private client and wealth management. It tends to be more of a geographic-centric business in our 12-state footprint. Our specialty banking business is the area or the portion of the organization where we provide vertical support to a number of businesses or industries on a national basis. We have a restaurant franchise, finance business, an asset-based lending business, mortgage warehouse lending business. Our fixed income business is in our specialty banking business. You can see in both of these businesses that we have very strong return profile. We have good geographic cover. You can see the mix between the loan and portfolios as well as the fee income mix across those 2 businesses. Slide 7 is an update. This is some information that comes from our third quarter results. You can see we've made a tremendous amount of progress. The ones that are most encouraging to me, I mentioned revenue synergies. Through the third quarter of this year, we have identified about $35 million of revenue synergies from the combined organization. This comes from taking some of the specialty products like you saw in the previous page, our equipment leasing or financing business, and delivering that to the legacy First Horizon franchise. The ability to take our asset-based lending product set, deliver that to the former IBERIA Bank franchise. And we think there's a tremendous amount of revenue synergy upside as we continue to integrate our product set, to integrate our systems. And as we build momentum in terms of hiring and growing our franchise across this very diverse customer base we have in the South. You'll also see on the right side of this that we have seen -- building momentum in terms of driving the balance sheet. Our loan activity, commercial lending was very good in the third quarter. And we also saw very strong production of new commitments. Many of those new commitments were in our commercial real estate business, which, by nature of construction, fund up over time. So I feel good about the ability to capitalize on the momentum we saw coming into the fourth quarter. The fact that we had, in some ways, spring-loaded the balance sheet that we should produce fairly attractive balance sheet growth over the course of the next year or so. On Page 8, just a quick slide on merger integration. We have made a tremendous amount of progress in integrating the 2 organizations, the vast majority of the last 2 years has been spent on integrating our systems. We have taken a slow and deliberate approach to making sure that we get that right. We have worked very hard to take the best of systems from both organizations, and implement that across the broader organization. In some cases, such as treasury management, we've actually upgraded our system, which will be applied to the entire organization. So I think when we come out of this integration, we feel very confident that we have a set of systems, technology and processes from a customer facing as well as an efficiency in operations that puts us at table stakes or better in many of these areas. So we've been very deliberate. You can see on this list, there are a number of system conversions that we have already completed. The top of the page, one of the key things that we focused on throughout is making sure that we not only retain but continue to recruit our associates throughout this process, and we're very, very pleased with over 90% retention of the associates in the combined organization. When you go through a merger, notwithstanding whether it's a merger of equals, or otherwise, you tend to get a certain amount of uncertainty, and we work very, very hard across the organization to try to bring a stable, firm foundation for growing our customer relationships and positioning our people to be able to serve their customers, to minimize change or adverse impact in their ability to serve those customers and ultimately to continue to grow the business. On the right side, there's a little bit of information on cost saves through the third quarter, we'd realized just under $100 million of our annualized cost savings. I have a high degree of confidence that we're going to be able to achieve the $200 million in run rate savings by the end of next year. Our final systems conversion will be in February. I put cost savings in the context of the inflation that we all see across the financial services industry today. Costs are going up more broadly. But we think we're somewhat positive and unique in the sense that we have the tailwind of additional cost savings opportunities, which will flow through in terms of reducing our cost base in 2022 as it relates to the merger cost savings. Page 9 is a very high-level summary of our strategic plan. We have run a strategic planning process, really began in the fall of 2020 right after we closed the merger of equals. We put together a plan that was updated this year in more detail, but is essentially unchanged. We're focused on really these 3 pillars. One is driving organic growth, taking our regional and specialty banking product set and geographic coverage and driving deeper relationships, focused principally on driving profitable, strong long-term relationships. We're leveraging our investments in technology, treasury management, digital, things of that nature. We think that over the next 3 or 4 years in terms of controlling costs as well as transforming the business, we've got to continue to selectively transform the business, how we automate processes, how we take cost out of the organization, how we enhance our delivery models to provide better service and support to our customer base. And then finally, we believe that really the secret sauce in any banking business is its people. We feel very strongly that people are where we truly differentiate in the activities that we provide for customers. We invest heavily in attracting -- recruiting, attracting and retaining the best bankers in the business. We've seen tremendous success even in this integration period of bringing people onto the platform, and