First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for being here. We're pleased to have Bryan Jordan here from First Horizon. A year ago, I wasn't sure if you're going to be here, but you're here. I'm pleasantly happy, surprised. Pleasantly surprised and happy about that. So thanks for being here, Bryan.

Well, thank you. Thanks for having us.

Yes. Good. And we'll get into some of the things that happened over the last year. But maybe the first thing you can do, I think most people are familiar with the company, but not everybody is, and we have a lot of generalists looking at regional banks, believe it or not. So give us a quick overview of First Horizon, kind of the footprint in the markets and then we'll talk about the economy a little bit after that.

Happy to. We are going to turn 160 years old in about 3 weeks, March 25. We're in 12 Southern states, headquartered in Memphis, Tennessee, roughly $82 billion in assets. We have what we believe to be a terrific footprint with a real strong presence in Tennessee, strengthening in the Carolinas and Florida and great opportunities in places like Houston, Dallas. So we have a footprint that we think will grow very, very quickly relative to the rest of the U.S., and we think we have great opportunities to deploy capital across that footprint.

And can you go back and talk a little bit about pre-TD, the IBERIA merger and some of the things that you were going through there just to fully get us up to speed?

Yes, absolutely. We -- as I mentioned, we'll be 160 years old. We've -- up until about 2017, our banking business was principally in the state of Tennessee. We had #1 market share in the state of Tennessee, still do. Very strong market shares in the 4 of the 5 major MSAs and a growing and strong market share in Nashville. We have a big fixed income business, which is a great fixed income distribution, sales and trading business. But we've started to expand for growth opportunities outside of the footprint. So we did a merger in 2017 with Capital Bank, which really gave us a toehold in South Florida and a good start in the Carolinas. We had, in late 2019, the opportunity to bid on and acquire 30 divested branches in the Carolina from SunTrust, BB&T merger, formerly SunTrust branches. And then we complete -- or announced and then completed in the midst of the pandemic. We completed the merger of equals with IBERIA and our footprint across the Carolinas into Florida gave us a great presence in Louisiana and strengthened our presence in Texas with overlap in Houston and growth opportunities in Dallas. So we've been building out the franchise in markets where we think we can be competitive in delivering a middle market commercial banking product set very capably. We believe we deliver very good Wealth Management/Private Client business. And then our specialty businesses, which tend to be more national, also fit well in those markets. So we think we can be a significant player by delivering a community bank look and feel, but have big bank products and really create differentiation all across that southern footprint.

Okay. Good. And like all the sessions, if you have questions, feel free to put your hand up and ask them and we'll get them covered as well. But the economy, we were talking a little bit about the economy beforehand. But give us your assessment on what you're seeing in the footprint. I mean, there's a lot of seemingly negative news, but at the same time, the banks are all talking about pretty decent performance in their own markets. So tell us what you're seeing, Bryan?

Yes. If I look at it through 2 lenses, in particular, one being the credit lens, credit continues to look very good. We're encouraged by what we see. There's always the idiosyncratic credit starts to emerge when financial conditions tighten. But we don't see any broad-based deterioration in credit across the footprint, either geographically or industry-wise at this point. So credit is holding up very well in our view. Second, we look at pipelines and borrower activity and you throw into that the anecdotal. It looks like borrowers are starting to lean in a little bit more this year. I think borrowers were somewhat encouraged by the we're-done-raising-rates kind of language that we heard from the Fed or the FOMC late in 2023. So borrowers are a bit more optimistic. I would say still somewhat reserved. Rates are higher. I think borrowers are optimistic that rates will come down and it will give more opportunity. But all in all, the economy seems to continue to be moving along very well. If I had to wager a guess, it would be it's going to look a lot like 2023 in terms of economic environment this year, maybe not quite as strong. But overall, pretty good economy, and I think business will hold up pretty well in that environment.

Okay. Good. We do want to get into lending and credit in a little bit, but we're coming up on a year from the termination of the TD deal. Talk a little bit about some of the changes that you've made over the last year. I know it was -- you made a lot of changes early, and you kind of had to make some quick moves. But talk about what you've done over the last year and kind of regain momentum in your business?

