First Horizon Corporation (FHN) Earnings Call Transcript & Summary

All right. Up next and finishing day 1, we're pleased to have First Horizon here. First Horizon has produced solid results across deposits, credit. And given its peer-leading capital ratios, it's been able to aggressively return capital to shareholders. Here to tell us more about the road ahead is Chairman and CEO, Bryan Jordan; and CFO, Hope Dmuchowski. They're going to walk us through several slides, and then we're going to have a fireside chat. So let me turn it over to you guys.

Sure, thank you. Thank you, Ryan. Thanks for having us. I've got a handful of slides that I'll flip through real quickly. Starting with the disclaimer and the forward-looking information, if you would take a minute to review that. The following slide is a bunch of GAAP data. So what we show typically is reconciled to GAAP in our quarterly release, but this is the actual GAAP data. The 4 key points that I want to emphasize in these slides are here on Slide 4. We are committed to driving our returns back north of 15% ROTCE. We see a fairly clear path to do that over the next couple of years, 2 or 3 years, and we are committed to that. Part of it is through our capital management. And then there's a tremendous amount of opportunity in our franchise, which I will come back to. Great-looking footprint. I've got a map on a couple of slides. We have a very diverse business model. It is very well balanced, and it is very -- are counterbalanced between our asset-sensitive net interest income, our balance sheet, and our fee income businesses, which tend to have a liability-centric orientation. Between the 2, we have a very balanced business model. And then we have, on our final slide, a couple of data points as you look forward to 2025. In terms of targeting 15% ROTCE, we've shown on the right side of this chart the historical numbers. Clearly, it has been impacted by several of the events over the last few years. But we have, in the past, achieved those mid- to high teens ROTCEs. And we are focused on deploying capital in ways that create value for shareholders by driving superior returns on the capital that we have deployed in the business. It is as simple as that. We focus on profitability as a principal driver of the way we measure and incent in our organization. And that will show up, we think, over time, as we continue to leverage the combined franchise that we have following the IBERIABANK merger of equals. You see the trends in PPNR and common equity Tier 1. We start with a very strong common equity Tier 1 of just north of 11% at the end of the third quarter. I mentioned our footprint. You can see the geographic representation. We have very strong markets where have a top 5 share in 11 of our top 20 MSAs. You can see the population growth. You can see the opportunity for deposit growth in the marketplace. And you can see the GDP growth has been higher than the U.S. as a whole. None of that is a mystery to you, but it does represent a franchise that we think has tremendous potential to grow with the local economy, and we have the ability to continue to hire and bring new producers on. You can see we've hired 50-plus people in the last year. We continue to look for opportunities to bring people into the franchise that bring high-quality relationship-oriented portfolios that we can continue to leverage in these high-growth markets. This, basically on Slide 7, illustrates the diversification in the business model. The picture on the right side of the page probably tells of a thousand stories. You can see when interest rates drop, our countercyclical businesses really show a tremendous amount of strength. And when interest rates go up, our fee businesses diminished -- our countercyclical businesses diminish a bit, but our net interest income businesses completely strengthen. And so we have a very balanced business model. And I think through the cycles, you will see that we performed very, very well and in a consistent fashion with less volatility than others. We are an asset-sensitive balance sheet. And as I said earlier, our countercyclical businesses tend to be liability-sensitive and so they offset. So we're much more neutral in the aggregate, when you look at our combined business. And then I mentioned '25 outlook. I won't spend any time reading this to you. This is our outlook for 2025. We have built in essentially the forward curve, which has a 25 basis point cut in December, 3 cuts across the year in 2025. I'll remind you, as I say that, that we all sat here in December of 2023 and the forward curve said we were going to have 6 cuts front-end loaded in 2024. And so it's only as good as the market is and anticipating what the Fed is going to do in reaction to the overall trends in the economy around inflation and unemployment. But this is our outlook, and I'm happy as we go through this, Ryan or others, to ask any questions with that. And then I mentioned the reconciliation to GAAP, and that gets you back to Slide 1. So with that, I'll sit down and we'll take questions, Ryan.

Maybe we could start with the reconciliation. I'm just kidding.