I'm optimistic that we can continue to do that. And as I pointed out earlier, so far, we've had an outstanding success in retaining our bankers through this period of transition. Page 10 gives you a little bit of information on driving growth. If I start on the right side of the page, I think this is a telling opportunity. If you look at treasury management, for example, one of the opportunities we see in the organization is to drive deeper penetration in our treasury management product set. Today, vis-a-vis peers, in terms of product relationships that go beyond the loan relationship and the treasury management, we think we have tremendous upside. And if you take -- if you close a gap of 15% penetration. That's roughly $60 million in revenue. Now we're focused on dedicating capital to our organic growth, particularly making sure that we're driving profitability in our footprint as well as our customer set, attracting people, as I mentioned earlier, and then providing information, which allows our bankers to make the decisions necessary to price on a daily basis to serve our customers and ultimately, alignment of our incentive plan. So we've got a lot of investment designed to improve the profitability of the business to increase penetration and to identify opportunities for further growth in the franchise. Page 11 is more visual, look at it. We have opportunities to reduce cost. We think there are a tremendous number of opportunities to streamline the processes, use technology, robotic process automation, for example. We think that we can further improve our customer experience by deepening our specialization in the way we serve our customers. And then, as always, how do we use new technologies to improve productivity but also drive efficiency in the franchise. Page 12, as I mentioned earlier, is a summary of the work that we're doing. On the ESG front, we have put a tremendous amount of effort over the last several years into developing an environmental program. We're in the -- we put out a report 6 months or so ago, here for good, which lays out our corporate responsibility report and all the things that we're doing in great detail. We're putting a lot of work into understanding our role and serving our customers and at the same time, helping improve the environment. We're also doing a lot on the diversity, equity and inclusion side. We work a lot to make sure that we create an opportunity for people to grow and develop in the organization. And we are very focused on creating an opportunity where all of our associates have the opportunity to grow and thrive in the organization, and that our organization is reflective of the communities that we are blessed to serve on a daily basis. Key focus for us in driving value over the long term is making sure that we're allocating capital effectively. We have the ability to disaggregate the business at a very granular level. We can get down to account-level profitability. Account-level profitability can be rolled in any number of ways, but is fundamentally built about or return -- about or around, easy for me to say, return on equity. And we take a tremendous amount of time to make sure we understand where we're deploying capital, where we're getting paid for the use of that capital. And we focus a lot on how we manage capital in the organization to drive shareholder returns through performance of that capital. The upper left-hand corner of that chart is, I think, pretty impressive, whether you include credit or whether you exclude credit, release of reserves through this integration period. We have delivered very strong returns on tangible common equity, and we think we're positioned to continue to do that. We're very thoughtful about how we stress test our balance sheet. We're not required to complete the CCAR, but we do it on an annual basis. And not only do we do it, we complete the CCAR and we disclose it so that investors can see how we look at capital and see -- you can understand our capital allocation where we think the risk is in the balance sheet, and how it performs. We, in many ways, focus in terms of our communication on our common equity Tier 1 CET1 ratio. We think the organization ought to be managed somewhere between 9.5% and 10% in CET1. In the third quarter, we authorized another $500 million share repurchase. That follows a $500 million share repurchase in January -- million dollar, not million share. $500 million share repurchase. And we have been aggressive when organic growth is not using that capital -- returning that capital to shareholders either through our dividend program or through our share buyback. Page 14, to summarize, we're, I think, very well positioned with the opportunities in front of us in 2022. We are, in my view, well positioned with footprint, with great growth markets where we have the opportunity to grow in terms of market share and then markets that have very good, strong underlying growth dynamics. We have an extraordinarily talented group of bankers. We have the ability to continue to realize cost savings, drive revenue synergies. And I think we're very well positioned from a capital perspective that we can create a tremendous amount of shareholder value. One of the questions that will likely come up, if not in this conversation, in the future, I'll point you, there's a page in the slide deck that shows you some information in the appendix around interest rate sensitivity. We've put some modeling in there so that you can understand how the balance sheet performs in a rising rate environment. We are asset sensitive. So overall, I think we're extraordinarily well positioned to benefit from what continues to be a strengthening economy or recovering economy. Pandemic seems to become more under control, notwithstanding the Omicron variant, and the short-term impacts. It seems like we're moving in a very positive direction. And I think we're extraordinarily well positioned to capitalize that and to grow our business. So Ryan, I'll be happy to stop and see what questions you have.

