First Horizon Corporation (NYSE:FHN) Q1 2024 Earnings Call Transcript

First Horizon Corporation (NYSE:FHN) Q1 2024 Earnings Call Transcript April 17, 2024

First Horizon Corporation  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Natalie Flanders, Head of Investor Relations to begin. Natalie, please go ahead.

Natalie Flanders: Thank you, Carla. Good morning. Welcome to our first quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, and then we’ll be happy to take your questions. We’re also pleased to have our Chief Credit Officer, Susan Springfield, here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and therefore, we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings.

Additionally, please be aware that our comments will refer to adjusted results which exclude the impact of notable items. These are non-GAAP measures, so it’s important for you to review the GAAP information in our earnings release and on Page 3 of our presentation. And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them. And with that, I’ll turn things over to Bryan.

Bryan Jordan: Thank you, Natalie. Good morning, everyone, and thank you for joining our call. The first quarter of 2024 was another strong quarter for First Horizon, demonstrating our ability to produce consistent returns for our shareholders. We grew revenue both through expanding our margin and improvement in our countercyclical businesses, while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate base. In honor of our 160th anniversary, we recently announced our Grants for Good Campaign, which will award $1.6 million in grants to non-profit organizations within our 12-state footprint.

We believe that the communities where we do business are the foundation of First Horizon’s long record of success and we are proud to continue to support the clients and communities in our markets. On Slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.35 per share, up 9% from the prior quarter with pre-provisioned net revenue up $25 million. Adjusted return on tangible common equity improved to 11.6%, driven by positive operating leverage, as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our countercyclical businesses. We grew the net interest margin 10 basis points from the fourth quarter from improved pricing on both loans and deposits, driving a $7 million increase in net interest income.

FHN Financial had a stronger quarter as well with a $15 million increase in fixed-income fees. In January, our Board approved a $650 million share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150 million of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near-term target. As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter-after-quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint, a competitive product set, and a strong credit culture that will allow us to profitably navigate the ever-changing economic outlook of the upcoming year.

With that, I’ll hand the call over to Hope to run through our financial results in more detail. Hope?

Hope Dmuchowski: Thank you, Bryan. Good morning. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre-provision net revenue of $323 million, up $25 million from the prior quarter. Net interest income increased $7 million from fourth quarter, driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Fees excluding deferred comp were up $13 million from last quarter, driven by higher revenues from our fixed-income business which saw a 58% increase in ADR. Expenses excluding deferred comp were down $4 million linked quarter, driven by a significant reduction to outside services, which as previously mentioned were elevated in the fourth quarter.

That reduction was partially offset by personnel increases for annual merit, seasonal benefits, and revenue-driven incentives within our fixed-income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Provision expense was $50 million this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On Slide 7, we outline a couple of notable items in the quarter, which reduced results by $0.02 per share. First quarter notable items include; incremental expense of $10 million for the FDIC, a Special Assessment which stemmed from revised estimates of the FDIC provided in February.

We also had $5 million of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies. We also noted an upcoming event in second quarter. On April 1st, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on May 1st. The Series D shares were acquired during the Iberia merger of Equals and do not qualify for capital treatment as the first call date was in a five-year window. The interest rate was set to convert from a fixed coupon to a three-month SOFR plus 4.12% in May. Second quarter will include an approximately $7 million non-cash charge associated with retirement of this instrument. On Slide 8, you will see that margin expanded 10 basis points from the prior quarter to 3.37%, improving NII by $7 million.

First quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023, with interest-bearing deposit costs declining 9 basis points from prior quarter. Loan yields also expanded 9 basis points from the benefit of wider spreads on new and renewing loans, as well as the ability to redeploy lower-yielding fixed-rate cash flows. The path for deposit costs over the rest of the year will depend on when the Fed decides to cut rates, as well as the level of competition we see in our markets. Meanwhile, loan yields still have room to modestly expand as fixed cash flows continue to reprice. As you can see on Slide 9, we’ve successfully maintained deposit balances while reducing our deposit costs. Period-end deposits are flat quarter-to-quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest-bearing rate paid.

We continue to see strong retention on the promotional deposits repriced last quarter with about 90% retention on both the number of clients and the balances. We had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately $800 million of brokered CDs maturing in the second quarter. Though, we continue to see some rotation out of non-interest bearing in January, balances were relatively flat since February. We have an overview of our diversified loan portfolio on Slide 10. Period-end loans were up 1% from the prior quarter. Loans to mortgage companies were up 17% or $343 million at period end, though average balances were down slightly due to typical seasonality in the business. CRE loans are up $210 million, driven by fund ups, primarily in multifamily.

