First Horizon (NYSE:FHN) National Corporation (FHN) reported its fourth-quarter 2024 earnings on January 16, 2025, surpassing analysts' expectations with an adjusted earnings per share (EPS) of $0.42, compared to the forecasted $0.39. Despite this earnings beat, the company fell short of revenue expectations, reporting $729 million against a projected $820.34 million. Following the announcement, First Horizon's stock rose by 2.95% in premarket trading, reflecting investor optimism.
Key Takeaways
- First Horizon's EPS exceeded forecasts by $0.03.
- Revenue fell short of expectations by approximately $91 million.
- Stock price increased by 2.95% in premarket trading.
- Company maintained strong capital ratios and disciplined expense management.
- Optimism for growth in 2025 amidst muted loan growth and competitive deposit market.
Company Performance
First Horizon demonstrated resilience in the fourth quarter of 2024, with an increase in adjusted EPS to $0.42, up $0.06 from the prior quarter. The company focused on maintaining expense discipline and optimizing operations, contributing to a stable financial performance despite challenges in the broader banking sector. The firm's strong deposit growth and diversified business model have positioned it well in the competitive Southeastern U.S. banking market.
Financial Highlights
- Revenue: $729 million, below the forecast of $820.34 million.
- Adjusted EPS: $0.42, exceeding the forecast of $0.39.
- Pre-provision net revenue increased by $11 million.
- Adjusted return on tangible common equity: 13.2%.
- Common equity Tier 1 ratio: 11.2%.
Earnings vs. Forecast
First Horizon reported an adjusted EPS of $0.42, surpassing the analyst forecast of $0.39 by approximately 7.7%. This marks a positive surprise, driven by the company's focus on operational efficiencies and cost management. However, revenue came in at $729 million, missing the forecast by roughly 11.1%, which may raise concerns about the company's top-line growth strategies.
Market Reaction
Following the earnings release, First Horizon's stock experienced a 2.95% increase in premarket trading, reaching $22.02. This positive movement reflects investor confidence in the company's ability to manage expenses and deliver earnings growth despite revenue challenges. The stock's performance is notable as it surpasses its 52-week high of $21.72, indicating strong market sentiment.
Outlook & Guidance
Looking forward, First Horizon is optimistic about navigating the economic environment in 2025. The company projects flat to 2% year-over-year revenue growth and positive pre-provision net revenue growth. With a focus on maintaining an 11% CET1 ratio and preparing for a potential $100 billion asset threshold, First Horizon aims to capitalize on growth opportunities in its markets.
Executive Commentary
CEO Brian Jordan emphasized the company's strategic positioning, stating, "We are well positioned to capitalize on our attractive footprint and opportunities to grow along with these markets." CFO Hope Domchowski highlighted the company's deposit strategy, noting, "Our goal is always to use client money first and brokered second."
Q&A
During the earnings call, analysts inquired about the potential for growth in the fixed income business, strategies for deposit pricing, and expectations for loan growth. The management addressed these concerns by outlining their strategic priorities and expressing cautious optimism about the mortgage market's potential recovery.
Risks and Challenges
- Competitive deposit market pressures could affect margin expansion.
- Muted loan growth may limit revenue opportunities.
- Economic uncertainties, particularly post-elections, could impact loan demand.
- Regulatory challenges as the company approaches a $100 billion asset threshold.
- Potential volatility in the mortgage market recovery.
Full transcript - First Horizon National Corporation (FHN) Q3 2024:
Carly, Call Coordinator: Good morning all and thank you for joining us for the First Horizon Third Quarter 20 24 Earnings Conference Call. My name is Carly and I'll be the call coordinator for today.
I'd now like to hand over to your host, Natalie Flanders, Head of IR to begin. Floor is yours.
Natalie Flanders, Head of Investor Relations, First Horizon: Thank you, Carly. Good morning. Welcome to our Q3 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Brian Jordan and Chief Financial Officer, Hook Domchowski, will provide prepared remarks, after which we'll be happy to take your questions.
We're also pleased to have our Chief Credit Officer, Thomas Hung, 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. 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 Brian.
Brian Jordan, Chairman, President and CEO, First Horizon: Thank you, Natalie. Good morning, everyone. Thank you for joining our call. Before we get into the details of the quarter, I want to express our concern and support for those who were impacted by hurricanes Helene and Milton. I'm incredibly proud of our team how our team prepared for and responded to the needs of our associates, clients and communities.
We were on the ground immediately providing food, water, fuel and other essential supplies. In North Carolina and Tennessee, all but one of our banking centers are back open with mobile banking units on-site there to provide continuous banking services to our clients. Florida is in the early stages of recovery, but our banking centers fared well and all are open at this time. We've also announced financial commitments to the restoration of these communities and we'll remain heavily engaged in the rebuilding process. On Slide 5, we have shared some of the financial highlights for the quarter.