Great. Thank you for the in-depth presentation, Bryan. So a handful of different things that I wanted to touch upon. But maybe just starting to dig a little bit deeper in terms of organic growth, and you outlined on one of your initial slides the fact that you expect your markets to grow significantly faster than the broader marketplace. And I'm curious, while I know we'll get formal guidance in January. Can you maybe just talk about in your traditional commercial businesses what you're seeing? I think you referenced pipelines that double, commitments are up 5%. Maybe just talk about what are some of the areas of strength and are you seeing -- are you hearing about customers wanting to borrow more? Or are they still talking about supply chain disruptions and the like?

Yes.

Next question.

Yes. The next -- no. I think -- so if you start at 40,000 feet with respect to what's going on in the lending markets, it's still impacted by supply chain. It's still impacted by the pandemic. I was asked earlier in a conversation if it was customers being cautious. I don't think customers are being overly cautious. They're just trying to understand the rules of the road. And there are a number of things changing. It's clear that if you look at the aggregate loan to deposit ratio of the banking industry as a whole, us included, you have a tremendous amount of excess liquidity in the system. At any given day -- yesterday, we had about $15 billion of cash sitting at the Fed. That's not our cash other than we're keeping it for customers, both commercial and consumer. So there's a lot of liquidity in our customers' accounts. And until that money gets put to use, it's going to be hard to drive a tremendous amount of outsized loan growth. What we're seeing is strength in pockets. Some of it is geographic. Markets like Alabama have done a fantastic job, and we're seeing some growth there. Some of that is organic growth. Some of it is acquiring relationships as we've acquired relationship managers into the organization. Customers in pockets are putting money to work. I would point back to the slide I had up there, 5% commitment growth last quarter, 2% commercial loan growth, and that's on a linked-quarter basis. I would expect the fourth quarter will be at or above, on a linked-quarter basis, 1%. And I'm optimistic that in the aggregate, if you exclude PPP loans -- and the numbers I gave just excluded PPP. I think that we'll produce attractive loan growth next year, recognizing that we're going to have some contraction in our mortgage warehouse lending portfolio, things of that nature. But I think we'll see a pretty attractive balance sheet growth and I think customers are putting money to work.

I guess just to kind of round out regarding the lending environment, on one of the slides that I was just flipping back to you showed 30% of the book is in the specialty businesses. Obviously, loans to mortgage companies as the environment moves around still with the balances. But this has sort of been a hallmark of the FHN growth story over the past few years. And I'm curious, as we enter the next phase, these businesses are national in nature. How do you think about these in terms of their contribution to growth? And where do you think there could be pent-up demand across that?

Yes. I think it will be -- take mortgage warehouse lending, for example, I think it will be hard to see mortgage warehouse lending grow, particularly as refinance activity falls. And if my instincts are right and the taper occurs faster, longer rates move up, it will drive down refinance activity. Purchase money ought to continue to be strong, although there is a deficit of available housing. So it would be hard for me to see mortgage warehouse lending grow a lot. But I don't think it's tied strictly to a contracting mortgage activity because our team has done a very nice job picking up additional market share. And so I think it will be more stable than it's been in past cycles. Businesses like our asset-based lending business, where utilization is down, call it, 20% to 25%, maybe 30% in terms of line utilization for where it would traditionally be. We think those businesses will reaccelerate as the economy does. So there's some built up growth there. Our restaurant franchise finance business. So I think there are gives and takes in that equation. But overall, I think we continue to see the specialty businesses look very attractive over the long haul.

