First Horizon Corporation (NYSE:FHN) Q4 2023 Earnings Call Transcript

First Horizon Corporation (NYSE:FHN) Q4 2023 Earnings Call Transcript January 18, 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: Hello, everyone. And welcome to the First Horizon Fourth Quarter 2023 Earnings Conference Call. My name is Bruno, and I’ll be operating your call today. [Operator Instructions] I will now hand over to your host, Natalie Flanders, Head of Investor Relations. Please go ahead.

Natalie Flanders: Thank you, Bruno. Good morning. Welcome to our fourth quarter 2023 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 us 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 be making forward-looking statements that are subject to risk and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on page two 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 three 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 us. I think what our company and our associates accomplished in 2023 was nothing short of extraordinary, dealing with a significant shift in the banking landscape and the termination of our plan merger. We’ve detailed some of our highlights on slide five. Despite all the disruption this year, our 2023 provision — pre-provision net revenue was essentially flat to the prior year. We saw the benefit from our asset-sensitive balance sheet with the margin expanding 32 basis points versus 2022. This offset the decline in revenue from our counter-cyclical businesses, demonstrating the benefit of our diversified business model. Most of you have heard me say that we manage our company with three top priorities in mind, safety and soundness, profitability and growth.

You saw the benefit of that when our balance sheet was well-positioned to weather the crisis of a few banks this spring. This prudent balance sheet management enabled us to better serve our clients and strategically expand market share. We grew both loans and deposits at significantly higher rates than the industry as a whole, supported by our exceptionally strong capital levels. Our deposit growth was kick-started by our second quarter campaign. We raised over $6 billion of new-to-bank customer funds and we have retained 96% of that money as of year-end. We have long-tenured deep relationships with our clients and we’re excited to continue to deliver on the promo-to-primacy efforts with the clients we acquired in 2023. We have some of the financial highlights for you on the quarter of — financial highlights of the quarter on slide six.

We delivered adjusted EPS of $0.32 per share on pre-provisioned net revenue of $298 million, resulting in a return on tangible common equity of 11.1%. We grew the net interest margin 10 basis points from the third quarter as we improved our asset pricing and balance sheet mix. We anticipate the continued expansion into the first quarter as we successfully normalize pricing on our promotional deposits, reducing our interest-bearing deposit costs by approximately 15 basis points at the end of the quarter. We generated 29 basis points of common equity Tier 1 capital this quarter, bringing us to 11.4% at year-end. As I reflect on 2023, I’m incredibly thankful for the dedication of our associates as they continue to deliver value for our clients, communities and shareholders.

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 seven, you will find our adjusted financials and key performance metrics for the quarter. We generated pre-provisioned net revenue of $298 million this quarter. Net interest income grew $12 million from third quarter, benefiting from asset rate pricing and our ability to improve the funding mix. This expanded the margin by 10 basis points from the prior quarter. We expect to build upon this momentum into first quarter, which will benefit from our deposit pricing efforts in late fourth quarter. Fees, excluding deferred comp were flat to linked-quarter, benefiting from higher fixed income, which was offset by the timing of a couple discrete items. As expected, expense excluding deferred comp were up $30 million, driven by higher variable compensation tied to revenue and increased strategic investments in the quarter, which we expect to moderate in first quarter.

Provision expense was $50 million this quarter, increasing ACL coverage by 4 basis points, which was largely driven by modest deterioration in the macroeconomic scenarios used for CECL modeling, primarily within commercial real estate and consumer. Tangible book value per share increased 8% to $12.13. On slide eight, we outline a couple of notable items in the quarter, which reduced our results by $0.01 per share. Fourth quarter notable items include the FDIC special assessment of $68 million, a pre-tax gain of $1 million from the net of a small opportunistic FHN Financial asset disposition and equities valuation adjustment. Additionally, we have one notable tax item, a $48 million discrete benefit primarily attributable to the resolution of merger-related tax items related to the IberiaBank merger.

On slide nine, you will see that our margin expanded 10 basis points from the prior quarter to 3.27%, improving NII by $12 million. Fourth quarter benefited from a full three months of the rate hike that occurred in July, which improved asset yields. We were also able to use customer deposits and excess cash to pay down a significant amount of broker deposits, improving our funding profile. The average rate paid on those broker deposits was 5.3%. Though the impact of fourth quarter was modest, our success in repricing the promotional deposits gathered in our second quarter campaign will benefit margin as we head into 2024. As you can see on slide 10, we’ve been successful in executing our deposit strategy this year. Period end deposits are up 4% year-to-date, compared with a 2% decline in the Fed’s H8 data.