Yes. If you step back to when we announced the merger agreement with TD, we had just completed the integration of First Horizon and IBERIABANK Systems. And at that time, we had just re-branded the old legacy IBERIABANK franchise. And we were tremendously excited about what that potential franchise could do and deliver. And we announced the potential merger with TD shortly thereafter. Our view was keep the momentum up in the franchise to build on what we had put together with IBERIABANK, really for 2 reasons: one, we wanted to be in a position to deliver a better franchise if and when the merger closed. And if the off chance that it didn't, we had a lot of momentum coming out of that. We didn't expect the latter, but that's where we ended up. But as a result, our company had a tremendous amount of momentum in the spring of 2023. And our teams were in a position to hit the ground running when the merger terminated, by reaching out to customers, explaining what was going on with the termination of the merger, but most importantly, the strength and stability in the legacy of First Horizon too and to capitalize on opportunity to really grow deposits and bring new relationships to the business. One of the keys is we started immediately branding the First Horizon name in those legacy IBERIA markets where we had not spent a lot of money branding them. We have, in that period of time, done what I think is a fantastic job of growing new-to-bank relationships, growing our deposit and customer base. We have put in place more streamlined regional banking organization. And we have started to make investments in really remediating what I would say is deferred maintenance. A good example is we knew our general ledger system was going to be end of life the end of this year for 2 or 3 years. You don't start replacing it when you're in the process of doing a merger. So we'll get it replaced by the end of this year. We're also investing in new technologies that will be great for customer-facing products and services and that's treasury management and online mobile banking, so we've made quite a few changes. And my sense is the excitement level and enthusiasm is high in our organization. Our associates are very, very engaged. They're excited to be delivering products and services to their customers and have a high degree of confidence that we can make a meaningful difference in the communities that we serve.

Okay. Good. When you talk to investors, do you feel like the market's perception of the work that you've done is fully there? Are there gaps that you think you'd like people to understand?

I think the investor base has a pretty good sense of what First Horizon is today and the work that has been done and how we're positioned. I would say that was less true in May of last year. We would have gone through 14 months where we hadn't done any earning calls, and there was really not a lot of coverage of our results and because we had a fix.

Except for one guy.

Except for one guy, and that was not a lot. We had a -- because it was a fixed price cash transaction, we had a transition of shares into more of an arbitrage makeup of our shareholder base. So things had to be reset. And so we have really tried to put the effort behind getting in front of investors over the course of the last 9 months. And we think ultimately, the most important thing we can do is what we started in the second quarter of last year, which is deliver a good quarter after a good quarter after a good quarter after a good quarter. So just to continue to deliver on the financial returns in the business and prove that the franchise is working. And so I think we're in a place where we've made a lot of progress and we're in pretty good shape.

Yes, tough week for the deal to break. That was a difficult week in general.

It was. It was a handful of days after the First Republic acquisition by JPMorgan, and it was a tough environment. But our folks did a great job and most importantly, our customer and community engagement has been high and continues to work very well.

Okay. Do you feel like the hard work has been done? I mean, the last quarter was a good quarter. I mean it was a very solid quarter. It looks like there's momentum. But do you feel like the hard work has been done?

Jon, I would say the hard work's never done. It's always the next quarter. I think it's -- look, it's a competitive environment. Our industry is changing a tremendous amount and you can't ever stop thinking about how are we going to market. Do we have the right products and services? And are we doing the things that truly differentiate us with our customers? So I think we have done a lot of hard work, but I look at '24 and '25 and think we've got to continue to grow with our customers. We've got to continue to evolve. We've got to continue to build the product and the distribution capabilities are truly differentiated. So I don't think it's done, but I think we've made a lot of progress.

Okay. Good. Touch on the lending environment. You talked about it a little bit. Maybe it's getting a little bit better. But how are you feeling about loan growth in general?