That's why Hope is here.

Maybe you can walk us through it, no. So Bryan, maybe to start off big picture. It feels like the focus in the industry was around the uncertainty, around rates and the election. And obviously, we've gotten a handful of Fed moves, the election behind us now. Do you feel we have the clarity on what '25 inevitably looks like? Obviously, I understand that you put out preliminary guidance. But what do you think your clients are looking for in terms of clarity, in terms of overall borrowing?

We have -- we believe we have more clarity today than we had 6 months ago. I think the election and the fact that we got to an outcome fairly quickly led to confidence in the marketplace. We saw loan pipelines pick up a bit. That has somewhat stabilized because I think people are still trying to understand what are interest rates going to do. Do I need to borrow money at these levels? Or do I need to wait for the Fed to follow the forward curve and bring rates down another 100 basis points over the course of the year? What is tax policy going to look like? How does regulation and foreign trade affected by tariffs play out? So I think there's still a number of questions. But I would guess sometime between now and the time you do this conference next year, that we'll gain increasing clarity across the course of the year. And we think the next year can have a decent amount of momentum in our balance sheet. We're sort of estimating low single-digit loan growth and maybe a little bit better than that in terms of deposit growth. So we're looking for an economy that continues to grow next year and a balance sheet that would likely grow.

You had a slide up there that laid out your footprint and all the growth that you're seeing. Obviously, these are some of the most attractive markets in the country and you're seeing a fair amount of competition coming in. Maybe just talk about how you're defending your market share or how are you actually growing it in this type of competitive environment.

Yes. Part of what we are doing is we are actively trying to hire in these environments. And we've had very good success hiring in a number of these various markets. Clearly, part of defending market share is some of the volatility that we've all experienced in deposit rates. So we try to compete and make sure that we're in the market in terms of deposit cost funding. But we feel very, very good about our ability to continue to bring people on to the platform. We have, I think, an ideal platform in many ways that will allow bankers to come in and know what business that they can get done, that the local decision-making nature of our organization, where your credit officer is not only down the hall from you in many cases but is willing to go on calls with you and meet your customers, the ability to understand how you get compensated. We think that we have the ability to not only maintain or defend market share, but we think we have the ability to grow market share.

And then you talked about targeting 15%-plus returns, and you mentioned potentially getting back there over a 2- to 3-year time frame. Can you just spend a little bit more time talking about some of the main levers to actually getting us there? Obviously, you talked about the capital. Maybe you can dig into some of the others that you think are going to be the key drivers to us achieving those goals.

Yes, I'll start and then Hope can help me clean it up. But at the end of the day, we really focus on driving profitability before driving growth. And so we have gone through a tremendous amount of change over the last 4 years. We completed the integration of IBERIABANK and First Horizon. We went through a period where we were tied up in a merger agreement. So as we sit here today, we think we have a very good detailed list of opportunities to just improve the profitability of our existing balance sheet. Some of that is leveraging opportunities for improved cross-selling and relationship income, particularly around treasury. I'll go sidebar for a second and say, we just completed the integration of our treasury systems because when we converted IBERIABANK, we moved all of their customers onto our new treasury system. Because of TD, we left the First Horizon customer alone so they didn't go through 2 conversions. In the post-TD world, we converted the rest of the First Horizon customers. So now we have everybody on what is a state-of-the-art treasury system, so it gives us greater tools and capability there. We have been trading out lower-yielding, non-relationship assets for higher-yielding, relationship-oriented assets. We've got our brokery or professional CRE lending teams working with our market CRE teams today to help ensure structure, pricing and terms. We've got fee income and wealth management opportunities. So we think we've got a pretty good punch list of a lot of revenue, which ultimately becomes pretax profitability that we can go achieve over the next 2 to 3 years. In addition to that, you mentioned capital. We have a very strong capital base. It's at 11.2% at the end of the third quarter. It's higher than where we believe it needs to be through the cycle. We've indicated in our outlook slide that we will, in all likelihood, begin to think about bringing that down in 2025 as the economy continues to reach stability and as the Fed sort of works through this normalization of rates and balancing out inflation. So it does reflect our bias that we think that the economy is improving in 2025, so greater leverage on the capital that we have there. And then credit will tend to normalize. So we think there are a number of levers. But the greatest is this list of, it is very detailed. It's very granular. We have it broken out by geographic or market. We have it broken out by line item. We think we know where there's an awful lot of opportunity to drive profitability. What would you add to that?