First, Horizon delivered another strong quarter for our shareholders as we grew revenue, maintained expense discipline, improved credit coverage and continued to generate capital. Our results this quarter reflect the strength of our diversified business model and our continued focus on growing and deepening client relationships. We achieved an adjusted EPS of $0.42 per share, which was a $0.06 increase from the prior quarter. Pre provision net revenue increased $11,000,000 improving our adjusted return on tangible common equity to 13.2%. We continue to deploy capital through share repurchases, buying back $75,000,000 of stock in the 3rd quarter and over $440,000,000 year to date.
We ended the quarter with a common equity Tier 1 ratio of 11.2%. Our results continue to demonstrate the benefit of our disciplined credit culture as we saw just $24,000,000 or 15 basis points of net charge offs this quarter. I'm proud of the dedication of our banker that our bankers display in serving our clients and communities throughout the Southeast. I believe we are well positioned to capitalize on our attractive footprint and opportunities to grow along with these markets. As we head into next year, I remain incredibly optimistic that our franchise is fully equipped to navigate any economic environment we encounter, while continuing to enhance shareholder value.
With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?
Hope Domchowski, Chief Financial Officer, First Horizon: Thank you, Brian. Good morning, everyone. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated adjusted earnings per share of $0.42 a $0.06 increase from prior quarter. Pre provision net revenue improved by $11,000,000 from last quarter, largely due to strong performance from our fixed income business, while our net interest income and adjusted expenses remained essentially flat.
We continue to see solid credit performance from our portfolio with net charge offs of 15 basis points and $35,000,000 of provision expense. ACL coverage increased modestly to 1.44 percent, including $8,000,000 of qualitative reserves for potential losses related to Hurricane Helene. The improved revenue and lower reserve build drove an increase in our adjusted return on tangible common equity to 13 point 2%. Our CET1 ratio increased to 11.2%, modestly above our 11% near term target, driven by lower than expected risk weighted assets due to a late in the quarter portfolio sale. On slide 7, we outline a couple of notable items in the quarter, which reduced results by $0.02 per share.
3rd quarter pretax notable items include a $2,000,000 credit to expenses that was trued up to the FDI special assessment accrual, a $15,000,000 of Visa (NYSE:V) derivative valuation expenses related to the escrow funding that occurred in September, and lastly $2,000,000 of restructuring expenses associated with the operational efficiencies we have continued to identify. All of this totals an $11,000,000 reduction to net income. On slide 8, you will see that NII of $631,000,000 was relatively stable to the prior quarter, benefiting slightly from a higher day count. The net interest margin compressed 7 basis points from last quarter to 3.31% with better asset yields partially offsetting higher deposit costs. The increase in average deposit costs was driven by higher use of broker deposits as well as acquisition costs on the $1,000,000,000 of new client growth.
Loan yields expanded 3 basis points from 2nd quarter benefiting from new and renewing floating rate spreads and repricing of fixed rate cash flows. As we move into the Q4, we expect modest margin contraction due to the lag between the loan and deposit repricing. On slide 9, we take a closer look at our strong deposit growth. Period end balances increased 3% with client acquisition driving almost $1,000,000,000 of growth. We are also pleased to see that non interest bearing balances have continued to remain relatively stable over the last few quarters.
The average rate paid on interest bearing deposits increased to 3.44% from the 3.35 percent spot rate we saw at the end of June. This was driven in part by the higher use of brokers' deposits as seasonality in loan to mortgage companies drove a higher need for funding. Deposit costs are already beginning to improve with the interest bearing spot rate declining to approximately 3.33% by the end of September, partially due to the $9,000,000,000 deposits which are market indexed. Deposit rates have declined another 5 basis points in October with a spot rate today of 3.28%. We will continue to make progress on re pricing the deposit portfolio as we have approximately $18,000,000,000 of promotional deposits that are set to re price over the remaining of the year in addition to the $1,000,000,000 of brokered CDs that are maturing.
On slide 10, we have an overview of loans. Average loans were up 1% from the prior quarter, driven by seasonality in loans to mortgage companies. Period end loans declined 1% or $335,000,000 from last quarter. This included an opportunistic sale of approximately $340,000,000 as we exited the sponsored healthcare lending vertical. The portfolio consisted of approximately 20 relationships of higher leverage, low pass graded healthcare loans.
We do not have the intent to sell any other loan portfolios in the foreseeable future. After a period of fund ups in our commercial real estate portfolio, the balances in this portfolio have stabilized. As previously mentioned, loan yields were up 3 basis points from 2nd quarter due to wider spreads and fixed cash flow repricing. As we move into the 4th quarter, loan yields are likely to decline as 56% of our loan portfolio is indexed to short term rates. On Slide 11, we highlight the increase in fee revenue we saw in the quarter.
Fee income, excluding deferred compensation, increased $11,000,000 from the prior quarter. Average daily revenue in our fixed income business improved 22% to $593,000 driving a $7,000,000 increase in fee income. July was a relatively muted month. However, as the market's confidence in rate cuts increased, we saw increasing momentum in the business in both August September. Lastly, other non interest income increased $5,000,000 due to some non recurring items, including securities and other gains, higher Federal Home Loan Bank dividends and BOLI benefits.
