First Horizon Corporation (FHN) Earnings Call Transcript

Thank you for the question I feel like for the better part of 2 years we were standing up here and sitting at conferences Brian and I talking about our $100 million 3-year reinvestment into our platforms and treasury management was #1 on that We came out of the MOE running 2 different treasury management platforms because we had to do upgrades to the platforms that customers didn't go backwards when they convert it The only systems that we had after we finished the conversion with Iberia we still ran 2 systems was treasury management It is one of the biggest projects we did with that $100 million to get it up to get a new treasury management platform in to get all of our clients in there and continue to add new products And so the treasury management platform we have is absolutely scalable We're continuing to add more features functionalities and products onto that regularly I don't think we have anything we need to do We don't need to replace anything we're on the system We believe that we can keep for a long time and grow with us and our clients

And then just as a follow-up As you look through your mortgage book you've identified the $45 billion where you didn't have as much additional relationship with the client Is there more to do on that side as you look

We do not have any intent to do anymore This was really a onetime restructuring as we looked at how we reposition our balance sheet in line with our core strategy for clients

I'll continue on and see if others have -- there's one

Timure has one

Timur Braziler with UBS I guess looking at your deposit beta assumption just a higher pro longer environment and some of the increase in deposit costs that we've already seen I guess cycle to date I guess what gives you comfort that of future rate hikes you're only going to be capturing kind of 60% of that move given some of the outsized increases that we've seen last couple of quarters and maybe tying that into the restructuring that took place in 3Q with an 88% loan-to-deposit ratio now -- is the expectation that maybe some of that growth can be absorbed by the existing balance sheet and that 8-gram higher? Or is the expectation that you can kind of stay sub-90% growing and still maintain that deposit beta at 60% level

I will say starting with our confidence in 60% we think that's reasonable based off what we saw in the last cycle The last cycle we saw a 70% beta as rates were rising but that had the regional bank pricing right in the middle of it where we all went to top of market and spent quarters trying to walk that back as so much money flowed out of the regional bank system either completely out of the banking system or to the larger banks that we're seeing as too big to fail So we looked at that and kind of modeled in that increase and said okay if we don't have that type of onetime top-of-the-market repricing what do we think is realistic looking at our back book One of the things is we do have a lot of deposits with our commercial relationships Those clients have a loan with us Their loan is resetting up 25 basis points and we're getting the benefit of that yield So when they call us and say "Well I'm paying you 25 basis points more on my loan how much can I get on the deposits?" And it's a different discussion at that point in protecting the entire relationship So the goal is to really look at not passing 100% of that data on but we've asked the bankers to target 50% or 60% of repricing that When you mentioned what happened in the previous quarter on deposit costs 2 things happened to that quarter The first is we had significantly more wholesale deposits that quarter Our brokered deposits went up as we saw mortgage warehouse on average balance was higher in Q2 than Q1 We also have a seasonality in our consumer business which is we go out with rate specials or savings cash offers in the late spring early summer That is the time when customers are willing to move accounts it's when they're rate seeking it's when they're willing to start that process So we start those campaigns in the late spring early summer And so you bring those clients in at a high cost and then you walk them back So in our earnings the last 3 years we always talk about in Q2 and Q3 you see the interest-bearing costs come up first and then you see the expense hit in the future quarter for the noninterest-bearing So where we had a cash offer If you opened a checking account you would get $500 if you hit DDA x amount of balances You then opened a savings account and put x amount with us you then got an additional payout So a lot of that was seasonality not really tied to the market but the seasonality of how our deposits go up And if you look at our deposit pricing quarter-to-quarter for the last 3 years It always ticks up in those summer months for our consumer portfolio and we're always deeper in wholesale during the mortgage warehouse time when it usually peaks between April and September So it's really those 2 factors that drove it up last quarter not the market driving it up or us competing on rate only to get new clients

Yes give us some thoughts about when you think about the long-term profitability potential of the company You've hit your 15% RTC for a couple of quarters now what do you guys need to see to set the bar higher both internally and for us externally to hold you to?

Well I think we pretty much already set the bar higher by putting our earnings deck that this trade will create 150 basis points more ROE next year And we say that's the minimum before we redeploy it So -- we didn't say exactly what number that would be Tyler won't let me do it yet He wants to wait for a big conference or something to put a deck up I'm not sure But we've already reset it right? Without giving you a number you can say I'm going to use the average for the year I'm going to use what you had in Q3 and at 150 basis points from it What we'll do when we set guidance for next year is talk about where we're going to run the company next year We have a stated target We talk about our 5 flags framework we have the F-flag framework results in top quartile ROCE Every single time we get in front of our employees every time we're with our Board we say we're going to do these things And if we do these well with our clients we will be top quartile ROCE So that number will change as the industry changes The industry moves up to 19% 20% 21% That's the number that we're going to target We're not looking at a number just for what does First Horizon feel comfortable with We're saying how can we be a top-tier performer in our industry It's great that I don't let IR up here so you can blame them all day

Maybe I'll ask a few more questions Could you just talk about RM banker hires in your footprint It was a topic in the last bank that presented And what about just retaining current bankers?