You covered it great.

Thank you.

Hope, maybe let's dig into the outlook a little bit. First, maybe to just start off, you have outlined flat to up 4% on top line revenue growth. Maybe just talk about what puts us at the lower end of the range versus the higher end. What are some of the expectations underlying that?

Yes. Underlying that, first, is loan growth. So we have low single-digit loan growth, so that is an important factor that we are able to grow our balance sheet at a strong growth rate. We do assume a December rate cut as well as 3 more rate cuts next year. And so if we were to see faster rate cuts than that or more rate cuts, we would see our NII come down, and that could be on the lower end. The countercyclicals, it's the timing of it, when do we see the countercyclicals come back offsetting the NII offset. We always put the low end and hope for the high end. I think there's a lot of upside next year. I do believe that we'll see loan growth come back. And I think Bryan mentioned a little earlier the rate cut. We sat here last year and said 6 to 7, and we ended up less than that. It's hard to see right now we'd end up higher than 3 rate cuts at a faster pace than what we've assumed.

And then when you think about the drivers of revenue growth within that aspiring for the high end, how do you think about growth between NII and fees? Just given, as you articulated, the countercyclical businesses tend to do better in a rising -- in a falling interest rate environment. Obviously, the balance sheet is still positioned to be slightly asset-sensitive. Can you sort of triangulate for us how you're thinking about those underlying pieces and some of the main drivers?

Yes. We have a great slide that we put in our earnings deck every quarter that shows our fixed income businesses. There's a red and green slide in there, so decreasing rate environment is positive for our fixed income business. A steepening curve is positive for our fixed income business. So we're seeing everything that we think will happen next year be positive so we'll start to see increases in our fixed income business, which was really at a cyclical low last year, and we've seen a lot of volatility this year. Bryan talked about on our earnings call, the beginning of Q4, we had a $500,000 ADR week and a $1 million ADR week. We've seen a lot of that inconsistency throughout it. The other thing is one of our countercyclicals is our mortgage and mortgage warehouse business. So that is NII. It's our highest-yielding -- our highest-spread business with our lowest charge-offs. It doesn't hold a lot of provisions already. As we talk about all the time, mortgage warehouse already holds 50% capital against it, so the fund up doesn't have as much impact on capital either. And so we're sitting at a very low mortgage origination, mortgage refi environment. We expect that to pick up. We believe that the fixed income business will pick up and that NII will hold up well next year.

Got you. So maybe to just kind of think about them, we'll get into some discussion further on expenses. Maybe to just think about how the revenue and expenses work together. So I think at earnings, you talked about PPNR growth, right? And the top of the slide says PPNR growth expectations, so I'm assuming I know the answer before we get there. But are you still planning for PPNR growth as you look into '25? And what could derail that?

We are. We're looking at PPNR growth. The higher range on the expense is because of our commission business. If we see our fixed income business, our mortgage business really increase to hit the top side of that revenue range, then we'll have a higher expense base. We've continued to have expense discipline. Bryan talked about the long list of revenue opportunities that we have. We have just as long a list of expense opportunities. We're continuing every quarter to look at how can we continue to create efficiencies to offset the organically increasing inflation rate that increases labor, third-party contracts.

Got you. And we'll come back to some of the other things that are laid out on the slides as we start to hit some of those topics. Maybe just talk a little bit about the declining rate cycle. You've had success bringing down deposit costs. I think you guys updated us at earnings. You gave another update at the conference last month. Maybe just talk about what you're seeing in terms of deposit pricing and deposit competition overall. And what are your expectations if we do end up getting a slower rate-cutting environment and we do see the return to loan growth?

