All right. Up next, we have First Horizon. I'll get my usual disclosure out of the way. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we're delighted to have with us today Bryan Jordan, Chairman, President, and CEO of First Horizon. I also have with me Tammy LoCascio, COO of First Horizon. Thanks so much for joining us.
Thank you for having us. I feel bad I do not have a long disclosure to give.
We do it for you.
Thank you.
Bryan and Tammy, maybe a question to you both just on the broader strategy. We're a couple of years out post-termination of the TD merger, and you and your team have done a phenomenal job pivoting in a short period of time, making investments, growing the core business, bringing in new customers. What are the biggest strategic opportunities you see at First Horizon right now?
Yeah, we are very pleased with the progress that we've made over roughly the last two years. It is a fantastic footprint. It is a great team of bankers. The progress that they are making post-termination of the merger agreement has really been fantastic. As we look at the strategic opportunities, there's still a tremendous amount of value we think we can realize by bringing the two firms further together. For example, a year ago, we had close to 13 different go-to-market strategies in consumer banking, for example. We're pulling that together. We have one go-to-market strategy. We're working on doing a better job of understanding the opportunities and the way we deliver our commercial banking services, our specialty businesses. We see tremendous opportunity for us to focus on cross-sales and deeper penetration of the wealth and private client set into the traditional IBERIABANK markets.
We think over the next two or three years, this is an opportunity where we can add in excess of $100 million of pre-tax operating profit on our existing book of business. So we're very optimistic about the opportunity to add that $100 million or so and continue to improve our go-to-market strategy.
Part of enabling that go-to-market strategy is really making sure that we've got the infrastructure to be able to do that. So the technology and operations, as we continue to move forward, gives us a lot of positive momentum there. So really pleased that the work that we've gotten done over the last two years, as Bryan said, we've eliminated a lot of our tech debt. We really have moved into technology projects and work that is allowing us to focus on customer experiences and really enable the bankers to do a better job taking care of their clients.
Perfect. Bryan, maybe talking a little bit more about customer sentiment. I think in April, you said that many customers were not pessimistic, but they were in wait-and-see mode. Clearly, a lot has changed since then. We've got positive headlines even yesterday. What are you hearing from customers now?
I think customers are still very positive and attempting to lean forward. I think people are still trying to understand the short and the longer-term impact of these tariff and trade deal negotiations that are going on really all over the world. People are generally positive. Decisions have been and continue to be deferred, but I don't think they've been terminated. The economic growth and our footprint is still strong on a relative basis. And I'm very optimistic that when we get to greater clarity in the next two to three months around these trade agreements in particular and inflation, that we'll see a tremendous pickup of momentum in that southern footprint that we serve.
So is that what you need to see is the clarity on the tariff side? Is there anything more that customers are waiting for, maybe on taxes or anything else?
I think most people have assumed that with the Republican House and the Republican Congress and the Republican Trump administration, that taxes is largely going to be resolved. We're likely to know the resolution of that by July 4th before some of the other issues are resolved. I don't think that's a key determinant. It may be that it becomes that down the road, but right now, it feels like it's tariff, trade, supply chains, inflation, and ultimately, what's the direction of interest rates? Commercial real estate is a business that has been impacted by the higher rates, and very few deals are getting started today. As we look out, clarity about direction of rates and all those things would largely solve it.
Yes, I do want to double-click on each of those topics. But just broadly, given customers are deferring decisions, can you update us on what the lending environment is like and what trends you're seeing on loan growth?
Yeah, the lending environment is actually okay. Credit quality continues to look very good. We're pleased with the trends that we see in credit quality. I would expect our losses would sort of be in that, well, clearly, in my view, be in that range that we've laid out for the year. Loan growth through today is about where the H.8 data is, a little over 1% loan growth in the quarter. That tends to be even seasonal with our mortgage warehouse finance business, where balances will build up towards the back half of the month. Given all the uncertainty that I just described, I'm actually pretty encouraged about the level of loan growth that we're seeing across the franchise today. Again, it feels like an economy that's doing very well.
