Good afternoon, everybody. Thanks for joining us. We're excited to have First Horizon Corporation here, an $82 billion bank headquartered in Memphis, Tennessee. We're joined by Bryan Jordan, the Chairman, President, and CEO, and Hope Dmuchowski, the Chief Financial Officer. Thanks a lot for being here today.
Thank you for having us.
I guess maybe just to start it off, just a quick update on how things are going so far in the quarter, maybe an update on characterizing the current sentiment in the footprint, especially after some of the more recent economic developments.
Yes, I think, as we mentioned in the second quarter, we were seeing a general trend line upward. There is more activity. Clearly, I think people have gotten more confident with the tariffs and how they play out in broader terms from an economic perspective and the ability to do business, etc. I'd say, generally speaking, the economy is doing reasonably well. Our footprint is enviable in the sense that it's in a very good, high-growth, favorable labor tax portion of the country, and we're seeing that play out on a day-to-day basis.
You know, there's been a lot of news in your geography over the last month or so. Can you talk through the competitive landscape in your markets and how you see that potentially migrating and changing?
The competitive landscape in the footprint where we have in the South has always been competitive, and I think it will always be competitive, just given the dynamics of the growth dynamics, the household income, tax, labor, etc. While there are some changes going on in terms of consolidation that's been announced, I think in the near term, we think it will continue to be competitive. We don't see anything that changes that. I think we'll see more investment from other banking institutions in other parts of the country. You've seen a fair amount of branch building across the South from super regional competitors and that kind of thing. I think the competitive landscape is no less today.
It's going to be an environment that is going to create plenty of opportunity, and we feel very well positioned to capitalize on the opportunities in that footprint and think we can drive a lot of shareholder value with it.
How is that playing out in terms of pricing on deposits and loans? Are you seeing aggressive pricing, or is it on terms and conditions? Where is that coming through?
Yeah, there are pockets of aggressive pricing. Some of it is in very small institutions. Some of it is in people who are trying to build a foothold in the marketplace. I would say on the whole, deposit pricing competition is much like we ended the second quarter, and you won't see a lot of change in the third quarter. It's relatively stable at this point. We're in an environment where the deposit base continues to contract, and we're seeing the competitive dynamics around that as the Fed shrinks its balance sheet, continue to hold those deposit costs up. The Fed will do whatever it does this month. I think the market consensus is near unanimous that we'll see a rate cut, and then things will be in motion again, but it's been pretty steady.
What would you say, you know, how is First Horizon differentiating itself from peers when it's going to market and speaking to potential clients?
Our differentiating factor is and has been, is, and probably always will be that we compete with a big bank balance sheet, and that means products and capabilities, the ability to meet needs across the broader financial spectrum. At the same time, we do it with a community bank look and feel. We really do believe, as part of our DNA, that our decision-making needs to be close to the customer. We have leadership that is in the marketplace that knows customers, knows those customers well. We bring all of our lines of business together under that umbrella. That does not mean they all report in that umbrella, but they all work together. In team meetings and management meetings, people are together.
That shows up as building broad, deep, long-term relationships that we try to bring all of the capabilities of the organization to meet customer needs and do it in a way that adds a win-win situation for our customer.
Great. You know, you've been highlighting the $100 million plus PPNR opportunity and a 15% plus ROTCE target over the next two or three years. What are some of the initiatives that are driving that opportunity and that outlook?
Yeah, I'll start, and then Hope can help me. I'll start by saying that when we talked about originally in the second quarter of the $100 million plus opportunity, I probably didn't put enough emphasis on $100 million plus. I think, you know, it's $100 million, and I think there's some room for upside on that. This is a revenue-focused exercise. There's very, very little of any of it that is expense-oriented.
It is blocking and tackling and execution, and it's, I would say, the residual opportunity that exists because of bringing Iberia and First Horizon together in our MOE, having, you know, the interlude that we had. There are just opportunities to do a better job with revenue recognition in terms of discounting Treasury products and services, cross-selling private client banking, taking loan-only products, and bringing either it's wealth management or Treasury management or 401(k), whatever it happens to be. If you looked at this list of opportunities, it's lots of little things, and I don't mean to understate for anybody. Our people work really, really hard, and it's going to take a lot of work. Over the next two to three years and thousands of little actions, we can see a path to creating $100 million plus in additional profitability out of our existing business.
