Great. Moving right along. Very pleased to have First Horizon with us, from the company of Bryan Jordan, Chairman and CEO. Bryan, thank you. So Bryan, you were not at this event last year. Maybe tell us why, and explain to us kind of what's happened since.
Yeah. It, I commented to, to Hope and Natalie as we pulled into town, it's been about 18 months since I did a conference in New York. So we were tied up in, in a merger, and we thought if we did a conference, nobody would show up. So we, we had a fixed price transaction, which, as everybody knows at this point, did not, get closed, and we've terminated, and we're back to doing business and doing what we've done for 159 years.
I guess I, I guess as you pivot back from thinking you're going to join a larger organization to not I guess, where do you see kind of the biggest opportunities, and what I mean, what are some of the challenges?
Yeah, it's Jason. It was sort of an interesting period. As everybody likely knows, we had just completed the systems integration of our merger of equals with IBERIABANK in February 2022. And as we stated in our proxy with TD, we had not had the company for sale. And so over the course of that 14 months that we were under the merger agreement, we continued to operate the business as we would have under any circumstances. And I feel very, very good about what we did over the course of that year, proving out our ability to execute on the promises of the IBERIABANK merger. We hit our cost savings, we hit our revenue synergies, which were not in our forecast model.
We grew customer relationships, very strong loan growth, and our profitability improved very significantly. So our business had a tremendous amount of momentum. We're in a great part of the U.S. We have a great southern twelve-state franchise, and when the merger terminated, while we're disappointed for shareholders and while we're disappointed as shareholders, our customers and our associates hit the ground running with a lot of enthusiasm about what First Horizon can continue to deliver in making our customers and our communities stronger over the course of the foreseeable future.
I guess so obviously a challenging year for the banking industry. Some surprises for First Horizon.
Yeah.
So, maybe talk to how are associates doing and clients doing?
Yeah, we've had very strong customer and associate retention. As part of our merger agreement, we put in some retention for our associates, and that continues today. We had very good associate retention during the term of the merger agreement. Post-merger agreement, there's a great deal of enthusiasm amongst our associates. With respect to customers, customers are, I think maybe most relieved, as you might expect, by not having to go through a merger and through an integration. So our customer retention and our customer enthusiasm continues to build to be good, and we see a lot of momentum in terms of customer acquisition.
One of the things that we highlighted in our Q2 results, as we came out of the merger agreement, we wanted to do a couple of things, and we created a deposit campaign, which allowed our bankers to be very front-footed, reaching out, calling their customers, and it really accomplished a number of things. We raised about $4.5 billion of deposits in the quarter, but we created 32,000 new-to-bank relationships, which is about 3%-4%. It was about 25,000 new consumer relationships, 6,000 new commercial relationships. And while we competed with rate, that was advantageous to wholesale funds, and we have a tremendous optionality to create those diplomacy relationships over the next several quarters as that money is with us.
So we're excited about the momentum we see both on the associate and on the customer side.
It's, I guess, interesting what you said on the deposit campaign. Maybe just talk to kind of, maybe other initiatives you're kind of focused on to drive growth.
, right now, the entire banking world seems to be focused on the deposit side of the balance sheet, and we see very good momentum in our deposit trends. Our deposits, as we sit here today, are up quarter to date. Even this quarter, we have backed off some of the pricing initiatives that we had in the Q2 . We do think as you look at margin over this quarter versus next, because we started the campaign in the back half of the Q2 , essentially, you're going to see a little bit of margin compression this quarter, and then it all is stabilized in the fourth. And particularly with the rate increase we got in July, we're still asset sensitive, so I feel good about our balance sheet.
So we're focused very much on driving the profitability of the balance sheet. We're very focused on customer acquisition, deposit acquisition and attracting new relationships. On the asset side of the balance sheet, lending in particular, we're very focused on how do we drive the profitability of credit utilization, lending activities, and we're looking at spreads and new to bank relationships. We're looking at improving margins across existing relationships, and at the end of the day, financial conditions have tightened, but we feel very good about our ability to show a little bit of loan growth and probably a little bit better deposit growth in the Q3 .
I guess a little bit of loan growth, a little bit of deposit. Maybe just delve into a bit more kind of where you're seeing loan growth. That's kind of something we haven't really heard from some other banks and just maybe kind of your view in terms of how that ties into your view for the economy overall. I know maybe your markets are a bit better than some of these other banks that have presented.
