Great. I think we can get started. Thanks, everybody, for joining us. We're excited to continue the day with the team from First Horizon. We have Brian and Hope here. You know, Brian, maybe starting it off, for those new to your story, I guess, how would you describe what makes your franchise different?
Yeah, it's a really good way to think about our company. You've got the 160 up there. We turned 160 years old this past March, and if you look at our franchise today, it is, I think, a very unique franchise. It's headquartered in the South. We cover 12 southern states, from Florida to Arkansas, and from Virginia to Texas. We're in some of the best growth markets in the United States. We have fantastic growth demographics, household income, and I think we're extraordinarily well-positioned from a geographic standpoint. On top of that, we have an outstanding team of bankers who have a really unique ability to serve their customers through differentiation and really local decision-making.
We've started running a program or a new tagline on some of our ads that you may have seen on the internet, "Big bank muscle and small bank hustle." So we have the product set and the capabilities of a much larger institution. We have the ability to make decisions locally and differentiate for our customers in ways that competitors can't. So we look at that franchise, we look at that business model, and see tremendous opportunity to grow in and along with our customers and our communities. So we're pretty excited about when we look out for the next several years about what we can generate.
You know, the last few years have been an especially stressful time for the industry, and, you know, you've had your own specific challenges. As we look forward, what would you say your top priorities are for the bank?
Yeah, we've probably gone through more First Horizon-centric change. We spent two and a half to about a year and a half, two years integrating a merger of equals, and then we had a period where we were locked up in a merger transaction. And we've spent the last year, 15 months, really resetting the organization, and we've made a tremendous investments in systems and technologies, up to over $100 million. The technology deficit will largely be eliminated by early 2025. All of our projects are in flight, so I feel very good about that. You might want to ask Hope about her new general ledger system, for example, that she'll have in a few minutes. So I feel good about that.
I feel very, very good about the momentum our bankers have had in attracting and growing our customer base. We were very front-footed and forward-leaning last year when the merger terminated, and we were in a position where we grew a significant number of new-to-bank relationships. We've done a very good job of hanging on to those relationships and feel very good about the customer momentum. Then, over the course of the last year, we've identified what we believe are. It's a long list of blocking and tackling things, but we have at least in our minds a pretty clear path of how we take our roughly second quarter ROTCE of 12% and drive it back north over 15% over the course of the next couple of years, three years.
None of it feels overly heroic to us. So we think we've got a tremendous opportunity in an environment where the economy is likely to go through some sort of landing here and interest rates redirecting. We're very optimistic, very optimistic about what we see in terms of our ability with our existing franchise to create and enhance shareholder value.
You know, you mentioned your attractive markets. You know, what is your outlook for the broader Southeast market? And maybe touch a little bit on what client sentiment is like right now and what really needs to happen to-
Yeah
To improve that.
I would say my outlook for the South is still very, very constructive. If you look at the things that we're seeing in our existing borrower base, what we hear from customers, the South continues to do very, very well. We're seeing very strong credit quality continue. We feel very good about the performance of our portfolio. We're like everybody else in the sense that higher interest rates have an impact on borrowers, and that's ultimately the intent. But we're not seeing anything systemic in our portfolios today. Where we're seeing more trouble emerge is in those borrowers that just don't have the cash flow to cover the higher rates for longer. But all in all, you know, we gave some updated guidance or some guidance at the end of the second quarter and probably the same guidance we gave in January.
We still think portfolio is going to perform that way. And I think where we are benefits from the continued growth of population, people moving to the South. We're benefited by being in three states, at least, that are no income tax states, and they've attracted a lot of people and a lot of growth. You've got lots of reasons for people to be in that economy, and we think that economy will continue to do extraordinarily well over the next several years.
You know, there's a lot of competitors in your market, there's a lot of people targeting your markets. What are you finding you have to do to attract and retain deposit customers?
There is a lot of competition for customers in our footprint, and I would ask you to stipulate that no part of our country is really underbanked. I mean, we've got one of the most fragmented banking systems, so competition is high everywhere. It is particularly high, and we see a tremendous number of competitors reaching into these markets where they have small share and offering very high rates, and what we're seeing is that we continue to match higher than we would have expected rates in the marketplace. Our deposit cost is running a little bit higher than we anticipated, but our retention is great, and if you look at our balance sheet, at least through today, we're growing deposits in the quarter, so we feel good about the momentum we see in the balance sheet.
Anything you'd add to that?
You covered it well.
Maybe Hope, you know, what are your expectations around deposit beta as we start to see rate cuts? How quickly do you think the industry will be able to pass those lower rates on to clients?