So when you think about the trends on the C&I side, if customers are deferring decisions, presumably, they're not making those big CapEx investments right now. But is there anything you're seeing in terms of a temporary rebuild on the inventory side from any of your clients?
We're seeing just a tiny bit. It's not a huge percentage of what we're seeing. If I took the loan growth that we're seeing today, mortgage warehouse lending is a more than minimal part of that. Commercial real estate, on the other hand, quarter to date was down $25 million or so, as deals are doing what you would expect them to do going into the permanent secondary finance markets. But C&I is one of the, it's positive, but it's not moving at a very rapid pace at this point.
For commercial real estate to start growing again, you noted it's being impacted by higher rates. Is that what you need to see? You need to see rates come down, or will some certainty in the environment help that business as well?
It'll help that business as well. Clearly, if you're going to build a building, you want to know what interest rates you're going to pay and how you're going to finance it. But you also need to know what are my raw materials going to cost me to build it, what does steel cost, and all of those elements. So certainty is always better. And I think deals will pencil out better when people can understand what are my financing costs and then greater clarity, whether it's with or without a tariff, what it's going to cost me to build the project. And I think that's something two, three, four months from now we're going to be a lot smarter about.
How do you feel about the low single-digit loan growth that you outlined for the year?
In terms of our guidance, we'll still be in that range.
All right. Perfect. Maybe pivoting over to the rate environment that you mentioned, we're seeing a lot of changes not just on the long end, but also on the short end. And there's a wide range of expectations as well around which way this can go. How do you think about managing the business through this changing interest rate environment?
I think one of the really key strengths of our balance sheet is that we have a tremendously interest rate-neutral balance sheet. Our net interest margin is asset-sensitive. And then we have our countercyclical businesses, which report to Tammy. But we have our mortgage warehouse lending business. We have our fixed income distribution business, FHM Financial. And we have a mortgage origination business. And they tend to be in countercyclical balance. And so we're much less impacted by rates going up or down than I'd say many of our peers are. And if you go back and pull our second quarter earnings deck, our slide materials, there's a really good graphic in there that sort of shows how they ebb and flow in opposite directions.
That said, when we lay out our expectations for the year in terms of financial guidance, we've put it in the context of total revenue to sort of take into account that these things are going to move in opposite directions. We still feel good about our outlook for the year. We use the Ford curve to update it. And we're not any smarter than the market in terms of where rates will go. I agree that there is a lot of uncertainty about how inflation will or will not impact what the FOMC does. But we feel good about that strong balance in our revenue sources.
Yeah, I think one aspect you didn't touch on from a countercyclical perspective is also your ability to drop deposit costs lower. You've had tremendous success in the first quarter. I think part of your NIM expansion story was dropping deposit rates down about 27 basis points. What tailwinds do you see for the net interest margin and net interest income?
I think in the near term, the tailwinds are going to be driven by the pickup in loan growth, the seasonality pickup in our mortgage warehouse finance business. The ability to continue to reduce deposit costs has somewhat abated. The market has gotten more competitive as we've gotten into the second quarter of this year. I would say if you look at our total deposit costs, where we've used more wholesale funding to fund up the mortgage warehouse finance business, you'd see a tick up of mid-single digits basis points in total deposit costs. Customer deposit costs will be up slightly, a couple, two or three basis points over the course of the quarter. So I think our team has done a really nice job of managing deposit costs. It's created a tremendous amount of stability. We still see a lot of competition.
And I don't mean it to be pejorative, but in my terms, very high rate offers in the marketplace. And they show up in our banking centers too, which is, "I have this opportunity or that." And I think our teams have done a really nice job managing that.
And why do you think it's getting more competitive? I know loan growth has still not picked up as much for the industry. But do you feel the banking industry is acting in advance of that loan growth improving?