We added some additional CRE detail in the appendix this quarter, including a geographical breakdown that illustrates the granularity and attractive footprint of the portfolio. Loan yields are up 9 basis points, continuing to benefit from wider spreads on new and renewing loans, as well as continued repricing of fixed-rate cash flows. Spreads on new loans increased 46 basis points year-over-year. Fixed-rate cash flows should continue to be a tailwind as we have $4 billion of cash flows coming back over the next year with a roll-off yield of approximately 4.4%. On Slide 11, you can see that our countercyclical businesses had a relatively strong quarter. Average daily revenue in our fixed-income business increased $268,000 from fourth quarter, contributing an additional $15 million of fee income.

The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market’s expectation that short-term rates have peaked and were likely headed lower. Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business will remain solid, though not as strong as first quarter levels. Mortgage revenue also increased by $4 million, primarily due to higher volumes. Service charges and fees decreased $2 million due to seasonality and overdraft fees. Card and digital banking fees rebounded $3 million as fourth quarter included a non-recurring impact from an accounting methodology adjustment on interchange rebates. Lastly, our non-interest income declined $6 million, mostly due to lower FHLB dividends, as well as a modest reduction in letter of credit and swap fees.

Slide 12, we show that excluding deferred compensation, adjusted expenses are down $4 million. Personnel excluding deferred comp was up $17 million from last quarter with a couple of drivers. First, salaries and benefits are up $9 million due to our annual merit increase, which were effective January 1, and seasonality in certain benefits lines such as 401(k) match and unemployment compensation. Second, incentives and commissions increased $7 million, driven by incentives on the fixed income revenue growth. Offsetting these personnel increases is a significant decrease to outside services. As a reminder, our fourth-quarter marketing expense was elevated for deposit and brand campaigns, as well as third-party services engaged on our strategic investments.

As 2024 progresses, we expect technology investment expenses to moderately increase over the year, but those costs will be offset by lower retention expenses and continuing to identify and implement operational efficiencies. I’ll cover asset quality reserves on Slide 13. Loan loss provision was $50 million this quarter, flat to prior quarter. Net charge-offs were $40 million or 27 basis points. Our largest charge-off this quarter was a $9 million C&I loan to a consumer goods company for which we were already fully reserved. We also had $12 million of partial charge-downs on three commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio.

We have remained disciplined in underwriting and our approach to client selection. While we have seen some additional negative grade migration in the first quarter, overall, we continue to see stable credit performance across markets and industries. On Slide 14, you can see that we have maintained strong capital levels while successfully deploying capital to shareholders through the repurchase of almost 11 million shares, utilizing approximately $150 million of our $650 million of share repurchase authority. Share repurchases drove a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. Adjusting for the marks on our securities portfolio and loan book, our pro forma CET1 ratio would be 8.8%, which is well above the regulatory threshold.

We will continue to opportunistically deploy capital above our 11% near-term target. First quarter tangible book value per share increased to $12.16, benefiting by $0.35 of net income offset by $0.15 of dividends, $0.15 from higher mark to market impact, and $0.04 of share buybacks. On Slide 15, we’ve updated our 2024 outlook slightly to reflect better-than-expected performance in our countercyclical businesses. We continue to expect our full-year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September, and November. Though the market’s expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact to our outlook.

We saw a strong performance from our countercyclical businesses in the first quarter, with fixed income fees up $15 million and mortgages up $4 million from prior quarter. We expect these businesses to continue to perform well, which has improved our outlook for non-interest income growth from a range of 4.6% previously to an updated 6% to 10%. The expense outlook remains unchanged despite increases to revenue-driven incentives in our countercyclical businesses due to the benefit of the operational efficiencies we have implemented. I will wrap up on Slide 16, which is a slide that you have all seen a few times now, but it really drives home that we are focused on a company in order to maximize shareholder value. First quarter was a great start to 2024 and I believe this is the beginning to a strong year for First Horizon.

We expect to deliver better revenue performance than we laid out in our original guidance, while finding operational efficiencies to maintain our expense guidance. We are making tremendous progress on the strategic investments we have been talking about for almost a year now and these initiatives will allow us to offer our clients and associates better products, better service, and improved efficiencies. First Horizon has a diversified business model that can provide top-quartile results throughout any cycle. We are well-positioned to capitalize on our 160-year legacy with our passionate and dedicated bankers, clients, and communities. We will continue to demonstrate our commitment, strength and resiliency, while increasing shareholder returns.

Now, I’ll give it back to Bryan.

Bryan Jordan: Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress over the last year on our strategic investments, which will allow our associates to serve our clients more quickly and efficiently. I continue to remain confident that this company has the people, the clients, and the enthusiasm to build an unparalleled banking franchise in the South. My expectation is that the next few months for the economy will look similar to the first quarter, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout the rest of the year.

Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield, has decided to retire later this year. We have named Tom Hung as her successor. Tom currently runs our franchise finance business and brings a wealth of credit and client experience to the role. We have already started the transition process with Tom serving as Deputy Chief Credit Officer as he prepares to officially step into the role on October 1. Susan will remain with the company until the end of the year to help ensure a seamless transition. Susan’s decision to retire is bittersweet and she will be greatly missed. She has been with the company for nearly 30 years, having served as Chief Credit Officer for 11 of those years. She led us adeptly through a number of credit cycles, maintaining strong credit quality under her leadership.