Retention of the promotional deposits acquired in the second quarter campaign has been exceptional so far at 96%. Those promotional rate guarantees expired late in fourth quarter and we were able to reprice those deposits down by an average of 76 basis points. This strong retention allowed us to pay down $1.2 billion of higher cost broker deposits. Though we’re continuing to see some rotation out of non-interest-bearing, we’ve been able to acquire just under $1 billion of new-to-bank interest-bearing accounts at a blended cost of 3.3%, which is down from the 4.2% acquisition rate we saw in the third quarter. The interest-bearing rate paid of 3.37% this quarter was essentially flat to the prior quarter, rates peaked in October and came back down as the promotional accounts were repriced in the back half of the quarter.

The end of period rate on interest-bearing deposits declined to approximately 3.25%, while the total deposit rate fell to roughly 2.4%. We expect this to provide upside to NII and margin next quarter. We have an overview of loans on slide 11. Our strong capital position and ability to grow deposits supported 5% year-to-date loan growth. Loan demand softened in the fourth quarter, with period end loans declining 1% from the prior quarter. About half of that decline was due to typically seasonality of loans to mortgage companies. This business experiences some seasonality, tending to peak in the third quarter, then decrease until hitting first quarter lows. C&I production was fairly muted as we entered into the quarter, though we saw that stabilize a bit in the back half of the quarter.

CRE growth continues to be driven by fund ups from existing loans, primarily in multifamily. And as you would expect, total commitments have come down slightly, as there’s not a lot of new production in that sector. Consumer balances are relatively flat, as we’re focused on using the balance sheet for customers, like our Medical Doctor program, where we continue to build deeper relationships. We are continuing to improve pricing with spreads on new loans increasing 21 basis points since last quarter and 64 basis points year-over-year. On slide 12, you can see that fee income, excluding deferred comp, remains stable at $173 million. Our fixed income business saw an increase of $9 million as the market’s expectations that the Fed has finished raising rates brought some participants back into the market.

Mortgage revenue was down $2 million, largely due to seasonally lower volume. Brokerage income increased $2 million, driven by higher annuity sales. Card and digital banking fees were down $4 million, driven by a methodology adjustment on interchange rebates, resulting in a one-time impact of fourth quarter. Lastly, other non-interest income declined $5 million, mostly due to elevated FHLB dividends in third quarter, as well as a modest reduction in BOLI revenue. On slide 13, we show that excluding deferred compensation, adjusted expenses are up $30 million. Personnel, excluding deferred comp, was up $14 million from last quarter with a couple of drivers. First, there is about $4 million of incremental incentives in our variable revenue businesses, driven by higher production this quarter.

We also accrued $5 million of additional expense, primarily related to the retention awards, as the stock price rose almost 30% this quarter. Lastly, medical expenses were up $5 million linked quarter, due to seasonality and a couple of large one-time claims. Moving on to our strategic investments, you can see the technology investments entering the run rate and occupancy and equipment. There should continue to be modest growth here, as we make progress bringing these projects online. Outside services increased this quarter, driven by a couple of items. Marketing was elevated from seasonality and sponsorship and client events that typically occur in fourth quarter, as well as the impact of some of the delayed costs we mentioned last quarter, primarily related to client acquisition and brand campaigns we initiated in late third quarter.

We also engaged additional third-party resources for consulting and resource augmentation on key projects. Fourth quarter had elevated expenses due to these items that will moderate next quarter. Expenses will stabilize as costs and technology investments increase throughout 2024, but are offset by lower retention expense and other operational efficiencies. I’ll cover asset quality reserves on slide 14. Loan loss provision was $50 million this quarter, down from $110 million in third quarter, which includes a $79 million idiosyncratic credit loss last quarter. Net charge-offs were $36 million or 23 basis points across multiple industries and sectors. The ACL coverage ratio increased 4 basis points to 1.4%, driven by marginal deterioration in the macroeconomic scenarios used for CECL modeling, primarily in CRE and consumer, as well as modest grade migration.

We continue to see credit migration, but we are not seeing any specific pockets of stress and what we are observing in this environment feels manageable. On slide 15, you can see that we have continued to build on our strong capital levels. We generated 29 basis points of CET1 this quarter, bringing us to 11.4%. Adjusting for the marks on our security portfolio and loan book, our pro forma CET1 ratio would be 9.1%. Total capital remains strong, reaching 14% this quarter. Tangible book value per share was $12.13, increasing 8%, driven by $0.72 from lower mark-to-market impact and $0.34 of net income, partially offset by $0.15 of dividends. On slide 16, we’ve reiterated the 2024 outlook we gave you in December. We expect to grow pre-provisioned net revenue from 2023 levels, as our ability to generate revenue more than offsets our strategic investments and we continue to look for operational efficiencies to offset rising costs.