I think it's a combination of things. One, I think it is just a progression of the transparency and the ability, transparency of rates and the ability to sit on your cell phone and not get out of your chair and move money around. So I think that's part of it. And I think too, it's new entrants into the marketplace and people who are investing in building out customer relationships. And it's a logical extension. If you're going to build a branch, you want to invite customers into that branch. The best way to do it is marketing a special deposit rate for some period of time.
And I think too, maybe the third element, if there is one, would be that with the relative expected stability in interest rates, it's easier to extend the term and put rate offers out there for not 90 days or 60 days, but you can go six months now. So I think the combination of all of those things. It never hurts to bring in new customer relationships.
So you touched on a good point. Rate is only one aspect of deposit competition. But you've also had a lot of success bringing in new customers and then also retaining them. So even if you bring them in with rate, you've had success retaining them. Can you talk a little bit about that?
Yeah, I'm really proud of the success we've had there. We have shown a lot of customer growth over the last two years. And if you look at just the last quarter or so, if you say, "What came off of a special rate and what has been your retention rate?" it's something like 95% of those customers that have been repriced. And that is, I think, a very good story about the way that our bankers build relationship and build connection with our customers over the opportunities we have to interact with them. And I'm really pleased with that. It's not to say, and I don't mean to say that we don't have special rate offers in the market. We have them in too. We have cash offers in the market from time to time on checking accounts. And so we're actively competing to grow that customer base.
The key being, we want to build customer relationships. Our bankers are doing an outstanding job doing that.
Perfect. Tammy, I want to bring you in here. You touched on technology investments. First Horizon has been making several, whether it's in the general ledger and the treasury management system. What strategic initiatives are being prioritized right now, and what outcomes do you expect from that?
Yeah. Well, the great news is over the last couple of years, we've been able to clear, as I said, a lot of the technology debt. So I know Hope is probably the only person who gets excited about a new general ledger system.
She's not here to brag about it.
And we censored a 25+ year-old treasury management system. So a lot of the systems consolidations that stacked up post coming together with Iberia is largely behind us. So it's given us the opportunity now to really focus on strategic opportunities that help enable better client relationships and client conversations. So we're doing a lot of movement of our platforms to the cloud, which gives us the opportunity to move much faster and iterate quicker. We're building a consumer digital platform so that we can own the customer experiences and the feature and functionalities that our clients tell us that they like.
So a lot of work going on around what I think we shared at one of our at our investor day, and Bryan has shared in earnings calls, is more things that change the bank, change it for the bankers, change it on behalf of the clients. And so spending a lot of time around that. Bryan mentioned private client. We're working on a new package of private client suite products. So things that are much more facing and enabling bankers and clients to interact with the bank in a different way.
So how do you balance this investment that you're making, these longer-term drivers versus expense discipline on day-to-day operating costs?
We talk about it every day. We're very disciplined in terms of how we think about investing. Obviously, we don't have an unlimited amount. So we're very thoughtful about that. We have what we call a strategic investment in board. Hope and I share that together. And we spend a lot of time focusing on the projects that come to the board and what type of returns that we get over the long term for that. The good news now is that a lot of the projects that we're seeing because of the advancement from a technology standpoint in cloud and AI and those types of things are honestly giving us kind of a win-win. We're seeing opportunities to become more efficient, but we're also seeing opportunities to change the business in a better way and enable additional revenue opportunities.
So we constantly talk about it and manage the projects that are in our portfolio to make sure we're maximizing the return relative to our overall company strategy.
And as you think about the macro environment, things are clearly going the right way. But say we got a few negative headlines over the next few months. What level of flexibility do you have on the expense side? Any projects you can defer out? Any flex there?
Yeah, I mean, we always talk about that. I mean, we have contingency plans in all of our project plans. So whether it's deferring it, whether it's not starting some new projects. But we feel good about where we are right now, certainly our expenses. Proud of where we are from that standpoint. So we always have levers that we pull. And we talk about those all the time in good times and in bad.