The work that we're doing to date gives us a sense that that is actually taking place. We're seeing it in everything from doing a better job the way we price yields on commercial real estate lending in our markets to doing a better job of collecting Treasury fees and services for the work that we're providing.
You know, in addition to everything Bryan said, one of the things that we've been doing and always have done, but we've really kind of increased in the last two years, is we have our specialty verticals, and we've partnered those with a regional bank. If you're doing an in-market CRE deal now, one of our pro-CRE market lenders is there, our credit analyst, and they're saying, you're meeting with two or three people that understand the CRE industry. You're meeting with a regional banker that understands your local market. We've seen in that particular example in our CRE book, we've seen an expansion of what we're able to get at renewal, whether it's a better spread or deeper relationships. Bringing the whole bank to them, not just the banker that says, "Yes or no, we're going to renew this loan," has really made a huge difference for us.
We're continuing to see those proof points over and over again as we're partnering those bankers together.
Yeah, we're going to have to figure out a way to talk about it because it's not $100 million incrementally perpetually. There's some starting point in there, and we've got to figure out the way to talk about it. We are starting to see those gains, and they will ramp over time. We think there's a really clear path to creating a fair amount, not a significant amount, of shareholder value.
Great. Let's turn to the audience with a few response questions. I think we have four or five of them here. First, what's your current position in First Horizon shares? Number one, long; number two, equal weight; number three, underweight or short; or four, not involved? Oh, yeah, quite a few owners in the room and quite a few potential owners in the room.
Yeah, I'm number one.
All right, our second question, which would have the largest impact on improving the relative valuation of shares of First Horizon? One, better relative margin performance. Two, above peer loan growth. Three, better expense control. Four, credit quality outperformance. Five, more active share repurchase. Or six, an accrued bank acquisition. Loan growth, loan growth driving the outlook. Any thoughts on that compared to how you're looking at things?
In some sense, I say this a lot, the growth part of banking is often the easiest. Doing it in a way that you're proud of your credit portfolio for the long term and you get paid for it is more difficult. That's a big part of our mix. As we talk to our teams about our strategy, we talk a lot about growth. We put safety and soundness, profitability, and growth in sort of a triumvirate of things that we think are very, very important. If you look at the dynamics in our balance sheet, you've got a few cyclical things going on. Commercial real estate, for example, which has been very slow with the higher rates, you see those portfolios running down. CNI is actually growing very nicely, and mortgage warehouse tends to ebb and flow.
We think that the makeup of our business does position us in this footprint to have very good loan growth opportunities. We're focused also on, as we said a few minutes ago, the cross-sell and bringing the whole bank to the relationship. It's not just about driving the credit piece, but we want to build long-term, deep relationships and not be transaction-oriented. I think the combination of all of those are going to give us a lot of levers. There's a lot in there about capital management as well. We think we have the opportunity to continue to leverage the balance sheet both ways by growing loans and at the same time repurchasing some stock.
Great. Yeah, we can definitely circle back on that. Number three, your third question, I guess here we go. What will organic loan growth be at First Horizon next year in 2026? One, 3% to 5%. Two, 5% to 7%. Three, 7% to 9%. Four, greater than 9%. A little bit of a step up from sort of where you are this year.
Yeah.
Looks like most people in the 5% to 7% range. We can circle back on that. Number four, what will ROTCE be at First Horizon in 2027? It was 13.8% in the second quarter and 12.8% in the first quarter. One, 12% or lower; two, 13%; three, 14%; or four, 15% or higher. A lot in the 14%, 15% or higher. It seems like the strategy is expected to work.