On the deposit cost? Okay. Just always ask the boss whether he wants to answer it first. On the deposit cost side, I'll update you again. We've continued to see our deposit costs come down. We're sitting -- we were able to get it right under 3 as we ended November. We're seeing the duration of deposit promos come back significantly shorter. We're seeing 30 to 45 days now. In some really, we're able to real-time price as we see a cut. We've been able to grow deposits year-to-date and maintain them. So the deposit environment has significantly shifted in the second half of the year to be able to walk those costs back. If we see loan growth, deposit costs, I think, is going to be under pressure, especially in the Southeast, which is a highly competitive market. Right now, there's not a lot of deposit promos out there because people are trying to figure out which way the interest rate is going and what promos are out there or short terms. We're able to turn around and adjust them down when we see a rate cut. But as we see loan growth, I do expect that we'll see a lot of deposit cost pressure in the Southeast. And we'll have to look at how we appropriately handle that and how we manage through it.

I think that the last 18 months, Ryan, is a really good picture of the power of our franchise. If you think about when the TD merger terminated, that was following the crisis of a few banks. You had a contracting deposit base. We had a historic expansion of the deposit base and the historic contraction of the deposit base. You had the termination of the merger, following the crisis of a few banks. And our team went out and generated very strong deposit growth. They did it at attractive rates. They've maintained those customers. And as Hope said, they've done a fantastic job of dealing with rates and competition in the marketplace and then bringing those rates back down. So I'm really proud of what the team has done. But I think that is a very strong signal about the power of our franchise and what this team can generate over the long term.

Got you. So Hope, you touched on the fixed income business and some of the other countercyclical businesses. It sounds like there's obviously been a fair amount of volatility in that business. As you look out, do you see the business stabilizing at a certain level, just given what's embedded within the outlook? You sound somewhat optimistic into '25. And what do you foresee as the biggest factors that are impacting the business right now?

I think the uncertainty in the rate outlook is a big issue for that business. They want certainty when you're buying bonds into a -- locking in long-term bonds. The other is the excess liquidity. There's not a lot of people out there trying to put bonds on their balance sheet right now. Those that were going to restructure, a lot of that's happened already. The steepening of the curve happened for a little while, and then we got back to flat, so a lot of certainty in that business. You asked about timing. I think when we get to our terminal rate on interest rates with a steepened curve, we'll start to get to a more normalized level. As a CFO, I hate the schedule that we have in there that shows us going from 32% to 6%. I'd like to see that be more consistent through the years. It's been a very unusual 5 years since we've put the MOE together on interest rate cycles.

And when you think about the countercyclical businesses, I know you have a slide in the deck that shows the profitability during different times. And obviously, 2020 and 2021 was an abnormal time. And I think we'd argue that '23 is an abnormal time. But how do you think about normalized profitability in these countercyclical businesses? Is 2019 the best indication and -- or what would you point to?

I think 2019 is probably in the right ballpark. I think the scenario for us as we get back to a normalized rate environment, a forward curve that's steepened and we're growing our balance sheet. When we can do all of that, we have the revenue profile to outperform. Bryan, anything else you'd add?

No, I think that's right.

So the outlook calls for credit -- I mean, credit losses have been performing better than expected. At least, they certainly did in the third quarter. And I think the outlook calls for, at least on the low end, decent improvement and even on the high end, continued very strong performance. Maybe just talk broadly about what you're seeing on credit and what gives you the confidence that we could see such good performance.

Credit performance has been very, very steady. And as you said, we -- our outlook for the rest of this year, which is not much, 20 or 21 days. And what we've seen this quarter, we're likely to be at the very low end of our guidance for 2024. And we've laid out a range, which in terms of percentages, is a reasonably wide range. But it does reflect our view that credit will continue to perform well. Improving interest rates has been very, very helpful. Lower interest rates has been helpful for those borrowers that have struggled. There's somewhat of a disconnect between what gets reported as a nonperforming asset and what leads to a credit loss. And most of our nonperforming assets, over 50% of them, are actually current and on time. So we think credit content is likely to be fairly low. As I said earlier, our outlook for 2025 and a strengthened economy is real. One of the challenges with putting out an expectation of guidance around charge-offs is that doesn't necessarily reflect how it impacts the income statement. And you've got an income statement impact that's driven by CECL and it tends to be pro-cyclical. So at some point where we've over-provided charge-offs, you'd expect it to reverse the other way. I would say the most telling sign in the guidance we've laid out for next year is very much that if we bring capital down, you'd expect that allowance would be coming down as well. So we're -- we think it's still a reasonably positive credit environment, and we don't see any signs that it's changing in the near term.