She has been a vital member of our Executive Management Committee, as well as a mentor and role model to countless young professionals throughout her distinguished career. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Thank you, Susan. Carla, we can now open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Ebrahim Poonawala from Bank of America. Your line is open.

Ebrahim Poonawala: Hi, good morning.

Bryan Jordan: Good morning, Ebrahim.

Ebrahim Poonawala: Hi, Bryan. How are you? I guess, maybe just first question for Hope around NII outlook. In the past, Hope you provided spot rates and deposit costs. Just give us, if you don’t mind, if you can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I’m assuming if we don’t get much in terms of rate cuts for the rest of the year.

Hope Dmuchowski: Thanks, Ebrahim. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest-bearing and total deposits, but on average kind of flat. Well, some of it is mixed, some of its timing. So I really want to focus on what was our overall deposit costs for the quarter. Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. We’re probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us to get that first-rate cut, the harder I think it’s going to be to continue to drive deposit costs down meaningfully. We could be a couple basis points here or there within a month or a spot rate within a quarter, but I think we’re probably close to where the deposit cost will be for the rest of the year with — within 1% maybe on the beta on either side.

It is really hard to predict. The market is just changing so quick and competition will slow one month and then pick up the next week. And so, it’s going to be kind of a month-by-month look for the industry, I think. Bryan, do you want to add anything to that?

Ebrahim Poonawala: Go ahead.

Bryan Jordan: No. Go ahead, Ebrahim.

Ebrahim Poonawala: Yes, no, and I guess just taking a step back when we look at that 1% to 4% NII guide, is it — is the delta going to be around what gets you to 4%? Is it going to be just loan growth or whether or not we get any rate cuts? Like what’s more impactful?

Hope Dmuchowski: Yes. Ebrahim, if you get to the higher end of that guidance, we would definitely have to see less rate cuts. We have an asset-sensitive balance sheet, and so less rate cuts put us — puts us at the higher end, more rate cuts put to the lower end. The thing that I can’t handicap right now within 1% to 2% on the full year is what are the deposit costs going to do for the rest of the year. We had originally given guidance, assuming we see a rate cut at some point early half the year and we start to see competition for deposit costs be going down as an industry. And if we don’t see any rate cuts, we don’t see rate cuts until late in the year. That’s where it gets a little harder for me to predict. But think about it as we’ll be on the lower end with the current curve and less rate cuts is more positive for us to get to the higher end of that guidance.

Bryan Jordan: You’ll remember when we laid out that guidance in the fourth quarter, we laid it out based on four rate cuts in 2024. And the over and under betting seems to be we’re going to — the market has two today and there are questions about whether we get two or not. So that will dictate it. So deposit and loan pricing will both be affected by how many cuts we actually do get. As Hope pointed out, the most important aspect of managing the margin is, we’re not playing solitaire. We’re doing this in a competitive marketplace. And we’ve seen pricing competition increase fairly significantly. And I think you’re seeing that show up in some of the earnings releases that are out there. And so, we’ll continue to protect our deposit base, we’ll continue to protect our customer base, and we’ll continue to compete on a long-term basis of growing the franchise.

I would say, we’re every bit as focused on managing both sides of the balance sheet. You saw improvement on loan spread and you’ve seen improvement on deposit pricing and we think that will continue. We just think it’s sort of stabilized at this point given what’s going on competitively.

Ebrahim Poonawala: Got it. Thanks for taking my questions.

Bryan Jordan: Thank you.

Operator: Our next question comes from Michael Rose from Raymond James.

Michael Rose: Hi, good morning, everyone. Thanks for taking my questions. I think, in the prepared remarks, you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you just give us a sense for what the magnitude of that could be? And Bryan, if you can just generally comment on loan demand in some of your markets at this point, obviously, I think some areas of commercial real estate a little bit weaker, but you are seeing some fund ups from existing commitments and just what you’re seeing generally on the C&I side. Thanks.

Hope Dmuchowski: Thanks, Michael. As I mentioned in my prepared comments, yes, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we’re forecasting kind of flat to maybe slightly up. As we look at where to redeploy that mortgage warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3. And it’s our highest-yielding asset that we have. We’re — so when we look at kind of how will the year project, you do need to look at the seasonality of that business. We continue to see on renewing business and new business, expanding margins anywhere from 150 basis points spread all the way up to 300 and some above 300 in our top businesses.

And so, when you think about our specialty businesses, they have a higher spread. When you think about regional businesses, they are slightly on the lower end of that. But feel confident that we will be able to, even with slowing loan demand, that we’ll be able to put this into our portfolio on the client side and be able to be there for our existing clients and bring new clients into the First Horizon franchise with an expanding loan margin.