, we do believe we're advantaged. We're in outstanding markets. Our footprint ranges from the North Carolina to Texas and then Arkansas to Florida, 12 southern states, a small presence here in New York. We have great markets, and economically, they continue to do very well. I'm in the camp that the economy is still doing reasonably well. It seems to be slowing. I think we're still in a high probability opportunity of this soft landing that the Fed is trying to guide us towards. There are a few things in the back of my mind that cause me to pay attention, that we could have a much bigger slowdown if the consumer gets knocked out. But today, the consumer continues to look pretty good.
So, that's driving pretty good customer activity across all of our lines of business. Our mortgage warehouse business has been a little stronger than we had expected, given the strength of, or the increase in mortgage rates. But folks pulling out of that business has given us the opportunity to increase line utilization and ultimately increase profitability in the business. We're still seeing demand in C&I and certain sectors of commercial real estate, while that has slowed down significantly. So demand is still pretty steady, it's broad-based, but it does feel like the financial condition tightening that the Fed has set out to achieve is actually taking place, and I expect that growth will be fairly modest over the back half of this year.
Got it. And then I guess one of the things that stuck out to me is fairly strong capital levels. Just in terms of-
Mm-hmm.
, how are you thinking about managing the balance sheet, the CET1 over 11%? Just further thoughts you have there.
Yeah, we, we have, in my view, very strong capital levels, and, and that's very strong capital levels, whether you look at them on an absolute basis, as you noted, 11, 11.1 CET1. But even on a mark basis, if you take out the mark on our AOCI, excuse me, on our available for sale, as well as, as held to maturity and even loans, you, you come out very well capitalized. So we feel very good about our capital position. We think through the cycle, we're, we're likely to, to be in that 10% CET1 area. Right now, above that. We'll, we'll manage that over time for the next several quarters. We want to see how the economy plays out, what happens in terms of, of soft landing or something more difficult than that.
We think capital gives us optionality, but we think through the dividend policy, we think through our ability to repurchase shares at the appropriate time, we can manage those capital levels down. And as we sit here today, I expect that those capital levels, with modest balance sheet growth, are likely to accrete up over the next several quarters. So I think we've got a lot of optionality in addition to a strong balance sheet.
And I know you're not a $100 billion bank, but can you just talk to are there... , does that, I know it doesn't impact you directly, but does whether it's the RWA impact, the long-term debt proposal, some of the talk on liquidity proposals, maybe not affect you today, or do they affect you today? And then certainly at some point in the future, how do you begin to think about that?
We're not seeing, Jason, a lot of impact from those proposals today. Our expectation is that as time passes, that the bar will continue to get raised, and we'll continue to be asked to show preparedness for becoming a $100 billion organization. I think inherent in some of the proposals that were made last week by Chair Gruenberg, that , maybe some of this information will be provided, supplied by organizations our size range. But today, we're not seeing a tremendous amount of pressure. We do think that the cost of becoming a $100 billion organization is significant.
If you take out tailoring, and you turn on all of the daily reporting, the living wills, all the things that go with being essentially a GSIB or north of a $100 billion untailored world you're probably talking $50-$100 million in incremental annual cost. And as I've tried to point out back in the fall, excuse me, back in the spring, time really fly, flies. Back in the spring of this year when we did our Investor Day, that we have the ability to tread water if necessary, and we're not gonna inadvertently trip across a $100 billion dollar threshold. We think we have the ability to moderate our balance sheet, improve the profitability of our balance sheet, and stay well back of crossing that threshold on an accidental basis.
I guess with that being said, and maybe not your favorite question after all you've been through this year, but we had Comerica up here before you, and they were talking about it may make sense not to cross it by a little bit, but to really cross that $100 billion mark through a merger and, and pay for the incremental cost through greater economies of scale. Maybe notwithstanding the regulatory backdrop at the moment, 'cause in part, 'cause I guess the TD deal wasn't a First Horizon issue, it was a TD issue-
Yeah
-which I think has been publicly put out there. Can you talk to your thoughts around acquisitions over the next couple of years?
Yeah, I think—Look, I think if you're gonna be $100 billion, you don't want to be $101 billion and incur that cost. You need to be $140 billion, $170 billion whatever that number is. And all of the regional players, and I think everybody thinks bigger is important than consolidation. I think clearly right now, there is enough murkiness around the merger approval process, the timelines. Maybe most importantly, the numbers really don't pencil out in a mark-to-market world with some of the balance sheet marks that are out there. But I fully expect that some point down the road call it 18 months to 36 months from now, you will start to see consolidation pick up.