One of the things I think we've done a very nice job of doing for 15, 18, 20 years now is controlling expenses. And we've shown the ability in merger integration, in all sorts of cycles, the ability to control costs. And we went into this year with a plan that we were going to invest in our business. And I think Tammy and Hope have done an outstanding job chairing this strategic investment board, SIB as we refer to it, and continue to make the investments in the business. And I would be reluctant to take investment dollars and say, "That's where we're going to cut." I think there are other opportunities that would be less of a priority to us.
I think more than a year ago or five years ago or 10 years ago, your investments in technology, your ability to be at or just above table stakes is extraordinarily important. And some of the decisions that they have made, for example, to build a new online mobile banking system and invest in that where we can control the quality of the project, the delivery times, the customer experience, those things are key difference makers over the long term. And so we can control costs without pulling investment in the franchise too, I believe.
I had a question later on my list, but maybe I'll ask it here. Last Friday, Michelle Bowman laid out her priorities for bank regulation. And part of what she focused on was tailoring bank regulation to size. First Horizon is just north of $80 billion in assets, close to that $100 billion threshold that is currently in place for CAT 4 banks. How do you see First Horizon potentially benefiting from a different regulatory landscape?
I actually read Vice Chair Nal Bowman's comments. And I was encouraged, if not more than mildly. I think it is likely that tailoring will be a much greater part of the thought process at the Fed and probably the OCC. And I think that's very positive. I think there were some unnatural barriers building to crossing thresholds like $100 billion when you looked at the cost of total loss absorbing capital or TLAC, the cost of just the daily compliance activities. And I would say what used to look more like a cliff or a wall to get over, it's much smaller. It may not even be that big a bright line at the end of the day. So I came away from that very optimistic.
And I think what that permits us to do is to continue to grow on an organic basis without the significant shift up in our cost structure to manage through sort of a regulatory, what has historically been a bright line.
So it looks like there's some benefits on the expense side there as well.
I think so.
Perfect. Tammy, the other thing I wanted to talk about was the countercyclical businesses. You mentioned your mortgage warehouse, origination, fixed income. Talk a little bit more about the strategic value that those businesses create for you.
Yeah, I mean, certainly we've been in mortgage, mortgage warehouse, FHM Financial for a long time. We like the businesses. We like the income stream that it provides us through the cycle and certainly helps us, as Bryan said, smooth out our income stream over time. So in times like this year when things are our rates are higher for longer and we've got more uncertainty in the market, you see lower levels of ADR on the FHM Financial side. Those bounce around week to week. And so we continue to monitor those. We look for other ways to bring in revenue on the capital market side besides just the trading that they do. So lots of other ways that we're spending time with clients and bankers in that business. On the mortgage warehouse side, we're right in the middle of busy mortgage season.
We would have hoped for rates to be a little bit closer to 6%. I think if we get a little bit of rate relief, it will help mortgage pick up. But still very, very pleased with where we are with our mortgage warehouse business. We were intentional over the last 12 months to spend time looking for new clients in this business. And the team's done an amazing job getting new clients, new mortgage warehouse clients. And that has paid off for us. So we're pleased with where we are in the rate environment that we're given, so.
And this is more purchase mortgage activity than refis going on right now?
Yeah, not seeing a ton of refis. If we don't get any rate relief, you'll start to see some adjustable mortgages pick up in 2026 and have some opportunities there. But it's largely purchase money now.
Got it. And with higher rates, there's always a concern on credit overall. How do you think credit evolves given the current economic cycle? And the other piece is you're also building specialization in various industries. How does that contribute to the credit performance that you're seeing?
Yeah. You want to start?
You go.
