First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Great. More broadly, you've highlighted the success of hiring experienced bankers from larger institutions. How has that cohort progressed from recruitment production?

Yes. We've had some success. And I'd say pretty significant success hiring bankers across the footprint. And there are a number of reasons for that. There are a number of reasons for that. And we're encouraged by the folks that we're bringing into the organization. A lot of that has been in the last couple of years. And so we're starting to see portfolios move, and we're seeing progress in growing and broadening our penetration in some of these markets like in Atlanta. We've hired a lot of bankers in and around New Orleans, and we're seeing very good traction there and feel good about, one, our ability to continue to hire and, two, our ability to move customer relationship. The proposition that we present for a prospective banker and their customers is, the banker is going to walk into a customer's office with a great deal of confidence about what they can and cannot get done. It ties back to the framework that we laid out or discussed with Five Flags. And they know that they have a credit team that is closed that they can bring out, meet the customer. And so we're seeing that being an appealing proposition for bankers. And then customers that are really relationship oriented want to be served by a banker who knows what they can get done, and that has been very effective for us.

Along those lines, how has competition been evolving over the markets as we move through the year? Are you seeing more focus on funding and pricing or...

Yes. Well, competition by virtue of where we do business is always tough, and there's always a lot of investment going on in our footprint, new de novo branching, et cetera. So we're used to tough competition and good competition. But it's -- the market, I would say, deposit pricing has been more steady or stable in the last 2 or 3 months than it has been in the handful of months before that. It's -- I think growth has slowed down a little bit. And I think we're seeing competition be reasonably steady at this point.

As we sat here last year, we were expecting rate cuts. Now we're expecting rate hikes. Any updated thoughts to beta if we do get some hikes this week or later in the year?

Well, on the whole, we are -- we're an asset-sensitive balance sheet. And I say on the whole because through most of the cycle, we have our countercyclical businesses, which work in opposite direction. So if rates are going down, they do better. And if rates are going up, they do a little bit worse. Generally speaking, our net interest margin will benefit from rising rates. I would say that in some respects, if you take my comments earlier that mortgages slowed down in advance of the Fed raising short-term rates where most of our balance sheet is priced and the fact that the fixed income business has been very volatile, but at relatively low average daily revenues, then we've sort of incurred some of the offsets. So in short, I think our balance sheet will benefit more than it might otherwise would have if the Fed starts moving up short-term rates. If SOFR, for example, and the Fed funds rates move up where most of our balance sheet is tied, I think you'll start to see that benefit flow through in the -- really the fourth quarter if they raise rates this week.

Our commercial clients responding to the rate outlook? And are you seeing that be a major part of discussion on utilization or growth?

Well, clearly, the cost of funds affects any financial model. So our customers like anybody else, will look at what does it cost to fund a specific transaction, whether it's to build a building or whether that's to buy a company or put a piece of equipment in. So that has the effect. And ultimately, that's the intended impact that the Fed and the FOMC has when they raise rates is to slow things down. So customers are focusing on it. In the near term, we're not at a huge inflection point and the steepness of the yield curve has started to have people start talking about swaps and things of that nature. But generally, it's not the market doesn't seem to have reacted a whole lot in advance of the Fed starting to make these rate increases if that's what they ultimately do.

When you look at your customer base, commercial customer base, where do you think -- which industries appear most sensitive to you?

The interest rates, the first one is going to be our mortgage warehouse lending business, is going to be sensitive to what refi activity looks like. I think next most likely is going to be in commercial real estate lending, will the continued investment pencil out to build new projects? But I think, at least at this point, it doesn't feel like it's going to be a big shift in interest rates. It feels like customers are still expecting fairly modest increases over the next 12 to 18 months. I'd consider more fine-tuning than anything. .

You talked about and some of the pressure on ADRs there. Do you view broader regulatory capital relief is creating an opportunity for FHN Financial?

I think FHN Financial is an appropriately sized business. And we look at that business as really a business of matching up buyers and sellers. And so we're constantly looking at are there opportunities to put different products or put different tools in the toolbox for our teams. But ultimately, it's not a business where we're using a lot of balance sheet and really don't look to use more balance sheet than we do today simply because we want to go home at night is close to flat in terms of interest rate exposure. When we put a bond in inventory, if it's not sold in 30 days, we force it into the marketplace. So we're very disciplined about not running a trading portfolio in the sense of making proprietary bets. And so we have enough balance sheet that we can match up buyers and sellers. And I think that business is appropriately sized and then we'll look for opportunities to fill in the product set as they present themselves and the customer needs dictate, but it feels like we're in a pretty good place today.

And maybe shifting over to AI. That's a main theme for the industry and really across the economy. What [indiscernible] over the last year and how First Horizon is using AI across the organization?

