After a one-year hiatus, we're pleased to welcome back First Horizon at our conference. Been a busy year since reintroducing its strategy to the market. FHN has produced solid results across both lending and deposits, continues to maintain best-in-class capital. Here to tell us more about the story is, Chairman and Chief Executive Officer, Bryan Jordan, and CFO, Hope Dmuchowski. Bryan is going to walk us through several slides, and then we will have a fireside chat. Bryan?
Thank you. I will attempt to be fairly brief with these. I'll start with the forward-looking slide, and, and I'll actually pause longer on it today than I probably ever have in my entire career. There's a footnote on one of these slides somewhere that says we're using the forward curve, I think it's November 28 . This is the kind of environment where you got to put 3 A.M. or 8 A.M.'s curve - because we're moving that much. So everything is, is dimension based on how rapidly the market is moving, but we'll give you our best sense of where things are headed. I'm very optimistic about our business. I feel very, very good about the trajectory of the business.
We've been through an interesting year, maybe to understate what's happened over the course of really the last two years with respect to our business. But our people have hit the ground running hard. We're very, very well positioned. We've seen great customer engagement. We've seen great associate engagement and excitement, and we feel very optimistic about the outlook for our business, given a bit of an uncertain backdrop where the Fed is having its intended impact of slowing the economy. So we're very optimistic. You can see sort of the key drivers of our business, strong capital base with a little over 11% CET1 ratio. We feel very, very good about our associate retention and tenure, and then we've got some of the best footprint in the U.S. We serve the South.
We've got great markets that we serve, and our associates are doing a fantastic job of growing with these markets. In this slide four, we've laid out a little bit of information with respect to our outlook for 2024. I think this is where we actually have using the 3 p.m. curve on the 28th. We've, we believe, as we look out across the year, that we are going to grow PPNR in the course of 2024. In the past, we've talked, in fact, in our earnings release of the third quarter, I talked about operating leverage.
With rates coming down a little bit, I don't know whether it is, in fact, positive operating leverage if you focus exclusively on the overhead efficiency ratio, but I do feel very good about our ability to grow revenue at a faster rate than we grow expenses, thus driving positive PPNR results for 2024. We've talked a lot about the net interest margin over the last several months, and we have, I think, in a unique position. We coming out of the termination of the merger agreement, we hit the ground running. We raised about $6 billion in deposits, about 32,000 new-to-bank relationships, great customer activity. And in those results, we took a lot of the deposit beta out of our deposit cost.
In the last few months, we have been working on repricing that, and as a point in time, we have actually seen a slight drop in deposit costs. It's a mixture of a couple of things. One is, is these maturing specials are being repriced at slightly lower rates. And two, you're getting a little bit of a mix shift in that non-interest-bearing deposits continue to run down, and you see, a continued growth in interest-bearing deposits. I look at the balance sheet as you would expect on a daily basis, and if you look at our balance sheet today for the quarter, loans are down something like 1% or so, about $800 million-$900 million, and deposits are essentially flat. You have to keep in mind that these numbers can move $300 million-$500 million in a given day.
So essentially, the balance sheet will be flat. Deposit retention and deposit growth is still good. We're still seeing growth in our non-interest-bearing deposits. You see the drivers that we've enumerated here. Loan spreads are improving a little bit. We're not we think we've got the capital base to grow loans. We're not expecting a tremendous amount of loan growth over the next year or so, simply because the economy is slowing and fewer and fewer deals actually pencil out. But all in all, we think there are many more tailwinds to improving our margin, not only here in the fourth quarter, but over the course of 2024. We're focusing a lot on operating the business efficiently. We've got an expense guide here that shows somewhere in the 4%-6% range. It's really a multitude of factors impacting that.
Some of that is the one-time retention awards that we made in connection with the merger. Second is we're going to make somewhere between $75 million and $100 million of investments in technology and infrastructure. These are things that, at the end of the day, will position us in a very strong position. Some of it is deferred maintenance, where we're on release three of a system where we ought to be on release six, seven, whatever it happens to be. All of that will work its way into the expense base, but at a very core level, we're expecting to manage other costs at essentially flat to up just slightly. We expect wage costs will be up slightly in the 3.5% area for 2024.