Our interest rate outlook assumes four rate cuts, with the first cut occurring in May. Given our ability to reduce funding costs, continued asset repricing and modest balance sheet growth, we expect net interest income to exceed 2023 levels. Fee income improvement will be driven by a modest rebound in the counter-cyclical businesses. The expense outlook includes continued progress on strategic technology investments, as well as a modest amount of incremental investment in personnel, including the annual merit adjustment that went into effect at the beginning of the year. The net charge-off guidance reflects continued macroeconomic uncertainty. As we have previously communicated, we do not see a need to continue to build incremental capital, giving us the opportunity to deploy capital in excess of that 11% CET1 target.

I will wrap up on slide 17. We have shown you this slide several times this year and Bryan opened with a version of it that listed a few of the things that this team accomplished in 2023. It is remarkable to reflect on everything that occurred this year and when I look at this slide, I am proud of everything the company did to serve our clients amidst significant industry disruptions and uncertainty, to deliver on the expectations we laid out during Investor Day in second quarter. To recap 2023, our Investor Day guidance for net interest income was a growth range of 6% to 9%, with actual growth coming in at 6%. Similarly, our fee income guidance was a decline between 6% and 10%, with actual fees down 9%. Lastly, we gave an expense growth range of 6% to 8%, at 5%, we came in favorable to that guidance, as we found efficiencies to offset other investments.

Despite a challenging environment, our dedicated bankers delivered on our commitment to clients and our diversified business model, producing consistent pre-provisioned net revenue year over year in 2023, which we anticipate building on in 2024. We have a strong balance sheet, which weathered the challenges the banking industry faced earlier this year, sorry, earlier last year, demonstrating our ongoing commitment to safety and soundness first. As always, we stayed focused on our clients, communities and associates, which results in strong client and associate retention. We are well positioned to capitalize on our 160-year legacy and I am excited to continue to demonstrate the strength and resiliency of our franchise in 2024 and beyond. And with that, I’ll give it back to Bryan.

Bryan Jordan: Thank you, Hope. Our 2023 results reflect the strength of our franchise and I’m incredibly proud of everything our associates accomplished this year. Their commitment to serving our clients enabled us to navigate an uncertain environment and come out of the other side stronger. I continue to remain confident that this company has the people, the clients and the dedication to build an unparalleled banking franchise in the South. My expectation for 2024 is much like 2023. With all that’s going on in the world, the economy continues to perform well and it still looks like a soft landing is possible. Thank you to our associates for all that you have done for our company, our clients and communities and our shareholders in 2023. Bruno, we can now open up for questions.

Operator: Thank you. [Operator Instructions] We do have our first question comes from Jon Arfstrom from RBC Capital Markets. Jon, you may proceed with your question.

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Q&A Session

Jon Arfstrom: Hey. Thank you. Good morning.

Bryan Jordan: Good morning, Jon.

Hope Dmuchowski: Hi.

Jon Arfstrom: Hey. Maybe a question for you, Hope, on the net interest income outlook. You made some comments on 2023 performance against your guidance and I just — I wanted to ask about the 2024 NII outlook range. I’m curious what kind of an impact do the four cuts have on your net interest income and margin outlook, and what kind of puts and takes do you have for getting the company to the lower end or the higher end of the range? Thanks.

Hope Dmuchowski: Thanks, Jon. I appreciate the question and good to hear from you in 2024. As we look at 2024, I know I’ve seen guidance out there from other different rate scenarios. We did use the four rate cut scenarios. The biggest impact in that range is how many cuts do we get and when. So our first one’s in May. If it happens later in the year than that, we would have a benefit to our margin. The biggest factor that we need that we have in the range when we look at a couple different scenarios is how quickly can we rephrase down those client deposits. We’ve shortened the duration of the promo rates and the deepening rates that we have and so our anticipation would be that as we saw rates decrease, we’d quickly be able to offset that in our funding costs.

Jon Arfstrom: Okay. So it’s safe to say if we’re less than four, you’re probably at the higher end of that range. If we’re at four, we’re mid to lower end. Is that fair?

Hope Dmuchowski: That’s correct, Jon. And also, we could be on the higher range — higher end of the range with four if we can bring down deposit pricing quicker with the rate decreases.

Jon Arfstrom: Okay.

Hope Dmuchowski: It depends on what that lag is.

Jon Arfstrom: And then just — yeah, okay. And then overall thoughts on loan growth for 2024? I was looking for it in here and I think I may have missed it somewhere, but how are you feeling about overall loan growth expectations?