I think it's hard to know in what we don't know today what the, you know, what loan growth looks like. I would guess somewhere in that mid-single-digits area is not an unreasonable place to think about 2026 as you go into the year. I do think that our desire to bring those capital ratios down, and particularly we've talked about going from 11% to 10.75% over time, and that sort of being a wave marker on the way to 10.5% and then this incremental profitability, we are going to drive higher returns. It's probably too early to say we're very confident that we can hit this or that number in 2026, but we think the trend line is upward, and we're positively encouraged by the direction things are headed.
Great. I think we have a final question. For the audience, what do you think happens to the category four bank thresholds? One, nothing. Two, the levels increased with inflation. Three, it's moved to $250 billion. Or four, an asset size test is removed. 45% moves to $250 billion.
I almost wish you would ask that question with what should happen.
Yeah, I guess maybe, you know, you commented on capital and regulation. We heard from Jonathan Gould yesterday. It definitely feels like the industry has a lot of tailwind with regulation. When you're talking about targeted capital ratios, are those longer term? Do you feel that the industry has reset to that higher level of CET1 for the longer term, or how much could you see over the next four or five years some of those target ratios coming down?
I actually think over time, Jared, that those target ratios will start to trend down. I think that some of the overabundance of capital that has been built up in the industry is not particularly healthy for our customers and our communities. You see some of that in the transition of risk out of the regulated financial industry into other pockets of the economy, whether it's private credit or structured product or whatever it happens to be. I think there's a real regulatory benefit to keeping things as much as you can, at least within the regulatory purview. I think there's a natural tendency to probably correct and maybe overcorrect following something like the Great Financial Crisis, but I think that will sort of moderate over time. We have said 10% to 10.5% is sort of where we think we need to be in this regime.
It would not be surprising to me that we would run in the organization with the makeup of our balance sheet at 9.5% or, you know, it's going to ebb and flow over time. For now, it's moving relatively slowly. As we get clarity on some of these questions about the tailoring of supervision, it will be easier to see. As the stress capital buffers start getting reduced and adjusted and it starts working down from the top of the industry, I think you'll see that downward drift over time.
You had referenced, we spoke a little bit about the longer-term loan growth and the opportunity for growth. Maybe as we bring the timeframe in a little bit more to the second half of this year and going into next year, where do you see the trajectory of loan growth going, and how does the exposure to mortgage warehouse and specialty verticals sort of play into your growth outlook?
Jared, that's the question of the day. We have our Treasurer here with me, and he flew up with Bryan and I yesterday and every other hour and said, "What's happening with the 10-year Treasury? What's happening with mortgage rates as the forward curve for this year keeps changing?" He said this morning it's at a 20% chance the market puts it at a 50 basis point cut. Mortgages, the last two years, mortgage originations, new homes refi, have really been at record lows. If we can see some pickup, the mortgage industry and our Head of Mortgage Warehouse, our Head of Mortgage, so we can get that 30-year below six, we really think we'll start getting back to normalizing. I think that will have a huge impact for us because it is such a large part of our balance sheet.
We've also picked up so much market share in mortgage warehouse the last couple of years, and we're putting the economic capital against it, but we're not seeing the fund-ups yet. I think that is one of the places that we're really hoping that cutting rates will stimulate that part of the market, especially in the Southeast, which is a strong home-buying location. We're continuing to see population growth. We're continuing to see the cost of housing go up, and there's still in a lot of our markets bidding wars when houses are available because there's just not enough on the market. I know you have a similar issue here in New York and Connecticut. There's so little inventory in the good areas for school districts and families that there's just not enough supply right now.
On any of the other specialty verticals, any bigger trends or opportunities to take market share?
I think CRE should pick up again. I think it's really been stalled the last two years. Part of it is the delay in the constructions in the Southeast. So many of the projects that were underwritten before COVID or during COVID just took so long to get done, whether it was supply chain issues, halts due to, you know, the shutdown in the economy. We're seeing a significant delay in some of that supply coming on, which is creating an absorption rate issue, which we'll work through, and we're continuing to see that be positive from our credit perspective. I do think we'll see CRE pick up from what we've seen in the last 18 months or so. It was really kind of stalled. Bryan and I have talked about this.