I think to address your point, at least Curt point, as you relate it, I think you're better off if you're an $85 billion organization doing something, a merger of equals, that gets you in that 440+ area, as opposed to doing a $15 billion or $20 billion acquisition. So I think size does matter in that regard. So I think you'll see more consolidation, more merger of equal over time.
I guess, and maybe you have more of a lens into this than others on the re-regulatory landscape, but kind of any thoughts in terms of when we can get clarity around all that, and...?
I think clarity is gonna come in two fashions. One, I think it is gonna be the regulators' continued receptiveness to evaluating and encouraging well-structured and strong organizations merging. But I also think it's gonna be sort of a demonstrated execution. In terms of our merger, it took us from the day of announcement to termination, a little over 14 months. And I think bankers can sign up for, We might get a no. That we go into it with that, but a fast no is a whole lot better than a very slow no. So I think that will work out over time, and I expect that the regulators are all thinking about how the timelines will work together.
As , in the regulatory bodies, we had a lot of transition in 2022. Vice Chair Barr been in his role for a little over a year. We've got an acting Comptroller at the OCC, so there's been a lot of change at the regulators, and so I think that will work itself out over time.
And then, I guess maybe shifting gears, credit quality has kind of been an afterthought at this conference, which is maybe a little bit surprising. , can we just talk to kind of your outlook there, or beginning to see any signs of deterioration, and how do you expect that to perform in the back half of the year?
Yeah. I would say in terms of broad stress in our credit portfolios, we're not seeing any signs of broad stress, and that's across asset categories, collateral types, or geographies. So broadly, we're not seeing much. I do believe as we sit here today, we're gonna see a significant increase in our charge-offs this quarter. We have one idiosyncratic loss that's probably gonna push our credit losses into the $100 million area for the quarter. This is a $170 million individual credit that filed Chapter Seven in mid-August, and absent that, our credit charge-offs are gonna be sort of in line with where they've been for the last several quarters in that $25 million-$30 million range.
So they're not any broad signs, but we've seen a couple of idiosyncratic things like this that have driven some losses, and that's sort of our expectation for the next several quarters, that there's gonna be one or two off situations, but nothing systemic or broad-based.
So just to be clear, that's a $100 million charge-off on a $170 million loan?
It, it... No-
Oh.
It's a $100 million of aggregate charge-offs for the quarter. $170 million dollar charge, $170 million dollar charge-off, driving the delta-
Got it
between where we've been running.
It's a large charge-off. I guess, any more color in terms of what the loan size was? How many loans of that size do you have, and maybe more color around the specifics.
It's a loan, and this loss will be pretty darn close to total. It's a company that valuations were good on it, and it filed Chapter Seven, and it's a complete liquidation situation at this point.
Got it. But it is, it is idiosyncratic in your view?
Oh, yes. Yeah. We have a lot of questions about how we got to where we are, but it's, yeah, it's a Chapter Seven, and it's clearly idiosyncratic.
And then, I guess, of that incremental $70 million of reserves to offset that, or that just flows through?
We'll probably take the charge off and reestablish the reserves. Yeah, that's my expectation as we sit here.
Got you. But beyond that, credit seems-
Credit, beyond that, credit seems to be fairly benign. All sectors are holding up pretty well. We're not seeing a tremendous number of downgrades. We're seeing some upgrades. Borrowers continue to perform well. We, I think, have done a good job in our portfolio stress testing for higher rates, and borrowers continue to perform well with higher rates. I think the real wild cards in terms of credit performance are likely to be what happens in the next several quarters, particularly in some of the asset classes that could be impacted by the shadow banking system and things of that nature.
So as it sits here today, $100 million in charge-offs in Q3, and then call it $25-$30 million-ish in Q4?
Yeah.
Got it.
Sort of be my expectation, yeah.
Got it. And maybe we could talk about some of your countercyclical businesses. Probably a tough operating environment for some of them, and just maybe talk about your expectations and what we need to see for a rebound in those.