I think loan growth will be okay. I don't think it will be great. Our guidance was for fairly modest loan growth this year. A fair amount of that will continue to be fund-up of pre-spring-loaded, pre-originated deals in construction real estate, for example. Demand has started to build at least pipelines a little bit in the first part of this year. On the whole, though, interest rates are still relatively high to borrowers. And I think there's still a certain amount of cautiousness. People are hanging on for rates to potentially come down later this year. I'm not particularly optimistic around that. But I think until people get comfortable with the economy being stabilized, that we're going to be at or pretty close to a soft landing, I think it will be fairly modest. Broad-based loan demand is not geographically centered. Probably the slowest area we see is in commercial real estate. And as you can imagine, with inflation and higher rates, it's harder for deals to pencil, but on the whole, I feel pretty good about demand in this environment.

Sources of growth?

I think it's going to be more C&I oriented in the near term. You'll see some growth in CRE simply because we're funding up some deals. But I think the incremental growth will be broad-based across the franchise. It will be C&I. And we're seeing a number of opportunities to pick up what I would describe as generational type opportunities as other people are resetting their balance sheet, managing risk-weighted assets. So we're seeing a lot of opportunity to grow. But I think the biggest driver will in the near term be C&I related.

Okay. Okay. On the margin, back to this May time frame. It was a unique period of time. All of the banks were looking for deposits, and I don't want to use the term window dressing, but everybody wanted to show stable deposits at the end of the quarter. But it's created some opportunities for you to reprice deposits downward? Can you talk a little bit about that and give us an update in terms of what you're seeing in the retention and pricing?

Yes, absolutely. We -- in May, I mentioned, our folks got on the phone and started talking to their customers. And one of the things we wanted them to do was to have a very attractive offer. And we were competing with a very attractive rate structure, whether you're looking at money market or CD. We felt good about our bankers having something to be excited about when they called their customers. And during that time frame, to put it in perspective, we raised about $6.5 billion in new-to-bank money in the second quarter of this year, about 32,000 new-to-bank relationships; and another $1.5 billion in the third quarter; and $1 billion beyond that in the fourth. But what I think was most important was at that time frame, we wanted our people to be talking to the customers and potential customers, and we wanted to demonstrate that we were here. And in some sense, you can look at the marketing aspect of it because we hadn't re-branded First Horizon very effectively or the way we would have done it in 2022. So we really had very good success. Those specials started to end in the fourth quarter, November or December. And we've had pretty good success in repricing the deposit base more in line with -- not only with the competitive environment, but to bring those rates down. Our retention on the new-to-bank money today is probably 94%, 95%, something like that. I think we're at 96% at the end of the year. So it's been pretty successful. We recognize that when it comes to deposits and thinking about the deposit franchise, we're not playing solitaire in any sense. It's a competitive environment out there. And our goal is and has been to take those new-to-bank relationships that I mentioned and convert from promotional to primacy. So we're making a tremendous amount of outbound calls. We're trying to deliver other products and services to those relationships. And I think we're seeing pretty good success at least in the early stages of retention and trying to build promises.

Okay. You've talked about the cadence of the margin over time. Has it generally been supportive in moving higher?

Yes.

Any change to that thinking?

No, not today. We think the margin is likely to be stable to improving. We think deposit costs will continue to drift down a bit here and there. When we laid out our guidance for 2024 in December and then again in January, our view was based on the forward curve in the market at some point on some day in December because it moves so much. A joke is [ 2.37% ] on December 31. But it's moved around a lot, but we had 4 rate cuts built in. We are asset-sensitive and we should benefit or have a slightly better margin if the Fed does not cut rates across the course of the year. And there's some countercyclical offset that will affect that. But all in all, I think we still feel very good about our margin outlook for 2024.

Okay. I want to do -- I want to talk about the countercyclical stuff in a second. But you said that you're -- you'd probably take the over on rate cuts. Do you feel like the Fed really doesn't need to be that aggressive based on what you're seeing?