We came into the year with a much higher expectation of loan growth, and tariffs really kind of put everyone at a 90-day or 20-day hold to see what does this look like, what is my cost of supply going to be. We're starting to see our pipelines pick up and our closings pick up in Q3.
You've got the CRE business is much more cyclical when you have these extremes in rates and these loans. You originate a loan today, it funds up over the next two to three years, and then it pays off, so it has this cliff effect. We're at that part of the cycle where the loans that were done in 2022, 2023 are funding up and going to the permanent markets. It's going to pick up. My sense is with rates coming down, people are much more interested in leaning in, and projects are starting to make a lot more sense, particularly given some of the things that Hope talked about getting cleared up: tariffs, etc., construction cost.
Let's see if there's any questions in the audience. Happy to open it up. I'll just wait one second. I think they're going to bring a microphone down to the front row, all for the webcast.
Given that the category $400 billion is still in place for now, and it's not that far off for you, how are you preparing for that? How much extra costs does that involve? How difficult is that? Maybe as an extra question, what else is happening? What are you expecting on AOCI, for example, in terms of expected regulatory changes?
Yeah, in terms of organic growth, you know, we're at $82 billion, as Jared noted in the beginning. We've got a couple of years minimum before we would cross that threshold, and then you have a period of time to adapt to it. We're not sitting around waiting for the threshold, and we've gone at it a number of different ways, and you can make all sorts of assumptions. If you have just category four regulation as it stands today, you're probably talking something $25 to $50 million of added incremental annual expense. If TLAC is added to that requirement, you're probably talking about somewhere between $125 and $150 million of incremental expense. I tend to think that the last part of that TLAC is less likely.
Given the $25 to $50 million we have gone through, and we have a pretty good punch list, we think, in terms of our gaps to preparedness. We've been building out the various elements. We complete and publicly disclose a stress test today even. Some of the run rate costs are built in. Given this punch list, we've sort of divided it into, it's going to sound more binary than I intend, but there's a list of things that we think are really good tools that will make us a better managed organization between here and $100 billion wherever that threshold ends up. There are those that we can put in the bucket of when we hit that threshold, we will complete them. Some of that $25 to $50 million is already in. We'll build more of it.
My expectation is, as an investor, it will not be a cliff in expenses when we hit $100 billion, and that we'll be, if not completely, we will be largely prepared to cross that threshold without a whole lot of interruption in the way we're doing business. On AOCI, we're sort of indifferent to that today. We look at our capital with and without, and we compare it across the industry. We do not have a large securities portfolio. We have a very small held to maturity portfolio, and it does not have a significant adverse impact on us one way or the other. We'll adapt to the rules, whatever they are. In real basic terms, marking part of a balance sheet and not part another part of it, it makes no sense to me, but we'll comply with whatever it is.
Any other questions in the audience? I guess, Hope, maybe you can walk us through some of the margin dynamics as we move through the year if we get the expected rate cuts, and how should we think about the sort of starting point for next year?
We'll start with what you think the expected rate cuts are at 12:30 P.M. today. You know, we have talked about this consistently over the last year. We've stopped giving NII guidance differently than fee income because we trade one for the other right now. A decreasing rate environment hopefully will stimulate mortgage warehouse. It'll stimulate mortgage origination. It's not going to be a static balance sheet for us. FHN Financial has had a much lower year than we anticipated coming into the year because there's been no rate cut. In the near term, I actually see rate cuts as stimulating for us. I think it'll get our countercyclicals moving. We have proven through the last, I guess, four quarters, five quarters now of rate cuts that we're able to make up the beta that we lose on the asset-sensitive loan repricing on the deposit side.
We are one of the best, if not the best, in cutting betas through this cycle. We've seen the deposits be very sticky. Consumers are not as sensitive to a 25 bps cut. We have two proposals that are ready to go. If we see a 25 or 50 bps cut with the Fed this month, we are already proactively discussing with our bankers what that will mean for walking back our existing clients as well as rate offers. We've already walked back our rate offers and expectations. We generally are seeing flat deposit costs quarter over quarter and expect that we'll continue that beta forward with any rate cut that comes. That won't be perfectly symmetrical in the quarter. It'll take a little bit to work through.