Hopeful that we'll be able to pass a lot of it on in the first cut. Traditionally, what we've seen in past cycles is the consumer has gotten used to the higher for longer, and that first cut is so well-publicized, and you can't turn on a TV today without hearing about that first cut, so they're expecting it. For us, as an asset-sensitive bank, we have the ability to talk to our customers and say, "Your loan side went down fifty basis points or twenty-five basis points, and your deposit went down the same." I think it's going to be very aggressive. That being said, as Brian mentioned, you can't come to a conference like this and not hear somebody talk about growing in the Southeast.
And so how we will perform nationally versus how the Southeast will perform, we'll have to see. I think the Southeast is the most competitive market for loans and deposits in the U.S. right now, and there's nobody exiting, and every couple of months, we hear somebody new entering.
Yeah. Yeah, for sure. You know, on the topic of rate cuts, you've been in the camp expecting fewer cuts than I think, you know, the market overall is predicting. If we do get our first cut, you know, coming up, what do you think drives the Fed's magnitude and pace of cuts in the back half of this year and going into next?
Before we get into the modeling on that, I want to make a really key point. We manage our balance sheet from an asset-sensitive perspective, and we have always done that and likely to always try to be asset sensitive. Given that rates can go to any to infinity, you want to be in an asset-sensitive position. What counterbalances that, and I know as people start looking at what the Fed may or might do and how much they might cut rates in the back half of this year, in 2025, people often lose sight of the fact that on a pre-tax income basis, because of our countercyclical businesses, our mortgage warehouse lending business, our mortgage business, our fixed income business, we are much more neutral.
We put a slide on the website this morning that sort of demonstrated the mix of fee income across various rate cycles, the lows of 2020, 2021, 2022. What you see is when rates go down, spread income starts to compress in our balance sheet. Our fee income businesses pick up. As you start trying to model our net interest margin, our fee income businesses are already starting to kick in, and we're starting to already see the benefit of expected Fed rate cuts. You have to think about our businesses being much steadier through all cycles, up and down, because when rates go up with an asset-sensitive balance sheet, we won't run up as much because the fixed income business will get softer and vice versa.
You said it well.
You know, when you, when you look at the fixed income business, you had some variability in average daily revenue over the past, you know, few years. You've done a lot of work on the expense side there. You know, how is that sort of running? What's your expectation for where, you know, you think that business can scale, and how has the profitability of that product line changed over the last few years?
We saw in Q1 a good pickup in our FHN Financial bond business ahead of an expected rate cut in June at that time. If you remember back then, there was a 90% likelihood, and so we announced a strong Q1, brought up fee income guidance as a result. Q2 kind of came down slightly as it became uncertain what the rate market would be, and as we're getting more certainty and there's an expected rate cut to happen in September, we're starting to see that business pick up. And so it is countercyclical in that in this cycle, it's really picking up ahead of when they think that first rate cut will happen. Not meaningfully compared to what we saw in 2020 and 2021, but as Brian says, a really great counter to our NII side that has downside sensitivity.
Yeah. You know, I guess, looking at the demand side of lending with lower rates, where do you think you have to see rates fall to before that really stimulates additional client demand?
We heard a story today of somebody that locked in a loan in May, and their banker has already called them and asked them if they want to refinance in September, down 125 to 150 basis points. So I think, there's positive momentum in any cut cycle, and so I think we'll start to see some pickup with the first cut, especially if it is as large as 50. And the quicker that we see that rate start to come down to that terminal rate, we'll see mortgages pick back up.
... We're seeing customers still, though, well-structured deals, strong financial borrowers are-- they're still penciling out deals at work. There just aren't as many of them in the market. I think as you start to see rates moving down, people will get more confident with more deals. Given that the vast majority of our lending is structured on the short end of the curve, tends to be floating rate in nature, I expect it's going to happen a little bit sooner.
Once people get confident that we're not going into a recession, that the Fed is able to pull off a soft landing or something close to a soft landing, I think people will start leaning in at a much earlier phase, simply because the consumer still looks reasonably strong relative to what's gone on over the course of the last three or four years in terms of inflation and high rates.
Great. We have a few questions for the audience, with your BlackBerry devices in front of you there. And then we'll open it up for some Q&A as well. You know, so for the first question: What's your current position in the shares of First Horizon? Overweight, market weight, underweight, or not involved? We'll give a few seconds to lock those in. All right, let's see. So it looks, you know, like a room with some opportunity in it. Over half of the people are currently involved, with 35% overweight or long. You know, it feels like that's a little bit of the sentiment with a lot of midcap banks. We're starting to get more people looking at it, and that's a good sign.