But overall, we're very focused on controlling expenses and trying to invest in the business, at the same time, keep our cost structure under control. We've delivered on credit quality throughout a number of cycles. You can go all the way back to the great financial crisis and the work we did really from 2009 forward to reposition the portfolio. This gives you a multi-quarter, multi-year view of it. We obviously had the idiosyncratic loss in the third quarter of this year, but as we look at credit for the rest of this year, and really into 2024, we don't see a tremendous amount of deterioration.
While we haven't laid out sort of a range for it, I would expect that credit cost in 2024 will not look a whole lot different than it did in 2023 in the aggregate. I think credit continues to perform well. Borrowers are in a good position. We feel good about not only where we do business, but the approach we've had to diversification, borrower selection, terms, and structure of relationships. So we're fairly constructive on credit cost as we look forward. We have, as I said, a tremendous capital base. We're focused on using that capital base to drive shareholder value. We focus very much on return on tangible common equity.
We're still targeting in the 15%+ area, but we're running a little more tangible return CET1 today than we would run typically in a normal cycle. But as we look into 2024, it feels asymmetrical. There's probably less upside than there is downside in the economy. We will, as we get into 2024, work with our board and talk about the possibilities for capital return as opposed to allowing capital to continue to build. So in my view, it's probably a period in 2024 where we don't bring capital down very much, but we're not likely to let it grow a whole lot unless the outlook for the economy looks very, very different. So we think, working with the board, we will have the opportunity to evaluate capital repatriation through buyback.
We're in extraordinarily strong markets, and we feel very, very good about our ability to create shareholder value. So with that, I will stop, and Bryan will start the fireside chat without the fireside.
Tell you what, it feels like there's a fire in front of us, given the temperature in the room.
I know. Somebody put an extra log on it.
They wanted to make sure we didn't fall asleep. Bryan, so maybe to kick it off, so we're now seven months post, you know, termination, the TD deal. Maybe just broadly, how are things feeling at FHN? Are they back to normal, and are clients reengaging with the team?
Yeah, it was—it's really been an amazing time for me in the sense that I've had a very strong belief system about the engagement of our associates and the strength of the customer relationships that we have across our franchise. It has really been an amazing thing to watch, not only the strength of those relationships with customers, but the excitement and the engagement of our associates. And while it was an unexpected event in early May of this year, I'm really proud of not only the way our team landed on their feet, but the way they hit the ground running.
It was demonstrated in attracting $6 billion of new deposits in that time period in the second quarter, principally by getting out there and telling our story about First Horizon, that we're in the marketplace not only for the near term, but for the long term, and that commitment to customers and communities, and it's really shown a great deal of momentum. So our retention has been good, and I think we've got very strong momentum as we turn the year in a bit of an uncertain backdrop.
So, you know, despite an uncertain backdrop, you know, slide four showed expectations into 2024, which show NII growth, some fee growth and expenses which are, you know, better than the last time we spoke. You made reference that obviously interest rate expectations are moving around a lot. I believe you said you used the forward curve to derive this, but maybe just talk about how you think about the ranges that you've outlined today. What is driving the different movements? How are the different rate environments going to impact your ability to potentially generate positive operating leverage?
Sure. I'll start, and then Hope can clean up for me. We have used the forward curve. I think we did use the end of November. I think it's got implied in that forward curve, four rate cuts, pretty much over the course of 2024. So we've used that. I personally don't think the Fed cuts that much in 2024, but that's. We've got to use something, so that's what we've used. I would say, as we model the use that to model net interest income, we probably didn't flow that through to the same extent in our fee-oriented businesses, basically, the countercyclical businesses of mortgage and fixed income. So I think we've probably been a little bit conservative there.
All of that said, I think the way we look at the business, we think we've got a lot of levers on the margin. We don't think loan growth will be a significant driver. So we think we have the ability to drive pretty strong net interest margin, net interest income improvement next year. We think our fee businesses will continue to do well, and when you couple that with pretty strong expense control, we think there's pretty good opportunity to grow PPNR. To the extent that the margin comes in differently because rates are at a different point, you know, fewer rate cuts or more rate cuts. We think we have the ability to manage through that piece of it.