Bryan Jordan: Jon, this is Bryan. We feel pretty good about loan growth expectations. We expect to see the balance sheet growth some. We think, as I said in my closing comments, that the economy is still growing consistently with the end of 2023, financial conditions have sort of ebbed and flowed, but I’d say overall they’re still on the tight side and I expect that loan growth will be more muted this year as a result of that. Our balance sheet benefits a little bit from the spring-loaded nature. We have some fund up of some commitments, construction, et cetera, that was set up a couple years ago or originated a few years ago and we feel very, very good about the opportunities we’re seeing. We’re being very selective in the opportunities that we choose to put on our balance sheet.

So we expect a little bit of modest growth, but we don’t expect it to be outsized given our outlook for the economy. To sort of go back to comments that Hope was making about the margin, the — our modeling is just based on taking a forward curve that’s implied in the market. At some point in time, it could have been $238 on December the 31st. It’s moving around a whole lot, which tells you there’s a fair amount of uncertainty about what interest rates will actually do. The Fed’s comments were interpreted as pretty significant cuts and the market implies. We don’t — I personally don’t feel that strongly that the Fed’s going to cut rates early in the year. I think rates are going to hold up better or higher than the market’s expectations right now.

But I wouldn’t substitute our judgment for the market. So we just use a market curve that ultimately reflects what is a slowing economy and interest rates coming down.

Jon Arfstrom: Yeah. Okay. That’s helpful. I’m more near camp, Bryan, but the framework you provided helps. So thank you for that.

Bryan Jordan: Sure.

Operator: Our next question comes from Michael Rose from Raymond James. Michael, your line is now open.

Michael Rose: Hey. Good morning. Thanks for taking my questions. I just wanted to go to the slide 24 in the appendix as it relates to FHN Financial. I appreciate you guys putting that in there. You guys had a nice uptick in ADRs this quarter. I certainly understand the way this business works. But can you just give us what your baseline expectation is for ADRs as we move through the year, assuming your rate cut expectations and then what it could look like in your estimation if we move a little bit slower? Thanks.

Bryan Jordan: Yeah. This — FHN is as you just implied very sensitive to what interest rates do. We did see a little pick up in the fourth quarter of this year. That was really based on the market reaching a conclusion that the Fed had reached peak rates and that we’re more likely to see rates falling and falling rates tend to be good for our fixed income business. Our expectations are for somewhat slightly higher average daily revenue next year. We think the markets will continue to stabilize and improve, particularly if the market follows the path that is laid out in terms of rate cuts next year. We don’t expect that FHN Financial is going to bounce back to 2000 and 2021 levels, but we do expect some modest improvement next year.

Michael Rose: That’s helpful. And maybe just as my follow-up question, just assuming that you — I just want to get a sense for how much flex there would be in the expense base if the revenues don’t necessarily come through. For instance, is there some technology costs that you could maybe push out or what other areas could you look to address if the revenue expectations come in at the lower end of expectations? Thanks.

Bryan Jordan: Yeah. Yeah. Our expense base at FHN Financial is very heavily tied to revenue. We have a system that is scalable costs with scalable revenue. Our team has done, I think, a fantastic job in controlling costs and even when you reach the lows in the cycle, we still make money in the business, and clearly, it’s not as profitable as it is at better or higher points in the cycle in terms of average daily revenue. But we’ve got the ability to control those costs and we will flex them, and we expect that no matter how low ADR is likely to drop in the near-term, we think we can eke out profitability even at the lowest levels and with some expectation for higher ADRs, we expect to be in a much better position through the course of 2024.

Michael Rose: Bryan, I appreciate that call. I meant holistically for the firm, not just FHN Financial.

Bryan Jordan: Oh! Okay.

Michael Rose: Sorry for if that wasn’t clear.

Bryan Jordan: No. Well, yeah, so expense levels are something that we have acknowledged that we have most control over. It’s something that we will stay focused on. We have demonstrated over a number of years the ability to control costs and take out costs out of the organization. In terms of the levers that are at hand, we think we have a number of levers. And in term, you mentioned specifically technology costs and while we’re investing in technology, we think those investments are important, particularly what I described as deferred maintenance or remedial investments from last year. There were some things that we had to get called out. So that’s a potential lever, but it’s not one I expect us to pull. Our overall cost consciousness in the effort we have in the organization I think gives us the ability to control costs as we sort of move through an environment if revenues don’t play out the way we expect.

So, again, I think that overall cost consciousness will serve us well in 2024.

Michael Rose: Appreciate the call. Thanks for taking my questions.