Yes We have strong retention of our bankers We put it in our deck before 90% 95% depending on whether you pick 3 5-plus years I think even in our Investor Day deck we kind of had it broken out in tenure of our bankers by our business lines than our verticals We acquired a franchise finance business from GE and they love to say that every employee they brought over with the GE acquisition actually retired from First Horizon or still works here The head of that business when we acquired it from GE is actually our Head of Wholesale Banking Todd Jones who was here with me last year And so when we talk about -- we're not talking about 5 year we're talking these long deep relationships Our prorate business that we talk about a lot the head of that business has been with the company for decades and so have most of us bankers like to work with the same banker know what they're going to get through a cycle they're bankers with them And so that relationship goes both ways Our 90-plus percent retention of clients that we talk about in our earnings is correlated to their bankers still being here the person they trusted the person that helped them build their business the banker that maybe helped them when things weren't going great And so we really focus on that client -- that banker retention first and foremost and then on where do we acquire new bankers The strategy that we run which is we do not want to rent our balance sheet we're not trying to have the best highest loan growth in the market requires us to be thoughtful about what bankers are going to be successful in our company It was only interview a banker We talk about how do you bring a bank to your clients? How do you create 10- 20- 30-year relationships with these clients not can you get us 10% loan growth And so we have continued to add bankers We've hired -- we've talked about this before Florida the Carolinas and now Texas We promoted a new regional president in Texas January 1 He actually came out of our proper business and has been in that business for quite some time and he's now running our Texas market has had great success We put out press releases continually Every time we hire -- every time we hire a good bank in our market So if you run AI through our press releases you'll see that we've hired dozens of bankers this year across our markets

And then a question on capital CET1 came down to 103% after the actions that we've already talked about The target is 1025% to 105% in how you balance opportunistic buybacks with funding those core relationships that we've also discussed?

One I will say the 103% was a unique thing that somebody actually had to bring the accounting table in my office and that person was Tyler And like Tyler helped me understand how did we rode this so much we built -- we only could buy shares back for a couple of days before we decided to explore the opportunity of selling this mortgage At that point you're not allowed to buy your shares back And so we built capital all quarter and would have ended up well above 105% and then deployed it all by putting this mortgage portfolio in held for sale on the last day of the quarter So that 103% is not really a good benchmark of what we do with our capital through the quarter But we changed in our outlook that our current target going forward for Q4 and beyond for now is between 1025% and 105% So we were targeting 107% and we're comfortable going down to 1025% The way we think about deploying capital which is what's your earnings next quarter how much do you deploy into loan growth and whatever is left over we do in share buybacks We do not do an ASR for share buybacks currently we are in the market every day We will close the books on last month -- later this week and I will get an updated forecast an upgraded NIAC forecast We'll have an updated loan forecast and we will give our treasury team what the share buybacks are for the next month We currently as of this morning had bought about approximately $100 million worth of shares back or this quarter

Hope can you talk a little bit about the expenses? How you've been able to hold the expense growth rate? And is that something that you can continue to do in the future? Or do you have to grow expenses like everybody else? Or is it somewhere in between?

Yes Flat was really a 1-year adjustment back to the run rate that we needed as a company coming out of our 3-year reinvestment in the franchise So when we held our Investor Day in 2023 we said we're going to invest $100 million back into technology over the next 3 years to get us caught up on some legacy systems upgrade some of our businesses and we really needed them to be competitive for the next chapter of First Horizon as well as add staffing in our lines of businesses We have significantly increased our fraud department our cybersecurity department So we were really coming out of 3 years of investing back into the company -- and at the time we said to many of you in this room that were there on Investor Day we said give us 3 years will bring our efficiency ratio back down to peer average So in order to do that this year we had to pull back some of the spending we have been doing now that we are not doing an entire end-to-end GL replacement We're not doing an entire overhaul of our treasury management system Those are not all capitalized projects anymore because you're going to Software-as-a-Service There's a lot of expansion in that project that comes down when you're on the other side of those so the 0% was really bringing us back down to that peer average efficiency ratio From here we expect to grow in line with inflation So if inflation is 3% 35% that's where we think we'll land for next year or the year after And the way we think of that is 60% of our costs are in people And so when you think about setting a raise pool and incentive pool medical costs that's going to raise with inflation So if you -- unless you can get a lot of people out of your company you've got to let that part of your cost base run up We have 400 branches over 1000 buildings many of them have leases that automatically increase every year So we're not saying that we're going to increase how we invest back in the company We're just saying our cost drift up Where we are going to invest back in the company in the coming years it's branches it's bankers We are self-funding that We -- the reduction in the cost of running a mortgage department is being redeployed into bankers in our regional bank and into de novos in our consumer business