Yeah, we have three that I would consider countercyclical businesses. Our mortgage warehouse lending business and our mortgage business, and they're somewhat closely related. Mortgage rates being up, production activity is clearly down, and they also tend to be seasonal. The second and Q3 tend to be better than the first and the fourth, simply because people relocate and purchase homes more during that time of year. So we'll see some seasonal effect. Our mortgage warehouse lending business has continued to hold up pretty well. We thought balances might come down a little more. It is one of our more profitable businesses, and we've been able to use some scale opportunities as people have drawn back their commitments in that space or exited that space. So that business continues to look good. Our mortgage origination business is softened.
It's, it's like most everybody else's business. It's a purchase money mortgage business today, as opposed to a refi activity, and it continues to, to do reasonably well. We've adjusted our cost structure there, and we will likely continue to, to try to control costs. On our fixed income business, average daily revenues have been very low. I think it's, it's clear that we've got an inverted yield curve that is tough on that business. And, and the other dynamic depressing activity is that we've seen a... There's an abundance of investment securities in the banking system today, and, and that's depressing activity as it sort of works its way through.
But all in all, we, we've worked on cost control there. We're, we're not making an awful lot of money in the business today, but we're not losing a lot of money either.
So we're continuing to operate it for profitability. It is... We've been in that business for years. All that said, I think if interest rates turn down and you get a little bit of steepness to the curve, those businesses should start to pick up. And while they're not adding a lot today, will benefit us in the event that the economy starts to slow down and rates drop, and we should start to see some enhancement activity.
Then at your recent Investor Day, you announced that you would be reinvesting a portion of the merger termination fee. What does that investment look like, and do you have a sense of timing on that yet?
Yeah, we're going to invest something like $75 million-$100 million of the merger termination fee in technology, and it's really to do a couple of things. One is because we were in integration mode first for a year and a half, two years, with IBERIABANK, First Horizon, and then with TD, there are some remedial things that we have to get caught up on. We're on version 3, and we ought to be on version 6 or whatever it happens to be. , we've got to update or replace our general ledger system. So some of those infrastructure things that we'll have to accelerate and get caught up.
And then, hopefully, we're going to use it as an opportunity to sort of not just try to catch up linearly, but to move to a place where we've got at least parity or table stakes in the competitive landscape. So that will start. That money is being spent today. Most of that work will be completed by the end of next year. It'll roll into our expense base gradually over that period of time, but it's we think a really good investment to catch up on the remedial stuff, but also position us for strategic advantage in the longer term.
Then, I have slide 15 from your Q2 earnings call or Q2 earnings deck. I guess outside of charge-offs I guess, how do you feel about the guidance that you laid out on the July call?
Yeah, outside charge-offs is the one notable exception, given what I just said. We feel pretty good about our overall guidance. We feel good about our PPNR. I think loan growth will probably run it a little bit ahead of, of what we might have implied. I think some of the seasonality, it, it could be a little bit better than what we have in the, in the guidance. Our deposit trends continue to be good. So I, in, in a macro sense, and the other place is our capital ratios. I think, I think they'll end up in that 11-11.1 range, and maybe a little lower than the guidance. But all in all, we feel good about the guidance we laid out back in June.
Got it. Why don't I pull up there and see if there's questions from the audience? I guess, Bryan, as the audience maybe thinks of some questions we've obviously covered a lot of ground so far today. Are there any ways in which you've kind of adjusted your strategy?
We haven't made huge strategic adjustments at this point. I think one of the things that will be a real area of focus for us over the course of the remainder of this year and the next couple is taking our retail strategy and really driving that forward. And what I mean by that is if you look at the legacy First Horizon franchise, and you look at the legacy IberiaBank franchise, there were differences in go-to-market strategy from a retail perspective. And Capital Bank is much more closely aligned with the way First Horizon looks. So we're going to really emphasize our retail strategy.
One, because it's an important part of our business, and two, because of what we've sort of seen in the last several months, which is a well-structured, disaggregated funding base is an important thing, and a retail strategy delivers that. So that's an opportunity. But that's the only real significant change we'll make in our strategy. We're going to have a tremendous amount of focus on our commercial middle market banking. We're going to have a tremendous amount of focus on our private client wealth management, retail, being added to that, and then our specialty businesses. We think we've got a tremendous amount of flexibility with our balance sheet to tailor our asset growth to what we're able to do in terms of generating deposits.
As I mentioned earlier, we're still generating deposit growth today, and we'll use that as a way to continue to fund asset growth, as we have that natural resource, the deposit base, continue to support our customers.