If you look at what we did last year, we had margin compression in Q4 and then expansion in Q1 and Q2 as the deposit beta down lagged the loan repricing.
I'll reemphasize a point Hope made very well, which is when you think about our business, you know, we report our asset sensitivity like everybody else, but you really shouldn't think about our business in terms of asset sensitivity separately from what happens in our fee businesses and our countercyclical businesses. Tyler does a fantastic job putting sort of the balance in that in our quarterly review so you can see things ebb and flow. You take just the last couple of weeks here where the market became convinced that the Fed is going to cut. We saw immediately a pickup in the activity at FHN Financial.
That balance is there, and we're going to be, over time, we will be much more neutral to, not we're not isolated from 500 basis point moves like we've gotten in the past, but we're going to be much more neutral than it would look if you just looked at our asset sensitivity alone. We run it from an asset-sensitive perspective. It's about 2.8%, 2.9% for 100 basis points, and that's a static move. It works in steps. We're going to be much more neutral than as you look at our balance sheet.
On the FHN Financial side, as you referenced, it was a little bit of a slower start to the year. What is going to drive that increased volume? Is it just actually seeing the rates move as expected and you feel that there's a lot of pent-up demand? As we start looking at sort of ADRs for the rest of the year, is that the expectation that that's going to be a sustainable improvement?
A steepening curve has been good for them this year, which is where we've seen the pickup, but with static rates, no rate cuts in a year, they're just missing that second component. Also, the high volatility we saw in March, April, May, and June in the market was not good for their business. We've seen a stronger Q3 as we had anticipated, and a rate cut will be very stimulating for them. If we see a series of rate cuts like we saw in Q4 of last year, we do expect that business to pick up. End of year also tends to be a better time for that business. A lot of people will reposition their balance sheet getting into the new year, so December tends to be a good month.
As Bryan said, we've seen a positive movement in that business in the last couple of weeks and expect that will continue with an expected rate cut this month. The question is whether it's 25 or 50 at this point. I don't think anyone's pricing in no rate cut.
Maybe shifting to expenses, how are you looking at the path of investments from here, the path of expenses, and any initiatives or opportunities out there to either invest in the franchise or see some cuts?
We're in the second week of September, but as we sit here today, we think that most of the significant investment that we needed to make following the termination of the merger has largely been made and is largely completed at this point. We have a number of levers that we continue to work on to control our expenses. As we sit here, we feel there's a really good chance that we're going to be flattish next year in 2026. We've got to accumulate a lot of budget work between now and then, but our goal going in is that we hold expenses essentially flat as we go into 2026.
One caveat to that, we'll be excluding commissions for FHN Financial. If they double their ADR, do you remember that they have a 60% attribution rate there for expenses and still positive PPNR? I'll take it all day, but we're not going to cut back office to fund commissions. That's positive PPNR. We're hoping that we see a much better year in FHN Financial than we've seen in the last three years there.
That's why I can say as a former CFO, she's the best CFO the company's ever had.
Maybe shifting to credit. Credit has been strong. Are you seeing any areas of concern, more recent developments of any areas of concern, and how should we think about the allowance and the provision build from or movement from here?
Yeah, I'll start. We feel we're still very constructive on credit, and we pay attention to what's happening in the portfolio at a very granular level. Certain sectors of the multifamily economy have been slower, one, because you've had slower absorption rates, but they're in good places, high-growth communities that are going to see very good absorption. They got delayed because of construction and materials and so on and so forth. That seems to be playing out very, very well. We've had some plus or minus $500 million of payoffs in those portfolios this year. We're very constructive. Office, whether it's bottomed or not, it feels like it is stabilized at this point. We do very little, very little over a 10-story building. A lot of what we do is medical office. That portfolio has been stable. We're very constructive on credit cost.
We think that the economy, as it continues to stabilize and to pick up, interest rate clarity becomes more clear. We think that MBAs, charge-offs have more of a downward bias as we go into 2026 than not. Loan loss reserves, we've built what we think are very healthy loan loss reserves. I would expect over time that those will attrit back into income just simply because the macroeconomy is significantly stronger.