So I'm pretty optimistic when you take those ranges, that you know, you'll come up with a scenario that delivers a fair amount of shareholder value next year. I don't know what you'd add to that.
The only other thing I'd add is, you know, uniquely to us, a little bit, you know, after the TD story, is we did get to the top of our deposit beta. So part of our improving margin story is that we are gonna be able to walk back deposit costs. A lot of our peers are just starting to come up to where we are, and we, we've seen good success with that.
You both Bryan, Hope, you both referenced, you know, deposit costs. You know, I think they were 3.36 last quarter. They ended the quarter at 3.39. Bryan, you made reference in your prepared remarks that they're down a little bit. Do you think we've seen the peak for deposit costs for FHN? What is helping you bend the deposit curves, the repricing of the $6 billion, and what other levers do you have to drive deposit costs lower?
I think we probably have seen the peak, and I will stipulate before I go any further, that we're not playing solitaire. We're in a competitive marketplace, and there are a lot of dynamics at play. But it does feel like the deposit betas have sort of run their cycle and we've seen at least through three to four weeks of starting to reprice some of these specials that we've got the ability to price these at lower levels. And most importantly, we've had pretty good deposit growth this quarter at ... I think the number, if I remember right, in the $950 million area, and they're at significantly lower levels than we priced in the second quarter of this year.
So it feels like that has sort of worked its way through the cycle. And it also feels like, given the lack of aggregate loan demand in the economy, that competition has moderated its deposit pricing as well. So we think we've got the levers to moderate deposit cost, improve margin, and if I step back from that, I would say, "Look, we're not gonna put ourselves in a position where we're losing core relationships. We'll continue to be competitive in the way we price deposits. We want to protect our customer relationships." But given the liquidity in our balance sheet, we've got strong liquidity. We're holding, in our view, excess cash at the Fed.
We don't really have used any of our true wholesale sources of funds, like the Federal Home Loan Bank, et cetera. We've got strong liquidity, so we've got the flexibility to be dynamic and respond to customers, but at the same time, manage our balance sheet and our income statement.
Maybe to dig deeper, you talked about starting to see some renewals on the $6 billion of deposits that have come up. Maybe just talk about the repricing trends you've seen, and given the deposit growth you've seen, I'm assuming retention of these deposits has been pretty high. Can you maybe just talk to what you're seeing on the retention side?
Yeah, we've seen good retention so far. As Bryan said, we're only a few weeks into the majority of this repricing. But we mentioned right out of the gate, we didn't see this as transactional money. When, you know, we brought this in, in May and June, we said, "This is the opportunity to bring clients into First Horizon." We've been calling on these clients. We've been setting up appointments. We've been proactive with rate. We're not waiting for the rate to decrease on a statement, then have them call us. We're reaching out, we're talking to them, and we're, you know, currently at about 100 basis points less, is our existing deepening, you know, relationship. If they're willing to deepen it and bring more money, it's at 4.90, but we're also not losing relationships.
And so where we have to negotiate on rate, we're seeing that, and we're being, you know, front-footed on that and seeing the rate come down and retain balances. So we feel really good about where we're sitting right now, Bryan.
And where we're using promotional rates, excuse me, it chokes me up to talk about deposits. Where we're setting promotional rates, we're, you know, using three-month promos as opposed to six-month promos, so it gives you a lot more elasticity at the end of the day if rates start moving at a rapid pace.
So maybe to talk a little bit about loan growth, I know you mentioned a couple of times that, you know, loan growth is likely to be soft. Maybe just talk, Bryan, about what you're hearing from your clients. What is the sentiment like, and, you know, how are you thinking about loan growth into next year? Where are you really seeing the best opportunities?
Yeah, we think loan growth will be fairly soft next year. We will have some fund up of existing commitments, particularly in some of our commercial real estate relationships. I was with a great cross-section of customers last week in our South Central region, and I would characterize customer sentiment as still generally pretty positive. I didn't get the sense that people were completely pulled back. People were engaged. They're still forward-looking and looking at opportunities. But we clearly have seen loan pipelines diminish, and given what we look at through the balance sheet flows, it just feels like next year will be a slower opportunity. We think we're pretty well-positioned in that we're not overly concentrated in any one sector.