Yeah.
Question two: How many basis points and rate cuts do we need to see for commercial loan demand to be impacted by the Fed? Twenty-five basis points, fifty, a hundred, or a hundred and fifty basis points or more? Just so we can see what the audience thinks. So a hundred basis points at the most and 26% think a hundred and fifty or more. It seems like, you know, what we've been hearing from Simon. I mean, you think that it really holds back growth until we see that hundred basis points or
I think you'll. Look, every generalization is wrong when it comes to what borrowers are going to do. But I think once it starts going in the right direction, and I think people get confident that we're not going to have a severe recession, particularly a severe recession, I think borrowers will start leaning back in. Whether it's fifty or a hundred, I'm not sure, but I think it will build as opposed to it be a cliff action.
Third question: Where will CD promo rates be by mid-2025? Less than 4%, 4%-4.5%, 4.5%-5%, or greater than 5%? Okay, answer.
We need term on that, and like, run through all our scenarios. We're running every version of what we'll put out for CD promo rates after this first rate cut finally comes.
All right, let's see. So a lot of below 4%, and then a lot 4%-4.5%. So, you know, and I think to your point, you know, that term is important. You know, most of the banks have been really shortening the term as we've gone through the last few quarters.
It's fairly anomalous for us to have CD promo rates. We put them in place last summer, as we came out of the merger termination and gathered quite a bit of customer activity there. But historically speaking, we don't compete very heavily in the CD market at all. So I would have guessed Hope would have said, well, less than 4%.
Then our final question: Which would have the most impact on improving First Horizon's valuation? Above-peer loan growth, better relative margin performance, stronger fee growth, better expense control, credit quality outperformance, more active share repurchase, or an accretive bank acquisition. Give that a few seconds to...
I'm glad you're asking the audience all the hard questions.
Yeah, well, you know, then we're going to shift it back.
You might have had A, many of the above.
All right, let's see, where we are. So better relative margin performance. So, you know, blocking and tackling, you know, day-to-day, day-to-day banking, another 20% between, capital management and, loan growth. So, you know, interesting, interesting view.
I think it's interesting, expense control is zero. That's historically in banking been the go-to level.
Yeah. Yeah.
Yeah.
Let's see. Any questions in the audience before we get back to the Q&A? I'm sure there's somebody out here with a question. No? While we're waiting, you know, to the point on expense control, you're one of the banks that, through organic growth, is likely to cross $100 billion before many others. How are you positioned? What's in the expense run right now? You had mentioned some systems investments. What can we expect as you continue to approach that $100 billion?
Yeah, I think I've talked about this fairly publicly in the past, very publicly. We estimate the cost of just crossing the $100 billion threshold, plus anything that happens with TLAC, somewhere between $25 million and $50 million. And we have been doing a lot of work over the course of really the last 15, 16 months, evaluating what is the cost of going across, and then, more particularly, what do we have to do to be prepared? I think that, coupled with our knowledge of it and planning for it. That, coupled with our belief that from a regulatory perspective, and given the events that happened in the spring of 2023 with institutions that had recently crossed 200 billion.
My sense is the closer you get to $100 billion, the more the regulators are going to help give you support to be prepared, so as we think about that, it would be summarized as we think those costs start getting layered in fairly soon, over the next year or two, and where we might have been in a position where we might sort of lag or tread water in terms of balance sheet growth, if you're going to start incurring the cost of starting, let's not worry about whether you get to $100 billion or not, we'll allow the organic growth to take us there, so we'll start layering in some of those expenses. Not that $25 million or $50 million is insignificant, it's a tremendous amount of money.
But if we layer in the asset growth and use this great economy we're in to create profitable value-oriented relationships, then we can cover those costs, and I think we can get there. I'm pretty confident in the work that has been done to date. We have a pretty good view of what's required. We've got to build out the capabilities, but I'm confident that we'll be able to get to $100 billion and manage through that sometime. I don't know what the math says, whether it's in two years or five years, but we'll start letting the asset growth take its natural course to offset the expenses.
Yeah, I don't think anybody wants to be a $101 billion bank. You know, once you get to that point, would you be more apt to be looking at doing a deal to try to help spread that cost over the bigger asset base?
I would stipulate first that size doesn't seem to solve the problem. So, you know, if you listen to any of the Category II, III, IV banks, a lot of them think more size is beneficial. So I don't think you can solve many problems with M&A. Recent experience tells us, one, there's uncertainty around it. The accounting marks don't work particularly well as they exist today. And in our experience, it takes a fair amount of time to work through the integration processes. And so our objective, as much as possible, is to grow organically.