I personally think the economy is very strong on a relative basis. Unemployment is still very, very low on a relative basis. And inflation seems to be getting stuck in that 3% area or more, depending on which aspect of it you look at. So my guess would be that it will be on the lower side of forecasts, whether it's 0 or 2. I don't know you're starting to see Fed voters and FOMC members saying, 1, 2. It just feels to me like it's going to take a very big shift in unemployment and growth in the economy before you see the Fed start to move on rates.

Yes. Okay. Okay. Good. So potentially positive for NII, but the flip side is some of your countercyclical fee businesses we've talked about for years.

Absolutely.

How do you feel about that? Or how's FTN going and some of the other countercyclical businesses?

Yes. Our -- we have the 3 countercyclical businesses, the mortgage business, and it continues to be one, seasonally soft; and two, because fixed rates and long-term rates are higher, it tends to be a purchase money business. So it is and has been slower. Our mortgage warehouse lending business ebbs and flows. We think we have seen and we'll continue to see opportunities to continue to pick up share there and that business feels pretty steady. We won't get to the outsized levels unless we start to see more refinance activity. And again, it is seasonally impacted like the mortgage business. It should pick up from first quarter levels across the course of the year, but we think it will still be fairly modest. And then our fixed income business. The fixed income business has started to bounce back late in the year. I mentioned the FOMC and Chair Powell's comments about interest rates and further rate increases. That business has picked up some. I would guess, as we sit here in early March, that our average daily revenues will be up at least $100,000 a day in the first quarter and maybe a bit more than that. Business has strengthened over the course of the last couple of months and is back to more normalized levels.

Okay. That's good. If the Fed stays where they're at, can that -- do you think that can continue?

I think if the Fed stays where they are, I think we will continue to see the fixed income business be pretty stable. So I would say I'm more optimistic about this year. I would say if the Fed cuts, it will be even better for the fixed income business. But right now, it feels like we're in a pretty good place. And with some luck, it will continue to play out over the course of the year.

Is there an ideal environment for you, a couple of cuts?

I'd say somewhere between 0 and 2% is probably ideal. I think we're -- given the balance in our business and the way we've constructed it, we've tried to desensitize our balance sheet to rates moving one way or the other. And I say this with some sense of -- if it moves 1% or 2%, it will have an impact on us. But hopefully, we've tried to minimize that impact good or bad and just continue to deliver steady and high returns through any cycle.

Okay. Good. Anything to note on credit? I remember back in the September Conference, you talked about the big credit, the idiosyncratic credit. Doesn't seem like there's anything that we're going to talk about today, but anything to note?

Well, credit, as I said a minute ago, credit continues to hold up pretty well on the whole. The longer you have higher rates, more inflation, you're going to find somebody's model or business or balance sheet that is going to get stressed in that. But it still is very idiosyncratic in the sense that it doesn't appear to be geographically centered nor does it appear to be centered in any one particular industry. So right now, my sense is that credit continues to hold up pretty well. The longer people are enduring tighter financial conditions and if the Fed happens to be late in reducing rates, it could get a little worse. But right now, credit feels pretty good. And as 2 years ago, if you said we'd be in 2024, it looks like we're going to have a soft landing, credit feels favorably positive to what you might have felt 2 years ago.

Okay. Anything on commercial real estate?

Nothing new on commercial real estate. Our portfolio is broadly distributed across the South. These are markets that have continued to see growth in and people moving into the markets, it helps with absorption rates. We tend to have a portfolio that's written with very strong borrower commitment on the front end in terms of cash equity in deals. We continue to work with borrowers in terms of rightsizing deals like everybody else has. But on the whole, commercial real estate still looks reasonably good, given all the inflation and interest rate movement we've had over the course of the last 18 months.

Okay. Couple more things I want to touch on, just see if there are any questions before we go any further. Okay. Expenses, you made an -- you talked about the $100 million investment that you've made to kind of get things back to where you want them to be. Anything else to note on expenses or call out? It seems like maybe you're through the bulk of that at this point.