I agree with Bryan. I think, you know, I had said this at the end of last year. I thought we were at the end of building provision and we would start coming back down. Unfortunately, the March tariff kind of changed the economic outlook that we use for Moody's for our CSO, and we had to build. We did release again last quarter, fully hope that we are at the end of this cycle and we'll start normalizing credit. It's one of our key levers to get the 15% ROTCE, you know, on a, you know, Q1, I think it was Martin Hoffmann might mean Q4, Q1. We had negative loan growth yet we had to build provision with lower charge-offs in the prior quarter. It wasn't because our credit got any worse. It was because the Moody's model said the economy was going to get worse.
As a CFO, it's really hard to look at our charge-off, a decreasing balance sheet and say I still had to build provision. I do think that's going to come back in. I hope that we're at the start of it and get through it pretty quickly.
If you look at our charge-offs, these are the most broadly defined peer groups. We're going to be better than average in charge-offs. We're going to have higher than average loan loss reserves. Those two together say we're positioned in a fairly, at least in my view, say we're in a fairly conservative position and that there's, you know, we can handle some bumps in the road between now and, you know, whatever nirvana is in the economy. Also, never hesitate to acknowledge we're always one day closer to the next recession. We just think managing the balance sheet from a conservative perspective is the way to do it.
You know, there's been enough check-in deal activity in your markets, some large deals, some smaller deals, some bigger participants coming into the market. Does that create an opportunity for you to step in and either take some share or hire some good people, or how are you looking at the specifics of some of these deals changing the competitive landscape?
Yeah, I think invariably it will create opportunity for us. Most particularly, the merger that was announced this summer are two big in-footprint players that we compete against on quite a number of deals. Having been through mergers and all that happens in them, it'd be hard to say that we don't think that some opportunity will come out of that. I think both organizations have been and will continue to be a strong competitor. We will look for opportunities, whether it's the existing market as it stands today and, you know, merging competitors. We're going to look for opportunities to grow our customer base and go back to what I said earlier, which is deliver that community banking look and feel with a big bank product set and decision apparatus.
What about, you know, we spoke about the improving regulatory backdrop, the additional, I guess, maybe some flexibility with alternatives there in your capital. What's your appetite for looking at potential, you know, deals in that, you know, as an acquirer?
Yeah, I think to say it most simply, M&A is not a priority for us today. We believe we have the capacity to announce a merger, integrate it, and we have the capital base, we have the technology in place. Going back to where we started at the top of this discussion, if we believe strongly in the things that we can accomplish with the $100 million plus incremental profitability, keep our eye on the ball, focus on that, deliver on that, and then use that as a platform for having the business model that you can transition to something else if you ever get into inorganic growth.
I don't believe that in our footprint, that given our capital generation, given the opportunities for organic growth where we have a number of relatively small footholds in some very dynamic markets, that we can't generate the growth that we need as an organization by growing with our footprint. It goes in the category of never say never, but inorganic growth, M&A makes very little sense. If you pushed me really, really hard and you said you had to do something, I'd say, all right, give me a good branch network and a good deposit base in some market and make it small, keep us under $100 billion, and then that might make sense. That doesn't feel like a priority given all that we think we can do with the existing company and footprint we have today.
Great. Thank you. Any closing thoughts?
No, other than we're really excited about the opportunity that we have. The franchise is in a premier footprint. We have a great team of bankers, a lot of enthusiasm. We've spent the last two years really positioning ourselves for acceleration, both by investing in our systems, our technology, our processes, and our products. We have tremendous opportunities to improve profitability. We have an energized team. We spent the last year talking to our people an awful lot about our strategy, our go-to-market strategy, and there's a lot of enthusiasm across the organization. We sit here today very optimistic about the opportunity to create value over the next two to three years and drive the returns that we've talked about.
Great. Thank you very much. Thanks for joining us. It was great speaking with you both, and hope you have a great rest of the day.
Great. Thanks for having us.
Thanks.