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

Susan Springfield: Yes, there are a number of things, Jared, that, first of all, whenever we downgrade loans to non-pass, we have a policy where we do updated appraisals on commercial real estate loans that get downgraded to non-passed within several months of a downgrade. And then as we — if we start to see further deterioration and in this case, these were non-performing loans, then we’ll — in all –in these three cases, these were we reappraised six months later. Just having to look at what may be going on. The other thing that can trigger it is if there’s something in an individual loan, it could be the loss of the tenant that was — maybe it was being renegotiated, thought it was going to come up, or maybe it was renegotiated at a lower rate that could cause the need for an appraisal.

So we believe in being conservative, and if we need to reappraise, like in this case, within six months of the last one, then we’ll do that to make sure we’ve got the valuations correct.

Jared Shaw: Okay. So those three loans you talked about, they were previously non-performers, and they hit the six month. So you did an additional reappraisal. I guess, what happened with that first reappraisal? So if these are down, call it, 20%, what was that first reappraisal step down from maybe peak to current?

Susan Springfield: How long that? That’s on one of them, I mean.

Jared Shaw: Well, I guess on those three loans that were previously non-performer, I guess what — you talked about a 20% markdown now, from what I’m assuming is the six-month prior reappraisal. What’s the magnitude of sort of origination to current markdown?

Susan Springfield: Right. So in terms of — I have to look back at that. But again, on average, what we’re seeing, and I hate to do averages, because it really does vary by property. So in one case, it was down. 20%, 25% from an original appraisal. But then our charge was not nearly that much because we’ve got significant equity that we’ve gotten these properties when we underwrite them. In other cases, we’re seeing appraisal changes of 10%. So there’s a different number for each building.

Jared Shaw: Okay. All right. That’s good color. Thanks. And then maybe shifting to the fixed-income business, really good trends in ADRs this quarter. I guess, in a stable rate environment, what’s driving the expectation for lower ADRs going forward? Was that just, you saw some, maybe a spurt of activity early on, and then it tapered off or how should we be thinking about the pace of that for the rest of the year?

Hope Dmuchowski: Yes. Jared, I’ll start that. The first is, there was a pent-up demand, right? There had not been a lot of balance sheet repositioning. There had not been a lot of liquidity put to use. So we started to see it happen in December. We had a really good December, which we talked about in our last earnings call. And that just carried through to Q1. And so we think some of that is behind us and it was more of just kind of a catch-up. Additionally, the current week has given us a little bit of pause in that we are talking about not if we’ll see rate cuts, but could we see a rate increase this year. What will it look like? And that has stall, we will stall that business for a period of time. And if you run the current guidance? I know you all do after this call, it assumes kind of a 500k-ish ADR for the rest of the year, which is still significantly stronger than we saw last year in every quarter except for Q4.

Jared Shaw: Okay. Okay, thanks. And then finally, just for me, on the buyback, strong activity this quarter. Should we be thinking that you continue being pretty aggressive on that $650 million authorization, or was there anything unique in first quarter that may have accelerated some of that?

Bryan Jordan: No, we’ll continue to be very opportunistic, but we still believe that the stock is and has been on sale, and we’ll look for opportunities to manage our excess capital relative to that 11% near-term target. And the buyback is a great vehicle for doing that in the absence of a significant pickup in balance sheet growth, i.e. loan growth.

Jared Shaw: Great. Thanks a lot.

Bryan Jordan: Sure, thanks. Thank you, Jared.

Operator: Our next question comes from Chris McGratty from KBW.

Chris McGratty: Great. Thanks. Good morning. Just wanted to follow up on Jared’s question on the buyback. Bryan, you mentioned 11% as a near-term. I guess, what would lead you to change that directionally, either up or down? And maybe is there something you could consider this year?

Bryan Jordan: Well, right now, I don’t think about changing 11% near term. I think there’s still enough uncertainty in the economy and the interest rate environment that we want to see a few more cards. If anything changed, it would — it’d have to be a significant pickup in the economic environment and inflation abating significantly. And I don’t anticipate either one of those at this point. So we’ll manage to the 11% near term. We’ll have greater clarity, probably by the end of this year about what Basel 3 is likely to, Basel 3 in game is likely to look like and we can manage from there. So we’re comfortable with that target. And as we pointed out earlier, we start with a 11.3% ratio in CET1. And so, we have a little bit of gap there and we’re going to have some earnings. So we think we’ve got the capacity with the authorization that we can make a significant dent in that authorization over the next three quarters.

Chris McGratty: Okay, great. And just maybe one more on the fee income business. A lot of talk about the fixed income. The mortgage banking is a smaller line item, but directionally had a decent jump linked quarter. Maybe what’s in your assumptions in your guide, Hope, for the mortgage, just the gain on sale business.

Hope Dmuchowski: Yes. It’s not materially up from here. Q1 was coming off a pretty record low last year for mortgage originations and Q4 was somewhat anemic in that space. And so, we’re not expecting a big upturn, but just a continued originations coming in.

Chris McGratty: Okay, thank you.

Operator: Our next question comes from Steven Alexopoulos from JPMorgan.

Steven Alexopoulos: Hi, good morning, everyone.

Bryan Jordan: Good morning, Steven.