Yes. We have what will be a surge for a year or 18 months in expenses. The $100 million is investments in technology to close that gap between where we were and technology investments and where we needed to be when the merger terminated. And that road map is pretty much laid. We just got to do the work. And it'll sort of work its way into the expense system as we start to amortize some of these systems. But I think that's sort of a bubble that we'll work through in the next 18 months or so. We have a little bit of -- we had some retention money that we put in place when we announced the merger. That has been rolled into operating expenses. It will step down later this year and will step down again next year. All in all, I feel good about our expense run rate and our ability to continue to invest in the business, invest in a way that makes us a better, stronger, more profitable organization for the long term. We are always mindful of controlling our expenses. And over the last 15, 18 years, we've shown the ability to bring that overhead efficiency ratio down with time and take expenses out. So I think we've got a pretty good balance today, and I don't think there are any big surprises coming on the expense side. The better fixed income does, it will drive a little bit more expense, but it also drives more to the bottom line. But all in all, I don't expect any surprises.

Okay. On the buyback, I have 8 of these sessions today. And I'm really not talking about buybacks with people except you. And you have a nice sizable buyback out there. How do you want us to think about the pace of that? How active do you want to be? What's the messaging around that?

Yes. I think we think capital is extraordinarily important and having a strong capital base has served us well over the course of '23 and will in '24. We started the year with a CET1 ratio of about 11.4%. And what we have said is we don't expect to let that capital ratio grow from there. We expect to floor it out somewhere around 11%. We think a buyback is an appropriate way to manage capitalization in the organization and we will use the excess capital to repurchase stock as we see opportunities. We would obviously rather invest it in organic growth in the footprint. So to the extent organic footprint growth is stronger, buyback will be a little bit less. And we'll manage with a capital ratio of around 11% or greater this year. I think 11% in a more normalized investment -- excuse me, environment is on the higher end. We can operate the business probably more appropriately between 10% and 10.5%. And I think we'll figure out how we get there when the economy is clearly stabilized, and we're confident that the soft landing has been achieved and the economy is showing very strong growth and, in some sense, the world situation stabilizes. We'll pick up. We'll buy a little bit of stock back. We started the buyback this quarter. We announced the authorization in January and to date, we've bought $90 million worth of stock, something like that.

Would you like to use it all?

Like to use it is probably too strong. We're willing to use it, but it's really a preference to invest in customer growth and growth in the balance sheet. And to the extent we don't need it there and we've got adequate capital, we will use it to buy back stock. I believe our stock is on sale and it's at an attractive value, and it's -- as we have the opportunity to capitalize on buying stock that is relatively cheap to us, we will do that.

A few people in the room agree with you on that. Last question, last topic is the $100 billion in asset topic, which has become quite a prominent topic. You're still a ways away from it. How do you think about that, that ceiling? Is it a ceiling for you?

Yes. I think it's an open question. I am excited that we've got 2 or 3 years of headroom. Just in terms of organic growth, we're at $82 billion, as I mentioned. So we have plenty of room to run. I think we will have clearly greater clarity as time passes about what is the true and incremental cost of crossing that $100 billion threshold. I think it is -- if Basel III is proposed like it was late middle of last year, it's a fairly significant call step to go across $100 billion. And my guess is what -- 2 things will happen. One, that will likely get moderated; and two, we will start to have some of that built into our run rate anyway. The FDIC has a proposal out to start creating living wills. We have always stress test and disclosed our stress testing. So we have a lot of that infrastructure in place, and I'm sure it will build out. So I'm hopeful that with 2 or 3 years of optionality on timing and understanding how things are going to work, I think we have the ability to navigate it. So I don't see it as a ceiling that we can't deal with. I think it's fairly significant, but it's not something that we can't deal with.

And you have time.

We have time. Time is our friend on that topic.

Yes. Okay. Okay. Well, with that, we're out of time. Bryan, thank you for being here.

Thank you, Jon. Thanks for having us.

Glad you could meet us today. Yes.

Good to see you.