I was actually going to ask you if the allowance was going to be coming down, but it sounds like you beat me to it. Before we move on to a couple of other topics, we're 2 months into the quarter. We talked a little bit broadly about deposit repricing has been very, very successful. Any just updates in terms of broad expectations for the fourth quarter on what you're seeing? And anything to highlight in terms of business performance?

Yes. As I mentioned earlier, our teams have done a very good job of controlling deposit cost, deposit pricing. It's something that I see on a daily basis. And we finally have moved that aggregate number down below 3%, and the spot rate is there as well. And so it's -- we've had very good, what I would say, reverse betas with the cuts that we've seen in the third and early fourth quarter. And I think that trend ought to continue as we move into 2025. I think what you see is maybe just a margin, a tiny bit of margin compression in the fourth quarter, simply driven that loans reprice almost instantaneously. And deposits, while having 45%, 47%, 48%, 50% beta, it didn't reprice quite as quickly. So you might see a little bit of margin, but we ought to be -- compression, but we ought to be stabilizing as we transition into 2025.

Got you. Maybe to shift gears and talk a little bit about capital. You've been targeting this kind of 11%. You've been running a little bit above it in recent quarters. Slide shows a near-term target of 11%, but you're also saying 10.5% to 11%. So obviously the question of, what is it in the environment you're waiting to see, Bryan, to determine whether or not we're going to be at 11% or we could bring it down to 10.5% or somewhere in between?

Yes. I think we're very -- we very strongly believe that we're over-capitalized vis-à-vis through the cycle. And you might get a part of the cycle where we are at 10% CET1 or 10.5%. But we think at 11%, we have the room to bring it down. I don't -- that's a conversation we have with our Board, and we talk about it on a quarterly basis. And I don't know if that's early, middle, or late in 2025, but we think that given what we see in the economy, we will bring it down. If you think about the leverage that we have at our disposal is -- one is we hope to see organic growth, and as Hope mentioned, low single digits. We'd be thrilled with more than that. But realistically, we think it's low single digits. And then we have our buyback authorization and the ability to use share repurchase as a way to return capital to our shareholders. We authorized $1 billion share repurchase late in October at our Board meeting. And through this point in the quarter, I think we bought back something like 7.5 million shares, about $146 million worth of stock. And so we will continue to use that as a lever to get excess capital out of the organization. We think it's still an attractive value even with the post-election adjustment that happened with the industry vis-à-vis what we think we can do in terms of improving returns, the discounted value of the profitability that we will create, we think that stock buyback is still a good lever.

And when you said 7.5 million shares, I got nervous. Luckily, I remembered that the stock's right around $20, so I was able to do some quick math in the head -- in my head, but you were kind enough to do that for us. I guess, given the fact that you still think the stock is a good value, even as it's gone up, how do you think about use of the full $1 billion? And how do you think about toggling it between holding onto capital for loan growth versus buying back shares?

Well, I think we will clearly be opportunistic in the market. And we -- estimating where your CET1 is going to end up, this also requires you estimating what your loan growth is going to be and you sort of work in a simultaneous equation. But day in and day out, we're looking to target that. And to the extent we're not using it with loan growth, we will use it through buyback or some other option that allows us to create value for our shareholders.

A couple of last topics in the last 5 minutes or so that I wanted to dig into. So you laid out guidance of 2% to 4% expense growth. I know the bank has been investing in a handful of different initiatives, things like GL, treasury management, some that have been more backroom-oriented than a lot of revenue-producing initiatives. Can you maybe just talk about, as you think about the expense growth that you're putting out for next year, how do you think about what is more kind of maintenance-oriented, run the bank, versus where are you investing in frontline producing to drive top line growth?