Bryan Jordan: No. My pleasure and sorry I misinterpreted the first time.

Operator: Our next question comes from Casey Haire from Jefferies. Casey, your line is now open.

Casey Haire: Great. Thanks. Good morning, everyone. Quick follow-up on NII, specifically the funding side of things. So, first off, is the $6 billion deposit promotion, is that fully rolled over and then what kind of deposit beta are you expecting along these four cuts?

Hope Dmuchowski: Good morning, Casey. Good to hear from you on 2024. Yes. We are fully through that repricing of the second quarter promo campaign and that 96% retention is an up-to-date number as of yesterday. So it’s not a December 31st number. It is an up-to-date number of what we’ve seen in retention on that. Through the cycle when we think about deposit rates, we really think it’s through the cycle of when do you start cutting rates and we’d probably be right around 60. If we see a May cut, we would end our beta cycle about 60. If it got later in the year, the first cut and the cycle continued, we do think that we can continue to moderate by bringing in client deposits, paying down a little bit more of a wholesale, as well as, as we mentioned in my prepared remarks, we saw a fourth quarter new-to-bank money at a significantly lower cost than we saw the prior quarter.

So we are seeing the ability to step back, not just existing money and retain it, but also bring new money in, about $1 billion in each of the last two quarters, for a lower rate than we saw in the second quarter.

Casey Haire: Got you. Okay. And just as a follow-up, trying to gauge buyback appetite, it’s — at CET1 at 11.4%, you’re comfortably above your 11% target. You do mention organic capital deployment, but it doesn’t seem like, I mean, Bryan — to Bryan’s point, loan growth sounds kind of muted. Is there — it just seems like you guys are being a little vague on the buyback, given the strength. Do we — do you manage CET1 back to that 11% level or are you going to run above that?

Bryan Jordan: Yeah, Casey. This is Bryan. We have — at this point, we don’t have an authorization with respect to share repurchases. I expect that that’s one of many things that the Board will evaluate when we work through sort of our continued outlook for the remainder of the year. And so it is one of the tools that we will consider, but ultimately, that’s a Board decision that gets made in the context of safety and soundness, outlook on the economy and so we expect to have those discussions, and again, that’s one of the levers we think that is on the table to manage that capital level.

Operator: Our next question comes from Ben Gerlinger from Citi. Ben, your line is now open.

Ben Gerlinger: Hey. Good morning.

Bryan Jordan: Good morning, Ben.

Hope Dmuchowski: Good morning.

Ben Gerlinger: I was curious if we could talk through — I know this is kind of more philosophical in nature, but the CD campaign, you obviously got a lot more money coming in than previously expected or at least kind of what the implication was. So from that, I get that there’s a retention, but how much of that is actually turning into new business, i.e., something along the line of the income line and more bringing over a relationship in general in terms of a lending opportunity?

Bryan Jordan: Yeah. In terms of the retention, the retention has been very, very good and our bankers are, I think, executing very, very well on what we’re referring to as promo-to-primacy. And while it is still early, we think we are making good progress in taking those new-to-bank relationships and broadening and expanding those relationships and that doesn’t happen instantaneously, but we see early indications that are encouraging.

Ben Gerlinger: Got you. And then is that embedded in anything or is that kind of just icing on the cake for a 2024 if they start to bring over wealth or something like that?

Bryan Jordan: Well, inherently, that’s embedded in our estimates of fee income and net interest margin. So, yeah, inherently, it is embedded, but there’s not a specific add-on at this point in terms of the way we manage our forecasting and budgeting.

Ben Gerlinger: Got you. And then just to completely switch gears here in terms of just lending appetite, I get there’s so many competitors here in the Southeast that are pulling back or reorganizing or something that might have them take their eye off the ball. Are you seeing additional client ad potential? Just from a commercial perspective, if you could highlight any areas within any lending categories where you’re seeing better risk-adjusted spreads or conversely kind of shying away because it really just doesn’t make a lot of sense? I get office is an easy little thing to prove to call up, but just anything more granular than that would be helpful?

Bryan Jordan: Yeah. I’ll start and then ask Susan to sort of pick up. We sort of get varying degrees of information and a lot of it is anecdotal. I would say, in the middle of 2023 and in the early fall, you saw more people actually pulling back from the markets in terms of lending appetite and getting out of lines of businesses, which we think created a number of opportunities for us in things like mortgage warehouse finance and mortgage warehouse lending and restaurant finance and things of that nature. The markets seemed to stabilize a little bit as you got into late 2023 and whether that was the Feds essentially loosening financial conditions by talking about the speaking of rates and potential for rate cuts being the topic of 2024.