I think you're seeing higher rates do what higher rates are supposed to do, which is to slow the economy. And it has an impact at the margin on borrowers. We're not seeing anything that appears to us to be systemic, whether it be geographic, whether it be collateral type, or whether it be line of business. So our outlook on credit continues to be very constructive. And we've been running in the mid to high teens in terms of credit losses. And we expect that's sort of likely to be the future's big extension of that. I'll caveat all that and say I don't know what the impact of inflation and tariffs and interest rates in the next six months are likely to be. But we're still very constructive in that regard. Our specialization in these businesses has been a tremendous benefit to us.
We have the ability to go very deep with our customer relationships. And if you take our restaurant franchise finance business, the leaders in that business are very well known across the industry. They speak at industry events. They have tremendous visibility. And so the ability to bring that expertise with a mid-sized regional banking balance sheet has been invaluable in terms of our ability to build relationships. Part of our credit culture is more than just how we underwrite and how we book and board loans. It really is we build long-term relationships with our customers. And that means, in my view, partnership where our senior credit decision makers are out in the field with their relationship manager, portfolio manager teams. They get to know their borrowers. They understand how they do business. And they develop an independent evaluation.
And that also means that our customers get to know us. And so that shared partnership, that shared culture is a long-term benefit to us, whether it's in straight C&I lending or in those specialty businesses like Tammy is leading today where we're really building deep, broad relationships.
We're getting great looks. I mean, we're getting and we've got a seat at the table. We're having lots of great client conversations. In times of volatility, it's the best time to get in front of your clients. And we have built those relationships, as Bryan said, over time. And those are paying off. So lots of good conversations. And our market-centric and deep specialty model really pays off now because we know what's going on in the markets that we're in.
Are there any specific industries that you're watching, any signs of stress anywhere?
The only sign of stress is slower absorption in some of the multifamily projects. They're in good markets and their projects that ultimately will be absorbed, but absorption rates have been slower, and rental rates have probably been slightly lower, but broadly speaking, that's the only thing that comes to mind on an immediate basis.
Got it.
Everything else just seems idiosyncratic.
Understood. Maybe pivoting over to returns. Bryan, you've mentioned before that your long-term 15+% ROTC targets include capital normalization and CT1 levels between like 10% and 10.5%. What does the process look like to move capital in that direction?
Yeah. Returns are very important to us. And we believe that we will maximize shareholder value by maximizing the returns on the capital we have deployed in the business. And very directly, we have the ability to disaggregate the organization. Hope and her team have built great models and tools where our line bankers can they can pull up and see their book of business and go very deep. So all of that is a big part of it. And so capital normalization is a factor of many things. But one, where do you have capital deployed? And are you getting paid for it? Two, it is at the top of the house. Where are you in an economic cycle and back to credit and uncertainty? Greater clarity and more certainty would be very beneficial. I would have thought that 2025 was the time to start having that conversation.
And then, not knowing where the tariffs and inflation are, I think it makes sense that our board takes up the issue and discusses it and lets some of this settle down. But I don't think it's. You probably measure it in years or quarters. It's not long term. We think we have the ability to manage the business on a lower capital base. Also getting to those returns, one more point on capital base. To the extent that, as Tammy suggested, if you get a 6% 10-year mortgage rate and refi activity picks up, pushing those capital ratios down, given that mortgage warehouse holds so much capital relative to the underlying mortgage, we're less sensitive to that fluctuation or ability. So it somewhat depends on the mix and makeup of the balance sheet. But in driving returns, it's partly about capital.
It's partly about normalization of credit from what we think are relatively low absolute levels of credit losses and a bit of a cycle. And then it's improving the profitability of our existing balance sheet. And the example I gave earlier in this conversation where we can drive more profitability out of existing relationships. So I think we have a pretty clear path that we're confident that we have the ability over the next two or three years to drive 15%+ returns.
Got it. And just to round out the conversation on capital there, so more clarity would get you to 10%- 10.5% CT1. Meanwhile, you're more focused at around 11%. Is that fair?
Yeah. Yeah.
And just given the volatility on the long end, that still keeps you close to the 11%?