We think we have adequate capital, adequate liquidity that we can lean in for opportunities, but it does feel like customer activity has slowed some.
... And then, I guess, given that you've seen slowing, but you've also seen improvement in pricing, and given how competitive the market, maybe just speak to what is actually driving the improvement in pricing? I know you were expecting that we could see further improvement, given the slower loan growth into next year.
Yeah, I think you're seeing it industry-wide, and it's easiest to see when you have multi-bank deals, whether it's a syndication or a club deal. Everybody is looking for either better pricing or deposits or ancillary business. So those things are playing out across the industry. New to bank originations, we're seeing higher spreads than we saw a year ago. And on renewals, we're seeing, you know, somewhere in the 25-30 basis point improvement in the renewal activity that we're seeing. And I think, you know, what you're seeing is a natural progression in that the cost of deposits has gone up, and that's translating into a higher cost of borrowing. And our bankers have had pretty good success in managing through that. Again, we're not overly committed to dogma on it.
Mm-hmm.
We're trying to do what's right for the customer, with the idea that we're building long-term relationships and driving the profitability and the capital to be there for our customers for the long term.
You know, on slide five, you laid out a lot of the moving pieces on the margin, and based on, you know, your commentary regarding loan growth, it appears that the margin will likely have an upward bias to it over the next few quarters. Maybe just speak to some of the risks to that. So obviously, you know, deposit costs would be one, further mix shift. Maybe just talk about some of the assumptions that are underlying that and where there could be risks to it.
Yeah. The biggest one for us is really the forward curve. We are asset sensitive, so coming down quicker is not great for us. You know, higher for longer is better for our balance sheet. But as Bryan said, we're not playing solitaire, and so it's really the competitive market, where we've seen the competitive market for deposits really kind of come back to more normalized in the last quarter for, you know, three to four months, as banks have kind of seen their loan growth slow down. But you know, if competitors were to all start to increase their rates, we're going to have to match it to retain clients. I think that's one of our biggest risks that we can't control. On the loan spread side, we're being disciplined.
We're making sure that we're looking at the loans that we want to book, the client relationships we want to be in from both a credit and spread perspective. So, you know, for me, the two biggest are, you know, a decreasing rate environment sooner and quicker, and a competitive landscape changing on the deposit cost side from our peer group.
Maybe before we get into credit, you referenced in the slides the countercyclical businesses. Obviously, this has not been an easy operating environment for the fixed income or the mortgage businesses, given QT and the shape of the curve. Maybe just talk a little bit about what's baked into your expectations. It sounds like you took a conservative approach, and if we do start to see the forward curve come to fruition, as an example, in the capital markets business, how do you think performance could look different entering the year versus exiting?
Yeah, we think that fixed income and mortgage, given the forward curve, is likely to build across the year. It's interesting, I watch the fixed income business weekly, and average daily revenue last week was up, and, you know, it's moving all around. And as you see activity in the markets, particularly with the big backup in the long end of the yield curve last week, you had a fair amount of activity. So we think that it will likely pick up. The fixed income business, we think, is troughed, and it's break even, not profitable at the levels we have in round numbers. So we think we're sort of at the bottom, and we think that's largely true of the mortgage business.
But we have average daily revenue moving from that 300 area up a little bit over the course of next year. The way to think about the rule of thumb in fixed income is $100,000 a day in average daily revenue is, in round numbers, about $10 million a year in pre-tax. So if it moves from 300 to 400, you're talking about another $10 million in pre-tax. So I don't think it's going to be a huge driver of next year, but we expect there'll be some offset if rates decline significantly.
If the unthinkable were to happen and the Fed were to cut rates 100, 200, 300 based on something happening in the world or something in the economy, we think that'll be a nice countercyclical offset for that business, both mortgage and fixed income.
I guess, more near term before we move on to 2024, any near-term updates to expectations? I know you had put out guidance regarding, you know, you had full year guidance that had implied guidance, including a big uptick in expenses. Hope, any sort of updates in terms of how things have progressed across the fourth quarter?