The market seems to have stabilized a little bit in terms of lending appetite and has probably gotten a bit more competitive. There are one or two examples of folks who are not taking new or new-to-bank relationships that are now back into the market. So it ebbs and flows. All of that said, we feel very good about the opportunities that we are seeing. We try to execute with a very consistent and steady go-to-market approach. We try not to pull into and out of markets based on what’s happening in the next 25 days or 30 days by our estimate and essentially, what we believe is how we conduct ourselves in those periods of volatility are the things that define us for the next 25 years with our clients and our customers. We literally try to just be very steady and very stable.

And as a result, I think, we continue to see a number of attractive opportunities. It’s not a high volume because the economy doesn’t support that, but we’re very encouraged by what we’re seeing in the market. Susan?

Susan Springfield: I agree with what Bryan was saying. We do take a through-the-cycle approach. As Bryan says, we try not to have the pendulum swing too much either way when times are really good or when things are a little slower or more challenging like they are today with the higher interest rate environment. We want to be there for our clients and communities and we have been. There were some instances mid-year where we were able to step up for existing clients when others were not. But it is a market where we’re able to get good core underwriting metrics, good structures and some good risk-adjusted returns on the pricing as well. So, again, we want to be there for clients. I think there are some opportunities in our specialty lines as well as in our market to take some generational opportunities potentially away from some competitors who might be having some kind of disruption in their ability to execute.

Ben Gerlinger: Got you. That’s really helpful color. I’ll actually email, I have a couple of those real small modeling questions. But I’ll sit back in the queue. Thanks.

Bryan Jordan: All right. Thanks, Ben.

Operator: Our next question comes from Brady Gailey from KBW. Brady, your line is now open.

Brady Gailey: Hey. Thank you. Good morning, guys. I wanted to start on the credit quality front. Last quarter, we saw the little blip with the shared national credit loss. This quarter we saw NPAs increase by about 17%. They’re still at a relatively low level, but maybe just updated thoughts on, it feels like credit is normalizing here, but just updated thoughts on how you’re thinking about credit into 2024?

Susan Springfield: Hey, Brady. It’s Susan. I’ll take that. We are being, as I just said in answer to the last question, very disciplined in our approach and we have been, we have been for years and so I do believe that that disciplined approach to client selection, the fact the markets that we’re in are very strong will continue to serve us well. As you pointed out, we’ve had some downgrades into non-performing and classified, but it’s very manageable at this point. We’re not seeing any specific things related to markets, industries, product types at all. We did a lot of deep dive work in 2023. We’ll continue that in 2024. We do it — really do it all the time, especially in a higher interest rate environment, we’re making sure that we’re touching the portfolio and even at a higher level where more executive management is involved in portfolio reviews.

So I feel very good about the fact that we’ve got discipline in how we’re grading and servicing credit. I think the outlook is one where we will perform well, our eyes on the ball and we’ll continue to be conservative both at origination, but also in how we think about grading and marking our loans each and every quarter.

Brady Gailey: All right. That’s helpful. And then, First Horizon is about $80 billion in assets now, so you still have some time until growth takes you to $100 billion. Maybe just updated thoughts on how you’re preparing for that and what you think the impact will be and when you think First Horizon could see that $100 billion mark organically.

Bryan Jordan: Brady, good morning. The way we’re preparing is we’re practicing treading water right now. We think at the end of the day that we have some flexibility in terms of managing the balance sheet and while it’s not clear what becoming $100 billion then for LFI entails and particularly with the proposals that are out on Basel III, we’re taking the time to understand that and to navigate through it. Some aspects of it we’re likely to have to deal with earlier, particularly if the final rule gets issued on resolution planning for $50 billion to $100 billion organizations. Some of those things will start to work their way into the system. But right now, we’re studying what becoming an LFI looks like. We’re preparing the groundwork for it.

But at the end of the day, we’re not going to just stumble across $100 billion. We have a few years of flexibility and as I’ve alluded to, the ability to tread water and keep our balance sheet at a level that doesn’t push us over a bright line threshold accidentally.

Brady Gailey: Okay. Great. Thanks, guys.

Bryan Jordan: Thank you.

Operator: [Operator Instructions] Our next question comes from Timur Braziler from Wells Fargo. Timur, your line is now open.

Timur Braziler: Hi. Thank you. Maybe a follow-up to Brady’s credit quality question. Just any color on what the increase in non-performers was in the fourth quarter?