I'm going to give you a two-part question here, they're going to be somewhat unrelated, but hopefully, you'll do a better job than me linking them together. So you outlined on the slide the differences in Europe penetration. And in treasury management versus peers, and you talked about what could be a $60 million opportunity. Can you maybe just talk about what do you think have been the impediments to that have caused you to be below peers? And just outline for us, what are some of the changes you're making to improve that? And then second, you talked a lot about process redesign, automation, -- what are you doing there? And is that part of the cost saves that you're hoping to get from the merger? Or are these sort of above and beyond to offset inflation in the economy, which will come to in the next question.

You're right. I'm going to have a hard time linking those 2. I'll use "and" in the middle. The -- on treasury management, I think the key there is a number of various things, but one, we have an opportunity just with focus and incentive programs and really intentionality around how do we broaden and deepen these relationships. And the number of -- in too many pockets, we have too many single-product relationships, loan-only relationships. And so we can be intentional about that. How we're doing it is beyond the focus. We're in the unique position today of actually running 3 treasury management systems. We have the legacy First Horizon system. We have the legacy IBERIA system. And then we're in pilot phase on the system that we're going to move everybody to in the early part of 2020. And we think when we get everybody converted over, we will have every bit of sticky treasury management system, but we have the feature functionality that makes us as good as anybody in the industry in terms of treasury. So a strong product set, coupled with intentionality about deepening these relationships gives me a tremendous amount of sense that we can move the needle forward. On the -- and on the cost side, we have a team on -- that's really focused on business improvement. And it is how we look at our processes and our systems to ensure that we're being as efficient as we can possibly be. But most importantly, are we -- how are we delivering the best service to our customers. And we spend a lot of time talking about end-to-end processes. And I know it's been a fad that people think about, well, let's align around customer journeys and agile thinking. And in some cases, people using traditional organization structures like we are. But ultimately, we've got to think about what the customer needs, and how we deliver it end-to-end. And customers don't and shouldn't care about how we're structured. So this team that works in Tammy LoCascio's organization is designed to think about how we use technology, how we use tools to make us more efficient, and to improve customer experience. At the end of the day, those kinds of actions are really geared towards how do we take more costs from unproductive activities and allocate that to more productivity and greater efficiency. So while they are not part of what I describe as our ability to hit our $200 million in cost saves. They will be used to offset the impact of rising costs or help offset the impact of rising costs, and to allow us to invest in new technologies and product sets that makes us a better organization over the long term.

[indiscernible] I think you did a good job linking them.

Thank you, and work.

So I guess you relative to a lot of other banks are fortunate to have a lot more cost savings. You highlighted you're at $96 million. You expect to be at $200 million run rate by the end of next year. Can you maybe just talk about what you're seeing in terms of rising costs across the business? What are you hearing from your customers? And how does this impact your ability to deliver positive operating leverage over an intermediate time frame?

Yes. I think we are fortunate that we do have the ability to deliver on our cost saves. And I think one of the things that we have proven out time and time again over the last 15 years is our ability to take costs out of the organization and drive efficiency. And I think it's going to be necessary. We're seeing rising costs across our organization, particularly in wages and compensation costs. Those increases are fairly broad-based in terms of merit increases. But on top of that, promotional increases and off-cycle adjustments the cost of recruiting bankers has gotten higher. We're also here to sort of the #1 topic from our customers. We're seeing a tremendous amount of conversation from customers about 2 things, usually labor costs first and then supply chain, labor costs first because it affects more than -- it affects services as well as the manufacturing supply chain oriented organizations. It feels to me like we've reached full employment, and that's sort of what's showing up in the numbers. I know the ratios aren't as good as they were pre-pandemic, but our participation rate is lower. We have missing a couple of million people in the U.S. because of lack of immigration over the last few years. Then -- and it feels like that there's going to be upward pressure broad-based on compensation, wages. And given the nature of significance of that to the structure of the income statement of a financial services company, where it's plus or minus half of our cost base, it's going to have some upward pressure.