Sure, Bryan. You know, as we were just talking, we think, you know, our NIM is continuing to improve. We troughed last quarter, and we do believe we know our margin will improve this quarter. On the expense side, we are going to come in a little bit on the lower side than our guidance. We're not seeing FHN come back, you know, as quickly as we had hoped when we gave guidance in June on the back half. When we gave it, when we gave our Investor Day guidance, we haven't moved off that, with the exception of our provision guidance. And FHN hasn't come back as quickly, and that's a highly commissioned business-
Yep.
... and so there's a little bit less expense. The second part is we announced that we were going to spend $100 million over three years in technology. It's taken us a little longer to get all those projects spun up than we thought. You know, we originally thought, "Hey, we say we're going to spend $100 million, everyone, we're going to be able to get this kind of all going in three, four, or five months." We're not, and so we haven't seen those costs come into the run rate this year, but they're accounted for in our 2024 forecast.
... Got it. Makes sense. So as you highlighted, you know, last quarter, credit was obviously impacted by the one-off charge-off. You know, I think you're talking about 25-35 for full year, and it's encouraging that you expect to be around that level next year. Just broadly speaking, how are you feeling about credit? Which portfolios are you the most focused on at this point?
I'm very constructive about credit so far, and as you would expect in a tightening set of financial conditions and economy slowing and rising rates, you would expect you're gonna see pockets that show up. That. This one we dealt with last quarter was truly idiosyncratic, not so much economic driven. We're seeing, you know, things slow down in isolated cases, but there's nothing that we sit there and say, we're concerned about this portfolio or that portfolio based on current trends. Classified, criticized assets have been largely pretty stable. And that's not to say that it won't change dramatically over the course of 2024 as rates continue to bite, but as we sit here today, there's nothing that seems particularly problematic.
We're like a lot of folks in that we're paying more attention to commercial real estate and things that are happening in certain sectors of the portfolio. In our deep dives, we go through a lot of deep dive activity and try to understand at a very granular level credits. At the end of the day, as of us sitting here in early December, it feels like credit quality will continue to hold up as we transition into 2024, and we're very constructive right now on the ability to sort of have a touch and go or soft landing.
Maybe just to dig a little bit more on it, the office portfolio, maybe just talk a little bit about what you're seeing in terms of renewals and restructurings, and how are you feeling about the multifamily book? We've had ample of southeastern banks talk about, you know, different parts of the Southeast, Raleigh, Austin-
Yeah.
... where they've seen oversupply and the like. Just curious what you guys are seeing there?
Yeah. I'll start with multifamily and work backwards. In, in the multifamily portfolio, we really have had very good results. There's a few projects that are leasing up more slowly than people anticipated, but they continue to look like they will be fine. And given the markets that they're in, large markets in the South, we're not overly worried about that given the structure that we have around it. But things have slowed down and leased up a little more slowly in, in a few places here and there. On the office side, office has continued to look pretty good from our perspective. We have really a bifurcated portfolio. A lot of our office is medical office, and that tends to be very different in terms of performance.
It's not return to work centric, and so that piece of the portfolio continues to work well. And, and broadly speaking, where we have office, business office, office business, that, that is a portfolio that tends to be, you know, 10 stories or less. It tends to have more of a suburban feel to it, and it's not as subject to being a 30-story building where you're not having, you know, a First Horizon or somebody return to office. So that portfolio continues to perform well also, and, and, we're paying a lot of attention to it. But so far, things feel good.
Bryan, maybe switching to capital, slide eight, I think there was five capital targets on there. Near term, 11, 10 to 10.5, over time, deploying above 10.5. Maybe just clarify for us, as we think about 2024, what do you expect to be the binding level of capital? And maybe just talk a little bit more, what do you need to see to get us from that 11% near-term target to the 10.5 intermediate-term target?
Are you suggesting there was a capital base that we didn't have covered?
So anything here?