Susan Springfield: It was really several different industries reflected on the top four that were added. You had one that’s an online retailer. We had one, a CREE Hotel [ph] project that was added. Then, a couple of other just general C&I credits more kind of the drivers of the — bigger drivers of the increase. One was a Hub and then one, Franchise Finance restaurant credit.

Bryan Jordan: It looks to us like, as we see the credit portfolios performing, that it’s still largely driven by idiosyncratic trends as opposed to broad-based, this category of asset or that category of asset. So what I’m really sort of suggesting is, borrowers that start in a more stressed position, more levered, inability to take price, higher cost pressures, interest rates, again, some — that’s stressing some borrowers more than its stressing others. We’re not seeing broad-based trends in the portfolio right now. As Susan said, we’re spending a lot of time doing deep dives and analytics, but at the end of the day, the trends seem to be driven by more idiosyncratic stories than anything.

Susan Springfield: Yeah. As an example, the hotel project that we added experienced some construction delays. So they’re just a little behind on where we thought they would be according to plan. That’s an example, like Bryan said, where it was related to something not necessarily industry-related. The others would have similar stories of one-off situations.

Timur Braziler: Okay. Thanks for that. And then, going back to expenses and the technology spend specifically, I think, the commentary prior had been around $100 million in technology spend over the next three years. Can you provide maybe some greater clarity on the cadence of that spend? Is that pretty even over the next three years or some of that remedial spend, as you call that? Is that something that’s going to be maybe a little bit more forward skewed?

Hope Dmuchowski: Timur, thanks for the question. Technology spend tends to be back-loaded. As the project’s gearing up, you’re capitalizing costs, the software doesn’t go into maintenance yet and so it is a little bit more back-loaded. We talked about in Q3, undershooting our expenses in the quarter. We’ve seen that hit in Q4. Those projects have started up. I said in my prepared remarks, we expect that the back half of next year, we will see those costs increase and then increase going into 2025 as the bulk of what we started in the second half of this year starts to hit the run rate at the full size. And that being said, we are, as we continue to say, looking at operational efficiency just to figure out how we can offset some of that investment.

We do expect — in 2024, we expect that in the back half of the year, we’re going to offset on a P&L basis the increased technology spend with the retention dollars that are running off that we have somewhat flat expenses throughout the year and we’ll continue to focus on looking at how we do that.

Timur Braziler: Okay. That’s good color. And then one more, if I could. Just on the promo deposits rolling off, that retention is impressive at 96%. I guess, what did those borrowers or those clients roll into? Are those back in CDs? Did that move to money market? I guess, what is the current CD specials out there right now for you guys?

Hope Dmuchowski: That was all money market, that repriced in Q4. Our CDs were actually a nine-month or 11-month CD, but we’re not as material. We’re repricing Q2.

Bryan Jordan: Those rates were down 75 basis points, 76 basis points from the special rates.

Timur Braziler: Okay. Thank you.

Hope Dmuchowski: The second part of your question was, what was the current offers? So our current offer is a deepening relationship of 4.25% [ph]. As you’re coming off promo, if you bring more money to the bank, you deepen your relationship with us, the offer’s 4.25%. You can see we ended up at about 75 basis points, 76 basis points down. We’ve gotten pretty far to that 4.25% rate. There’s always some negotiation in the discussion, but we believe that overall, that 4.25% is the target for new money coming in.

Timur Braziler: Great. Thank you.

Operator: Our next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is now open.

Christopher Marinac: Hey. Thanks. Good morning. Just one more credit question for Susan. Do you think that the C&I specifically would see some deterioration this year or should this quarter still stay intact?

Susan Springfield: Hey. I think, the — Chris, the interest rate outlook of stable rates may be going down. I — again, I think, you’ll see mostly stability based on the fact that we’ve done deep dive portfolio reviews, really throughout different sectors, C&I inquiry. I am not — I feel like we’ve got things graded in the right place. We’re continuing to talk to clients. We’re stressing — doing stress projections and the underwriter service credits. And so I think absent something really changing in the economy, if it were to worsen, obviously, we’d take another look, and it could impact clients then. But based on what we know today, I feel good about kind of a stable outlook at this point, based on what we’re seeing now.

Christopher Marinac: Great. Thank you for that. And then, Bryan, for you, do you think we’ll see consolidation in the industry this year and is there a scenario where First Horizon would be interested in buying other banks, even something small to fill in the footprint?

Bryan Jordan: Good morning, Chris. I think you might see consolidation start to pick up later in the year. I don’t think that it’s going to be a robust environment personally. I think there’s still a tremendous number of headwinds, the purchase accounting marks being the largest at this point and then I think some of the uncertainty around what the regulatory landscape looks like, both in the context of what it takes to get a deal approved and how long that takes, as well as what does it mean if you deal with some of the bright lines like $100 billion in LFIs. So I don’t expect a tremendous amount of pickup during the course of this year. In terms of First Horizon, our priorities are executing on the things that we’ve talked about and that’s dealing with the investments we want to make in technology and continuing to grow customer and client relationships.