If you have to have all the infrastructure in at $101 billion, and the next threshold is 250, it does benefit you to spread it over a larger customer base, but there is a cost to trying to do it in organic fashion. And so that doesn't mean opportunities won't come up. It does not mean that we wouldn't take advantage of opportunities if they do come up. But it's not an objective to go out and say, "Well, let's just grow through acquisition," because size, in and of itself, doesn't solve the problems of really trying to spread your cost base. The cost base of being $100 billion, $101 billion, is the same cost base you want to spread with your investments on your online mobile system and your Hope's new general ledger system.
All of that gets spread better if you have a bigger balance sheet, but you can't solve it with just size. You've got to have the right competitive dynamic.
Yeah, you mentioned the GL investment. What other sort of specific tech investments do you have on deck or and maybe any update on how those have more spec- have-
We got Hope choked up talking about her general ledger system.
Excited about it.
We've invested in a number of our customer-facing systems, and some of our back office. We've invested heavily in infrastructure that was old and dated, ledger system being one of them. We've invested in our treasury management capabilities, and we're still wrapping up the complete integration, going from two to one treasury system. We're investing in our online mobile systems, and I think we will continue to invest in that product, that we'll invest in building out our digital capabilities. So we're investing broadly. At one point, we had over a hundred major projects to start, or sixty major projects to start, probably a couple hundred smaller projects. All of those projects are in flight right now, at least the first sixty or seventy, and we're making very good progress on them.
Great. Yeah, maybe on going back to the growth, are there any specific areas, whether it's geographies or business segments, that you're looking to lean into here? You know, especially you look at CRE, you have relatively low concentration compared to a lot of your peers. How should we be thinking about maybe the location of growth as we go forward?
Yeah. We have a tremendous regard for our specialty lines of businesses, and I think we'll take some that we have had bundled up in existing specialty businesses, like our asset-based lending business, and maybe spread that out into two businesses. We're looking to grow our franchise finance business. We actually took Tan Ong, who was leading that business, and he will become our chief credit officer officially on October the 1st, but he's essentially been in that role for the last three months or so. We replaced him and to really lead our restaurant franchise business, continue to grow that. So we'll continue to invest in those businesses. We feel good about our ability to invest in our geographic franchise.
We're doing a tremendous amount of work in Hope's organization to not only decide where, but start to build out our branch infrastructure across the footprint, so we think that the business has changed, and I would tell you that if I was sitting here two years ago, I would've said commercial middle market lending and in and around our specialty businesses, commercial middle market lending, private client wealth management, and then our countercyclical businesses all being very important. I would add to that our retail business today, given the changes that occurred in the spring of 2023, is much more of an emphasis to us, and we will continue to place heavier and heavier emphasis there.
Not to avoid the question on commercial real estate, we feel very good about our commercial real estate portfolio. We have partnerships that go back, you know, ninety years or so in that space, and we still see a good flow of activity. We have always had portfolio limits that we maintain in that business, and we will continue to do that. We do not want to be outsized in any one portfolio. Commercial real estate, when you look at our ability to generate those assets in our market and in our professional career space, we feel like we've got adequate balance sheet allocated, easy for me to say, adequate balance sheet allocated to that portfolio, and we'll continue to see very good deal flow there.
Great. Let me ask you if anyone has any questions as we've moved forward a little further? No. Maybe we shift to credit. You know, credit has been an area of concern as we've gone through the last few years. Rising rates, I mean, credit performance has been, I think, you know, generally better than the marketed fear as we, you know, when we started entering the rate environment. What's your outlook on the ability for borrowers to successfully navigate, you know, this environment from here?
I'm still very optimistic. I think borrowers have done a very good job. I alluded to earlier, you know, the, and anytime you have a sustained period of high inflation and higher interest rates, you know, five and three-eighths is not high by historical norms, but what we've become accustomed to over the last 20 years, maybe, or 18 years. But you start to see softness or weakness in borrowers that tend to be a little more stretched financially, don't have as good operating margins. But all in all, we've been very pleasantly pleased in what we've seen in terms of borrower performance and ability to adapt to all of the above, and whether it's, you know, right-sizing commercial real estate projects or putting in additional capital, working with us, we've been very successful.
So I'm fairly confident that borrowers will do a very good job of navigating through this environment. And I'm, as I said at the top, very, very encouraged by what we've seen to date in credit performance, and my outlook is still generally very constructive.