I think it does for the short term. We're one of the few organizations our size, if any, that still does stress testing. So we take the Fed's stress test models and we run stress testing. That work is being completed. And we'll sit down at a board level and evaluate our stress testing. And then we'll continue to evaluate data points about the economy and tariffs and what that means in terms of the lack of a credit cycle or the fact that we might have a credit cycle and then make those decisions. With respect to stress testing, we always put that in an AK and file it publicly. So we lay that information out for our investors, whether they're fixed income or equity or otherwise.
Great. So I'll come to the audience in just a sec. But before that, I just wanted to talk about performance in general. In December, you put out a full year guide. I think it was revenues up 0%- 4%, expenses up 2%- 4%, and NCOs are 15 basis points- 25 basis points. How has the company's performance progressed compared to that guidance?
In December, we had an expectation for more interest rate cuts than we have today. And that's sort of the beauty of the balance of our model. Credit has been performing on the lower half of that range. But I would say in general, when you look at it on balance, we feel like we're sort of right down the middle of the road.
Got it. Tammy, you already spoke about the impact of the current rate environment on the mortgage warehouse business. As you think about the volatility in the bond markets, how does that impact the fixed income side?
Yeah. I mean, every day we look at ADR in terms of where we are. And certainly, there's volatility there when rates go down. The last time rates fell significantly, those countercyclical businesses generated $350 million-$400 million in PP&R for us. Obviously, we need some help in terms of interest rates for those to come back at that level. But we continue to watch it. We continue to look for other ways to drive revenue through those businesses during times when rates are higher.
Perfect. Are there any questions in the room? I have a couple more. One was on private credit. You spoke about competition on the deposit side. But also when you think about the loan side, there has been a share shift over the past few years. Can you talk about First Horizon's relationship with the private credit industry and where you partner and where you compete?
So private credit, I guess, a term of art. We compete more than we partner. We don't have a whole lot of direct exposure to that. We do lend in some of our specialty businesses into very experienced consumer finance companies. So broadly speaking, we see it on a competitive landscape. And we've seen it in a number of ways. Real estate projects go into the permanent markets faster than we thought it might happen. We see it at a transaction level where terms, duration, price, and structure can all be variables in those negotiations. So we see evidence of the changing landscape more every quarter than we did the last in terms of borrower relationships. I would say, is it something that causes us to stay awake at night? No. It's not at that scale today.
The credit and the profile of our portfolio is in many ways different than what private credit markets are doing, and our course of business has been very stable as a result of that.
Perfect. Maybe on the last topic, can you talk a little bit about how you think about the bank M&A environment in general? What do you need? What do you think we need to see for larger bank acquisitions to pick up?
I suspect back to my comments about Vice Chair Bowman's comments last week. I think the M&A environment is likely to pick up over the course of whether it's this year or next. I think it will pick up between now and at least the end of the Trump administration. I think that's healthy, and I think that's positive. In my view, a little more clarity about timelines and approval timelines is important, particularly given that you still have questions around what interest rate marks do over that period of time, most importantly, and then secondarily what credit marks do. Both of those are tied up in the uncertainty of how the tariffs and all of that play out, so I think a little more information about how credit, tariffs, and interest rate inflation are going to play out is important.
But my sense is that two, three, four months from now, we're going to be a lot smarter about the economic backdrop than we are today. And I feel like we're a lot smarter today about it than we were three months ago, two months ago, excuse me. And given that, I think M&A will pick up against that backdrop.
Right. Any final thoughts on what the market is missing on the First Horizon story?
I think over the course of the last couple of years, we've had the opportunity to speak with a lot of investors in different settings. I think the market understands our business. I think people clearly see the value of our Southern footprint and franchise. I think people understand the balance and the opportunity to improve that profitability in that franchise. So I think that story is getting out. I think we can create a lot of value for folks.
Perfect. Bryan, Tammy, thanks so much for joining us.
Thank you. Thanks for having us.