If you look backwards, we had spent roughly three years, maybe closer to four, depending on how you count it, in the merger of equals integration and then the pre-termination period. We really want to use this period of 2024 to continue to prove out the power of the franchise that we’ve built and we think we have plenty of opportunity to deploy capital there.

Christopher Marinac: Great, Bryan. Thanks for sharing that. I appreciate it.

Bryan Jordan: Sure. Thanks.

Operator: Our next question comes from Brody Preston from UBS. Brody, your line is now open.

Brody Preston: Hey. Good morning, everyone.

Bryan Jordan: Good morning.

Hope Dmuchowski: Good morning.

Brody Preston: I wanted to circle back on the buyback commentary. Bryan, if I heard you correctly, you said you don’t have an authorization and you’re expecting to discuss it with the Board. I guess I’d ask when’s your next Board meeting and will it get addressed at that Board meeting?

Bryan Jordan: Well, as a matter of fact, our next Board meeting is next week. So we always cover financial outlook, capital management, our capital outlook with our Board. So that’s a meeting-to-meeting thing. I don’t want to prognosticate what the Board is likely to do or not do in our next meeting, but capital management is one of those things that we always spend time on. We think about it from the context of adequate capital as we stress test our balance sheet. We continue to do that and report it publicly. So I don’t want to get into what the Board may or may not consider next week, but it’s always a topic in terms of our balance sheet and financial outlook.

Brody Preston: Understood. Hope, maybe I could ask you, could you speak to the non-interest-bearing mix that’s underlying the NII guidance that you provided?

Hope Dmuchowski: Brody, we do have a small, the NII guidance has a small increase in non-interest-bearing for 2024. We went out pretty aggressively at the end of Q4 and starting in Q1 with a new-to-bank cash offer for new checking accounts. We haven’t done that before and so we are seeing some positive momentum, which I had in my prepared remarks, but I wouldn’t say, it’s meaningful.

Brody Preston: Got it. And what does it take to pay off further pay down broker deposits? Is it an ability to grow other deposit sources or would you look to kind of pay down some of that with the securities cash flows that you have on a quarterly basis?

Hope Dmuchowski: The answer is yes to all of that. So we want to continue to bring client money in to offset our loan growth. We do have loan growth projections next year and so we are focused on it and you saw us have a large closing Q4 on the marketing front as we get into our Q4 2023 as we get into 2024. And we have paused reinvestment in our securities portfolio. We use our securities portfolio to hedge our interest rate sensitivity. We’re happy where we’re at and expect that that cash flow will continue to come back. For us, number one is creating client deposits so we can lend them to clients and if we have to be a little bit in brokered for that, we will be. The bigger thing for us when we look at brokered going into 2024 is the mortgage warehouse.

As you look at the seasonality of there, you can possibly see some brokers have to come back in and then out the next quarter. But being our highest yielding asset and being short-term on the balance sheet is a great trade for us.

Brody Preston: Got it. Okay. And then last one for me and I’m sorry if you totally addressed this question, I think somebody asked about it a little earlier. It was just on that 3.25% spot deposit cost. Is that where we bottom out unless we get rate cuts or will it incrementally decline from that level in the first quarter as the last of the promo stuff kind of rolls off?

Hope Dmuchowski: We’re anticipating it declining Q1 modestly. We do have additional brokered we can pay off that was lattered out. If you look at our cash balance at the end of the quarter, the bigger piece will be what does low growth look like in Q1, right? Can we pay down brokered with the excess money when it comes due or do we put it to low growth? But I would say, 3.25% is definitely…

Brody Preston: Got it.

Hope Dmuchowski: … the high length and we’ll be bringing it back down until we see a rate decrease. We do believe we’ve hit the peak of our beta last quarter and that we’ll continue to bring it down. Again, not meaningful, but basic point here and there each quarter is what we’re targeting.

Brody Preston: Got it. All right. Thank you very much for taking my questions.

Bryan Jordan: Thank you.

Operator: We currently have no further questions, so I’d like to hand back the call to our CEO, Bryan Jordan. Please go ahead.

Bryan Jordan: Thank you, Bruno. Thank you all for joining our call this morning. We appreciate your interest in our company and you taking the time to join us. Please reach out if you have any follow-up questions or if we can provide any additional information. I hope everyone has a great day.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines. Thank you.