Janet Lee from TD Cowen So you talked about outside of construction like extra charges like it looks like commercial borrowers are pretty -- you said they're agnostic to a 25-bps rate hike So outside of the $45 billion of restructuring that you did I mean you have $2 billion $25 billion of free capital that could be deployed into higher-yielding which I believe is like C&I So should we think about the mid-single-digit kind of balance sheet growth as an appropriate rate for you going forward in this current environment? Is that the right way to think about it?

Yes I think a little bit like ROCE it's about what does the industry have available We are not going -- as I said earlier we're not going to outperform industry on loan growth We're not going to have the highest loan growth in the industry We're going to be around that peer average GDP or GDP plus but the question is what's available to go get you can grow your loans as fast as you want but can you get the credit metrics that you want can you get the equity in the deal? Do you get the rate and the structure you want And so really being disciplined about how we do that We'll give guidance on loan growth for next year in January when we set out expectations for 2027 And hopefully by then we'll have a better idea as to how this election will change the economy one of the big ones for our industry that as of the last 24 hours I haven't heard anything different but you all are much more plugged in why I've been on the road with investors the last 2 days as we're here to increase loans and so that we can continue lending So I think depending on where the industry is I don't want to say it's low single digits or mix digits and then something happens the industry is at 10 right? So let us get through the next couple of months and we'll give that in our guidance What I will say though is we have a balanced revenue business model Two years ago I stopped giving NII guidance and fee income guidance separately And it didn't go that well originally But now for 2 years we've given an outlook for guidance with a rate curve that has been 100% different than what we thought going into the year and somehow 100% doesn't seem high enough for what happened this year And yet we are still in our range of revenue guidance that we gave last December when we thought we'd have 3 rate decreases And instead we're probably going to have 2 increases What happens if we set out at the beginning of the year we thought we'd have more FHN Financial ADR we thought we'd have more mortgage warehouse in the books we thought we'd have more mortgage refi That did not happen because of the rate scenario change but now we're getting the benefit of our asset-sensitive balance sheet pricing up towards the end of Q3 and Q4 And so whether it's low single digits or mid-single digit loan growth or that changes in the year it doesn't change our outlook for revenue

Maybe on the back of your comments to finalized The other bank was talking this morning and said they didn't think they'd be able to deploy all of it because of TC becoming more of a binding constraint Can you maybe just talk about -- obviously the focus has been on 10% to 105% CET1 how do you expect to see capital ratios evolving? And do you foresee the binding constraint shift for you guys?

Yes We look at TCE/TA it's one of our ratios We review with our Board every quarter and we measure versus peers I don't see that as a binding constraint for us in the near term I don't know who said that I don't know if they're already so high in loan growth that's going further We've been pretty moderate in loan growth in the mid-single digits For us with Basel III one of the biggest pickups that we get is currently our FHN Financial portfolio has to hold capital against it But if you're under $5 billion in the new proposal you don't so just not -- just being able to redeploy that whether it's loan growth or share buybacks that's a day 1 impact for us immediately

I guess maybe one more Hope Is the clock ticking for consolidation to occur in the banking industry for the next 2 years maybe among the small and midsized banks? Or is that too shortsighted of a view?

I think the clock is always ticking down to something The question is do we think there's going to be a door slam shut I'm not sure that any of us here quite know who the presidential candidates are going to be and whether we're going to see a shift in the White House in 2028 I guess it is right? I'm trying to get my years right I think it's a concern is could we get back to an environment where you -- it's much harder to get a deal done but it's not going to make you take a deal that is unfair to you as a seller or overbid on somebody to hit that We still have a fiduciary responsibility to our shareholders to do the right financial deal And so we sat here 2 years ago and it was a red wave and they're like there's going to be nothing but consolidation There's going to be so many less things That didn't happen And so the last 2 years has not seen the mass consolidation we thought So I think the industry tends to be very rational about if you're a well-run bank who do you buy if you're going to sell when and that works really well We were with investors recently that said every bank that goes up for sale is getting a buyer I said no every bank that you hear about that's for sale is getting a buyer There's lots of banks that have been shopped for years but you look at the math and you're just like who would want to buy that?

Great So with that I think we're out of time Thank you Hope Thank you First Horizon

Thank you