Yes. I'm smiling because AI -- I mean, this week, we're in a debate about whether we ought to put guardrails around AI. The pace of acceleration is rather amazing. We have made a great deal of progress using artificial intelligence to improve process. And I think there are tremendous opportunities. If I back up to 40,000 feet and think about the opportunities for AI in our business, I think first and foremost, I think artificial intelligence is going to be somewhat, if not a significant, but somewhat of a leveler in financial services. I think it's going to make it much more affordable for an organization like First Horizon, which will be a fast follower in terms of investments in technology. It's going to make it much more affordable. In other words, narrow the moat between some of the huge investments that the largest banks are making in technology. So I think that's a positive. I think, it will improve our ability to get answers to customers quickly. We'll have much more ability to take a loan request from a customer and turn that around in hours, days, not weeks. So I think it's going to present workflow opportunities. It's going to present customer service opportunities. And ultimately, it's going to allow us to put more technology, better technology in front of our customers, in front of our bankers and really make us much more capable of staying table stakes at best with technology and investments. So when I look across that outlook, I think we're making -- the investments we're making today are proving out that thesis. And I think it's going to be an interesting 4, 5, 6 years as we really learn how to deploy artificial intelligence in a way that is most effective in driving towards the future.

Are there any use cases that have already moved from experimentation into production at the bank?

Yes. There are a number of use cases, and we've put AI research tools inside our firewall, we call it ChatFHN, but we've put that in everybody's hands. We put -- we came up with 100 different ideas and a little contest that we built internally. I guess it qualifies as some sort of hackathon, but people generated a number of ideas, and we put those into practice. We've now taken the ability to take a set of financial statements and tax returns from a customer and spread those financial statements and be in a position to start generating a credit memo from that. This is all stuff that can be done manually but we're making progress. And we still have a lot of human in the loop because it does require verification and testing. But you have human in the loop, if I were a junior analyst, spread in those financial statements. So I think we're seeing a lot of progress on new processes around commercial lending and serving customers better. And then we've been using it to generate software and code for the last several years, like, I imagine, everybody else. And that's cutting significant hours out of -- more than hours -- is cutting weeks out of software generation. And that's allowing us to do an awful lot more.

How are you managing governance and risk with AI?

Yes. That's one of the things that we spend a lot of time on. And we do a lot of model testing, and we spend a lot of time talking about how you monitor the outcomes, and I've mentioned human in the loop. Human in the loop is one of the control processes we still have to make sure that we're getting the right outcome, but we spend a lot of time talking about creating the testing that we think ultimately will give us the capabilities to ensure the accuracy of outcomes.

Maybe shifting a little more to capital. The capital backdrop appears increasingly favorable. How are you thinking about optimal capital levels today and some of the potential benefits from Basel III revisions?

Yes. So I think in the last couple of months, we put out that our estimate was something like risk-weighted asset adjustment, if Basel III was implemented as proposed. And since then, we put out our capital stress testing, which we still complete on an annual basis. We're always in the process of evaluating how we deploy capital, how we put that to work in the business. And we've been operating at sort of a 10.5% CET1 targeted ratio. We have allocated over the last 18 months of a tremendous amount of capital to stock repurchase or repatriation to the shareholders. And that's a constant discussion that we have with our Board, and we think about it as a management team. We clearly wanted to deploy an organic growth. We evaluate the other opportunities for evaluating how to deploy that capital. And ultimately, what is the right level of capitalization in the organization. And that's an ongoing process. And as the economy unfolds, the interest rate, things unfold, we'll continue to make those evaluations.

And when you look at that 10.5% CET level, that's obviously a lot higher than it was going into sort of COVID and for the industry, do you see that drifting lower over time? Or is that -- do you think a new -- longer-term?

Yes, yes. I think that we can clearly operate the business on capital ratio that's probably between that 10% and 10.5% CET1 ratio over the long term, and we'll find the right time to migrate in that range. I think one of the takeaways of the crisis of a few banks in 2023 is when people start running screens, there are all sorts of simplistic analysis, and it doesn't really factor in that a mortgage warehouse loan draws 100% capital, but a residential mortgage loan draws 50% capital, and those are the same underlying collateral. So we're going to manage those capital ratios based on what our stress testing, our bottoms-up analysis tell is that we need to be safe and sound, but we're also not going to get out of the pack and show up as an outlier on the screen. So among -- and all of that, we think we can operate the business at lower levels. And depending on the mix of the balance sheet, if you have a huge mortgage refi boom, if rates were to drop significantly over the next 2 years, would I feel comfortable with a lower CET1 ratio than even 10%? Yes, probably. But it is part of a dynamic process where we're constantly evaluating what is the right capitalization for that business for the risk we have in our existing balance sheet.

Great. We have a few minutes if there's any questions in the audience, happy to take them. Bryan, I guess as you look out over the next year to 1.5 years, where do you think the most potential upside to the story is coming from? And how should we, as analysts and investors, sort of score that to judge progress?

Yes. I think as I look at the next several years, I feel good about the progress that we're making staying focused or focusing the business on where we create value for our shareholders, driving improved profitability. We've seen the ability to improve our margins in the business. We have seen stability in those margins. And as I look at the $100 million of pretax profitability improvement, I think we're making good progress on that. And then you put all of that against the backdrop where we're doing business in essentially 12 Southern states that are some of the fastest and most dynamic growth markets in the country and I think having a significant ability to invest capital in high-growth markets all over that footprint to the extent we can hire bankers, acquire customers, I think we have the ability to drive tremendous profitability growth and ultimately improve our [ OTCEs ]. We're at [ 15-plus ] today, and I think that number can continue to be improved.

Great. Well, thanks very much. Thanks for joining us, and hope you have a great day.

Pleasure. Thanks for having me.