Yeah, we have, as I said, an orientation towards returning excess capital and driving return on tangible common equity. CET1 is the easiest way to talk about it. And through the cycle, we think 11% CET1 is higher than we need to operate, given the risks in our portfolio and our balance sheet. And that sort of is proven out in some cases by the credit quality that we've showed, and you just look at the trend line in terms of net charge-off. We will bring that down. It just feels like it's an asymmetric world at this point, and that more capital is better than less if the economy goes bump in the night for some unexpected reason.
As I suggested, we'll talk with the board, we'll work with the board. You know, if it were me, you know, my view is we don't need to let capital build from 11%, but I don't think there's any urgency to bring it down. But given that the stock, in our view, is relative to price to tangible book or our expectations ability to create earnings, I think it's on sale. So if we have excess capital generation in 2024, there's a chance that we'll think about how we buy back some stock and return it in a flexible way that gives us the ability to adapt to changing financial conditions, but at the same time, doesn't accumulate excess capital that we can't deploy in the business.
You know, I think we could easily operate at the middle of that 10, 9.5-10.5 range. We could clearly be at that 10% through the cycle, CET1 ratio.
Maybe shift for a sec, talk about regulation. You know, the cost of being a $100 billion bank, I think you sized it at $50-$100. Maybe unpack a little bit what that includes, and help us understand a timeframe for you to prepare for that.
Yeah, I think, you know, based on just going, Hope and her team did a lot of work around what is the true cost of issuing TLAC or total loss-absorbing capital, if Basel III gets implemented in that fashion. What is the implications of all the reporting? And it's probably somewhere between $100-$150 million in all-in cost, is our view. Given the significance of that to what, you know, a logical estimate of our pre-tax earnings is, we're not gonna just stumble up against or meet that. We don't see it as a short-term barrier. We think that we've got, you know, just in natural growth in the balance sheet, we've got two or three, four years before it becomes an issue.
We also think we've got the ability to tread water fairly significantly for longer than that. So, we're not feeling any urgency in terms of ability to or having to deal with that in the near term. I do believe the FDIC proposal on, you know, banks over $50 billion have to have resolution planning. Some of that is embedded in that cost structure, so I suspect, given the regulatory nature of things, we'll start building in that cost gradually over time. But we're not feeling any urgency right now around the $100 billion threshold, other than just don't bump up against it and cross it.
So I know in the past you'd said it could be a couple of years before the industry sees M&A pick up, given balance sheet marks impact on capital. You know, you just noted that you're not gonna stumble up against this, and therefore, maybe you could consider another MOE. Maybe just flesh out your thoughts, and what would you look for in a partner? Would you look to expand outside the footprint or, you know, improve market density in the current footprint?
Well, I would start with, given our recent experiences with merger approval-accounting marks, I'd... it's not a great urgency for us. I would say that said, you know, if you're gonna do something, you've got to make sure that you have good cultural fit, and you've got to have the ability to continue to serve your customers in a consistent fashion, and not destroy a lot of value by putting together, essentially two organizations that merge like oil and water. So, it's not something we're spending any time on right now. Our focus is on doing the remedial, deferred maintenance things that we've talked about. It is operating our business and driving profitability.
Given that we don't have to get over that threshold in the near term, we've got a lot of time to see how the regulatory world plays out, both in terms of approval processes and what capital ratios and those things play out over time. So at this point, we think time is our friend, and we have optionality, and so we're focusing on our business and just operating that.
Maybe one last question from me. I asked you a similar question at the Investor Day. You know, obviously, PPNR growth would be a good start to achieving, you know, your ROTCE goals, you know, in the mid-teens. Can you maybe help us understand key drivers, and what do you think is a reasonable timeframe to getting back to, or what would the environment need to look like to get back to the mid-teens core returns?
Yeah. I, I think, you know, for every 0.5% or so we reduce the CET1 ratio, you add about 200 basis points to, to- if I've done the math right, Hope can check me, but at about 200 basis points to our ROTCE. And I think improving and stabilizing our margins and then being in a position to leverage the relationships we have more broadly over an improved product set over the next two or three years. I, I think you're looking at, you know, the end of this cycle and in the next couple of years, us approaching that mid-teens area. So I, I think it's in the next 24 months or so, we ought to be moving in that direction fairly significantly.
Great. Well, we are out of time, so please join me in thanking Bryan and Hope.
Thank you.