We're under 5 minutes here and maybe because this is probably the last time you're going to speak publicly before the end of the quarter, anything else to update regarding how the quarter is progressing in addition to you, obviously, talked about loan growth, anything to highlight on fees, NII expenses or just any broad comments to make.

Yes. I feel good about the momentum that we see in the balance sheet. At the end of the year, there's always uncertainty around what's happening around the holidays and what's happening with the virus. But I expect on a linked-quarter basis, we'll be at least 1% linked quarter loan growth ex PPP. I think our expense control continues to look good. I feel good about what we're doing there, delivering on cost saves and controlling costs. Our fixed income business continues to be active. We're seeing positive signs across the customer activity, our pipelines look good. So earnings don't know that we cross the year-end. They move right into January. And I'm as concerned about the momentum going into next year. I think our bankers have done an outstanding job over the last 2 years, but most importantly, the last 12 months in getting our organization prepared for an integration. And it's more than just us doing a bunch of programming in systems. It's making sure that our customers are prepared that our associates are trained on how to use new systems. So I'm pleased with how we're positioned. And I think 2022 can be a really exciting year for us. And I think we'll deliver very strong shareholder returns in that regard.

Well, obviously, earnings doesn't know that the calendar changes. But as the calendar does change, it does feel that you do have a lot of levers into next year, whether it's the cost saving revenue synergies, and I know a big topic on the most recent earnings call was just the transitioning from being kind of integration-focused to being more on the offensive, and I think that could be important for the story. I guess one of the other levers that you mentioned in the presentation was just you guys are -- the balance sheet is positioned to benefit reasonably well from rising interest rates. And I guess sort of a two-part question. First, you guys are obviously sitting on lots of liquidity. And as an ex CFO, I know you don't mind answering this. But given your views of the economy, what is the thought process right now in terms of further deployment and driving further upside to NIM earnings?

Well, I joked about it with Hope earlier. Hope's been with us 8 days.

Is she veteran?

Yes, veteran CFO. And I joke, the 1 way to get interest rates to go up is for us to increase the size of our bond portfolio, which we put about $1 billion over the last 3 or 4 months into our securities portfolio. And we still have extraordinarily strong asset sensitivity. So when I look at that, I think it's a tremendous opportunity. I think we benefit very nicely when the Fed starts to move rates up, and I think that will be sooner rather than later. And that excess liquidity gives us the ability to fund a tremendous amount of customer growth when it emerges, and at the same time, allows us to buy bonds along the way to -- or mortgages or whatever it happens to be. Because over time, as rates move up, we have to bring that asset sensitivity down because it becomes symmetrical further away you get from 0. So I think we've got a tremendous amount of balance sheet flexibility, and I think we're extraordinarily thoughtful about when we put that to work and how we use it. But as we sit here today, I'm pretty happy to have a balance sheet that's got about 65% floating rate loans, which will benefit when the Fed moves.

We're getting towards -- being out of time, but I wanted to give you the opportunity to -- because we are at the end of the year to give the company and the stock a little bit of a plug-in. And I guess my question to you is you guys have gone through the year. Obviously, it's been a challenging year and the stock is trading at a discount to peers. What -- as you sit in meetings with investors today and more recently, what is it about the FHN story you think investors are missing? Do you think they don't believe the return profile you get to, I think you're too imminently focused? What are the things that you're hearing that you think are misunderstood about the story? And what are you doing to change that?

I think we said around long enough, we could come up with a long list of things, but I think the fundamental challenge...

[indiscernible] too long.

Not too long, but the fundamental challenge and the one I would point to is as we've got to get our integration completed, mergers of equals or sometimes difficult to execute on. I think we're well positioned. We'll have our systems integration next year. And I think once we get beyond that, I think we can show that this merger has come together in the ways that Daryl and I anticipated 2 years ago with our Board and with our leadership team. And I'm confident that once we get that obstacle out of the way, I think the story sells itself. Then in the interim, as I pointed out indirectly when the stock is on sale and we have excess capital, we're not hesitant to use it to buy some back.

Great. Well, we are out of time, but please join me in thanking, Bryan.

Thank you.