You know, loss content overall has been relatively low. Did you notice, was there a significant impact from any of the accommodations that were put in place during COVID with some of the borrowers that were stressed, you know, going into COVID and the work you did with them? How, how helpful were those accommodations?
I'd say on the whole, whether it's a consumer or a commercial borrower, all of the accommodations, and it's amazing what $7 trillion of cash will fix. It did help borrowers in any number of ways and allowed the economy to sort of get back on its feet in fairly short order and continue to move forward. I don't know how to estimate how much of that was offset by higher inflation that came from all that additional cash in the system. Clearly, I think that the steps that were taken at that time had the effect of getting the economy back up and running at a fairly high level, fairly quickly, and borrowers did benefit from that.
Do you think we need to still see significant levels of deal restructuring from here for some of the more troubled portfolios in the industry, like office or other components of CRE?
... You know, our office portfolio is different enough from others. I don't know that I could generalize across the industry. We don't tend to do very much city center type lending. What we do is mostly suburban, you know, eight to 10 stories at the very high end. We have a lot of medical office, and so when you look at office in our portfolio, it's hard to take that and extrapolate across what other office portfolios may look like. That portfolio has continued to perform very well. Medical office, by definition, almost, has it has very low rounding to zero kind of occupancy vacancy numbers, and suburban offices seeming to do better than city center and high-rise type lending. So, again, we're pleased with that portfolio.
You know, Hope, maybe a question on the margin since you're up here with us. You know, if we saw something like a 50 basis point cut versus 25, can you just sort of walk through some of the dynamics of how that may change, you know, some of the calculus for margin in the near term or NII in the near term for you?
Yeah, I think it depends on whether it's 25 and 50 in September or in December, right? So the timing of the cuts and the pace of the cuts in the back half of the year have a big impact. But on just margin, you know, we believe we have a great opportunity to be able to walk back the promo pricing we have for new clients, as well as retention pricing that we have. And so we're gonna really target a high beta for coming out of that first cut. And as we gave new guidance last quarter on our earnings call, would've loved to have matched the higher fee income with the lower NII, but different environments in Q1 and Q2 on the forward curve. We feel confident that we're gonna hit the guidance we've given in the back half this year.
Could it be a little bit, one-sided on NII and higher on fee income? Yes, but we've run two, three at least scenarios in the last thirty days and feel confident about our revenue in the back half of the year.
Great. Yeah, maybe shifting to capital. You know, as we've come through the last few years, the industry has held increasingly higher levels of capital. At what point do you feel that capital could start to retrench, you know, beyond the elevated CET1 that we've seen for the last few years?
Yeah, we've been actively buying back shares all year. We have a authorization of $650 million. We're a little bit more than halfway through that in the first half of the year. With the uncertainty around TLAC, Basel III, you know, possibly getting through the $100 billion line in the next couple of years, we're gonna be a little bit more conservative than we've been in the past. So 11% is our goal this year. Sometime later this year, we'll give a goal for next year. But longer term, I think the environment has completely shifted. We used to say, three, four years ago, 9% to 9.5% was our target, and now Brian has very publicly said that long-term capital is probably 10% to 10.5% for us.
In terms of components of capital, how flexible are you in terms of, you know, how you structure that capital stack?
For today or as we grow?
Oh, I guess as we look out over the next, you know, year, two years.
Yeah, we tend to run a small securities portfolio as a percentage of our total asset size of our bank. We did start repurchasing some again, this last quarter. We talked about it, but I don't see any major changes for us. I know there's been a lot of talk about asset sales and restructuring the balance sheet or capital that way, but we don't see any reason at this time to take a one-time loss in order to prop it up in the near term.
Look, our capital stack is very heavily weighted towards common, and you know, maybe there are better tools that come along, they're just... Today, it's not clear what they are. You know, in terms of what regulations may occur, you know, today, it doesn't look like the TLAC rules take account for the fact that you have more than the minimum in common, so you may see some arbitrage games that get played there. But you know, as Hope said, holding capital today with the uncertainty that still exists in terms of what rates do, and more particularly, what is their cost to the economy, the borrower, and potential recession, we'll be a little bit more conservative as we wrap up this year and go into 2025.
But over time, we think we've got the ability to bring that capital down and prefer to do it through organic growth. But as Hope noted, we've been buying back some stock during the course of this year, and so we'll be opportunistic if we don't have organic places to put it to return the capital to shareholders.
Great. Well, we're close to the end, and I don't see any questions from the audience. But maybe you could wrap it up just a few minutes early, but thanks very much.
Thank you for the time, and thanks, everybody for joining us.
Thank you for having us.