, we talked about bank acquisitions earlier. I guess, given the kind of excess capital position do non-bank acquisitions kind of play a role?
I don't think non-bank acquisitions are really something that make a lot of sense for us right now. In fact, if you look over the last 15 years, we've shed a number of non-banking activities. I think there's a bit of uncertainty under Basel III rules as were proposed in the U.S., what it means in terms of capital, and I don't think they drive with the additional capital on operating risk, where it hasn't drawn a lot of capital in the past. I think they're going to draw a lot more capital, and it's going to change the economics of it. But more importantly, we don't think that there is anything that we have to own that is essential to our product set that we don't have today.
We think through partnerships and through buying, leasing the product from other providers, we can provide best-in-class asset or product capabilities for our customers. And so we don't see that as a place to spend a lot of capital right now.
So I guess you have you've been prudent with the balance sheet no non-bank acquisitions, you have over 11% CET1. I mean, do you think share buyback can resume next year?
I think there's a chance of that. It'll depend on where we are in the economic environment, what's happening in terms of whether we're getting a soft landing or something that looks more problematic, or... And then ultimately if trends happen to change in the credit environment. But we think, given the strong starting position and the capital generation we're likely to have we don't think it needs to build much above where it is today, and we think over time that we can bring it down. And I think buyback is a lever that allows us to get that capital effectively back in our holders' hands. And quite bluntly, we think it's a fairly attractive price to do that, so yeah, it could begin as early as next year.
I guess, as you kind of enter the 2024 budget season, obviously from much different position than you entered 2023, just how are you approaching that, just given certainly some areas of investment, on the other hand, kind of a lot of areas of, uncertainty from the macro perspective?
Yeah. Yeah, the budget process is always a bit of a mystery and we always start with a forward curve, even in the guidance we give, and the forward curve has been all over the place the last couple of years. As we look at next year, the fundamental underlying assumptions, in addition to the forward curve, is that the deposit base globally, the U.S., for the industry, will continue to be tight and probably shrinking. That loan origins and lending capability, financial conditions will continue to tighten. And so as we think about our balance sheet, we're thinking about how we drive the profitability, and we see growing deposits as the key fuel for our ability to support lending activities.
We're looking to drive profitability through our balance sheet by effectively selecting clients and improving profitability. I don't think there'll be much change unless there's a significant downturn in the economy in terms of our countercyclical businesses next year for a number of reasons. But the outlook, I think, is going to be sort of a steady environment from where we are today, at least as we sit here in September of this year.
I guess earlier you mentioned how maybe some NIM declining in Q3 due to prior deposit actions and stability into Q4. Can you just talk to in terms of balance sheet positioning?
Yeah.
Are you still asset sensitive, and how you think about that?
Yeah, absolutely. We have what is very naturally an asset-sensitive balance sheet, and we are very well positioned today. We have mid-single-digit asset sensitivity if rates move up 100 basis points, and we have about a mirror image if rates were to move down. And then if rates move down, we do have some of the countercyclical offsets to offset that. So we feel like we're in a pretty good and balanced position today. And as you pointed out, we've got a little bit of the drag of higher deposit rates and deposit promo in the Q2 , which will be felt in the Q3 , but we expect that the margin will start to stabilize slash expand.
If the Fed moves like they did in July, that will be a little reflected in the Q3 , full quarter in the fourth. You get another rate increase, that will also be positive. So, we think right now that the balance sheet is very well positioned in terms of NIM, and it should be very stable after you get through this quarter. My personal view, and again, we model off the yield curve, the forward curve. My personal view is that we're likely to see rates that are higher for longer, and inflation control is going to be job number one for the Fed.
I think even in the event of a recession, the fact that inflation has been sticky slash persistent is going to make it hard for the Fed to cut rates, at least initially. I think, quite bluntly, with the fiscal spending that we have today and what looks like it could be a $2 trillion deficit this year, that it's going to be hard for a fiscal response. Monetary policy and fiscal policy mean it's going to be something a little bit different if we end up in a recession than what we've been accustomed to for the last 40 years. I think what we've done is position our balance sheet to be very stable through what could be a persistent slowdown.
Yeah, I don't think it's going to be. If we hit a soft landing, I don't think it's going to be Q2 and gone. I think it's going to be a slow period of time for several quarters.
Got it. On that note, please join me in thanking Bryan for his time today.
Thank you.