Yes. If you think about the numbers we have there, that range of 2% to 4% represents a broad range of outcomes, as Hope mentioned earlier. So if you have fixed income business and counter -- mortgage business, countercyclical businesses, your expense growth will be driven much more by incentive compensation or variable compensation. In terms of investments in the business, it's flat to stabilizing in 2025. We had a surge of investment that we made really beginning in the back half of 2023. The bulk of it was made in 2024. And we should see the vast majority of that completed by the end of this year. I would say structurally, more and more of our expense dollars over time will be invested in technology and infrastructure investments that are really driven by evolving technology, product feature functionality, AI, things of that nature. And I don't expect those expense ranges to be 2% to 4%. But as Hope pointed out earlier in this conversation, we have the ability and a list of things that we can use to offset. And it's a really powerful tool set near term to keep what is, I think, a fairly modest level of expense growth in a world where inflation is still running somewhere north of 2%.

One thing I know we've talked a lot about in terms of investing and this just becoming a $100 billion bank, you'll get there at some point in time. Maybe just talk about how far along you are. And obviously, there's a lot of talk about -- I don't know if you want to call it deregulation or no finalization of regulation, but things like TLAC have been things you've spoken a lot about, Bryan. How does -- where are we in this and what are your expectations for some of these rules? And how does that impact your view of crossing that threshold?

Yes. We -- I'd start by saying we're not in any race to get to $100 billion. We're really focused on the natural organic growth rate of our balance sheet and our franchise, with an idea of driving the most profitable business. That said, we have made some investment in the infrastructure to be in LFI and the expense goals, plans, guidance we have for next year incorporates us making further investment in that regard. Partly because, one, it takes you a number of years to build out some of this infrastructure. And two, we don't want crossing $100 billion to be an event as much as just a continuation of being able to serve our customers and to do business. I do think that some of the big cost hurdles with crossing into LFI territory at $100 billion like TLAC are likely to be moderated from the proposals that are out there, whether it's 0 or some percentage between 0% and 6% TLAC. I think it's probably at the lower end of that range would be my guess, but I don't know. That will be decided. But we're going to continue to invest in preparedness. As Hope pointed out in our conversations earlier today, some of it's coming at us anyway because of the living wills and things like that have been pushed down to $50 billion banks. And I think that our regulators are expecting us to continue to invest in and demonstrate the infrastructure to be a well-managed organization. And as we all sit here and intuitively know, it doesn't really matter whether you're at $98 billion or at $102 billion. You've got to be well managed at both of those. So we'll continue to make some of those investments.

I had 2 more questions I wanted to get through in the last 2 or 3 minutes here. So Bryan, you have accepted TD's offer for a nice premium back in 2022. But obviously, they couldn't get regulatory approval. The market seems to be somewhat more upbeat on M&A into next year. Has the outcome of the election changed your views at all on M&A? If you were to consider, would you do within footprint? Would you ever consider expanding outside the footprint? What's sort of your latest views on that?

Yes. I'll start by being a little bit -- as we sit here today, M&A is not something that's a priority for us. And I'm not sure we have any better clarity to around who you're making an application to and what the regulatory approval process or time line looks like. That's one. Two is we believe very strongly in all these things that we've sort of laid out around revenue-driving activities or improvement in expense, and we'd rather focus on that. We think that there's a high degree of certainty that we can create value with those things, and it's probably more certain than anything in an M&A context. And thirdly, it's a distraction for teams and people, and so we're very focused on growing the business. Maybe that changes a year or 2, 3 from now. But right now, coupled with crossing the LFI threshold and the investments needed to make there, we think M&A is not a priority. The obvious thing that I haven't touched on is a TD-type opportunity. And the reality is we believe you have to manage the organization. We've been in 160 years. We believe you have to manage it like you're going to be here the next 160 years. And as we demonstrated with TD, our Board will be thoughtful. They will do what is in the best interest of our shareholders. And they will compare any potential opportunity with the kind of value that they believe that we can create as First Horizon operating in our markets. So if I summarize that to a phrase, it would be, we have to earn our right to be here, and that's what we set about to do every single day.

Well, Hope, we never got around to the reconciliation. But please join me in thanking Bryan and Hope for the presentation.

Thank you for having us.