On Slide 12, we show that excluding deferred compensation, adjusted expenses decreased by $1,000,000 Personnel excluding deferred comp was down $1,000,000 from prior quarter as a reduction in incentives and commissions offset the impact of a higher day count on salary expense and elevated medical expense. The $2,000,000 reduction to incentives included the continued step down in retention awards that took place at the end of the Q2 and outweighed the incremental incentives associated with the higher fixed income production. We are constantly evaluating options to improve operational efficiency. This quarter, we implemented 2 items that impacted headcount. 1st, we optimized the retail staffing model across our footprint to more efficiently serve our clients.
We also recently outsourced our property functions, which lowered headcount and salary expense, but will be offset by some incremental occupancy costs. We expect this to make our building support more efficient while providing a better experience for our clients and associates. Moving down to occupancy and equipment. There was a $2,000,000 increase driven by our new property management engagement as well as incremental software maintenance and depreciation from our strategic initiatives. Offsetting the increase is a $2,000,000 reduction to outside services driven by lower advisory services as certain strategic initiatives enter the production phase.
I'll cover credit on 13, which continues to perform very well. Net charge offs decreased by $10,000,000 to $24,000,000 or 15 basis points of average loans. Loan loss provision was $35,000,000 this quarter, increasing ACL coverage to 1.44 percent. The $11,000,000 of reserve build included $8,000,000 of qualitative reserves related to Hurricane Helene as well as the impact of continued grade migration, which was partially offset by improved economic scenarios. Non performing loans increased $4,000,000 with an increase in C and I slightly exceeding declines in consumer and commercial real estate.
We remain optimistic that our clients can navigate to a soft landing as 63% of commercial NPLs are still current on their payment. Overall, we are very pleased with continued strength of our portfolio through a high rate environment and expect to see continual improvement if rates do continue to decline. On slide 15, we'll talk through our outlook for the remainder of the year. What we have laid out here is consistent with the guidance we gave last quarter, though we are now focusing more on total revenue versus the individual components. We believe total revenue will be flat to up 2% year over year with the composition driven by what the Fed chooses to do over the next couple of months.
Our countercyclical businesses are a natural hedge against our asset sensitivity. If we see incremental declines in interest rates, those businesses revenues will offset that incremental NII pressure. Turning to expenses. Our guidance remains unchanged as we remain committed to continuing to identify efficiencies to help offset our investments. For net charge offs, you can see that we are trending favorably to our guidance, but we have left the range unchanged until we have more information on the potential for losses that could arise from the recent weather events in our footprint.
Lastly, we continue to target an 11% CET1 ratio near term. I'll wrap up as you turn to Slide 16. I am proud of all the progress we have made as a company so far this year. We are focused on improving profitability, while making the strategic enhancements needed to set us up for success as we continue to grow the franchise. As a leadership team, we remain extremely optimistic about the future of First Horizon and are excited to continue delivering value to our shareholders and a premier banking experience for our clients.
Now, I'll give it back to Brian.
Brian Jordan, Chairman, President and CEO, First Horizon: Thank you, Hope. Many of you have heard me say that our goal is to stack one good quarter on top of the next. This quarter added momentum to that track record and puts us one step closer to achieving our longer term return goals. As an organization, we are intently focused on execution. We aim to improve revenue through client growth and retention, while maintaining expense discipline through operational excellence.
We will continue to align capital and resources with the greatest business opportunities, while enhancing our technology capabilities to deliver exceptional client experience. I remain confident that our diversified business model, including our well established countercyclical businesses, will allow us to continue to deliver strong shareholder value over the remainder of 2024 and into next year. Our associates' dedication, combined with our attractive footprint and extraordinary client base, positions us to build an unparalleled banking franchise in the Southeast. Thank you to our associates for all that you do for our clients, communities and for each other. Charlie, we can now open it up
Thomas Hung, Chief Credit Officer, First Horizon: for questions.
Carly, Call Coordinator: Thank you, Our first question comes from Ebrahim Boonawala, Bank of America. Ebrahim, your line is now open.
Ebrahim Boonawala, Analyst, Bank of America: Hey, good morning. I guess, maybe, Brian Hope, so it makes sense in terms of talking about total revenues versus NII fees given the counter cyclicality of your businesses. But just talk to us, I guess the question is, at least in the very near term, NII, I think, I hope you mentioned some margin compression over the next quarter or 2 will impact NII. When we look at the fixed income business, the $47,000,000 in fees this quarter, is it as good as it gets in terms of the upper bound on this? Or what's like we've seen a fair amount of bond book restructurings at banks, rates got cut or is there another leg higher to go on additional rate outlooks certainty?
Would love for you to address that.
Hope Domchowski, Chief Financial Officer, First Horizon: Good morning, Ebrahim. This is Hope. Happy to answer that question. I mentioned in my comments that we saw a very muted July. So we absolutely think we see some upside if we continue to see rates decline as September August were much stronger than July.
And we've seen strong momentum ending the quarter. The one thing you mentioned was, were people still buying? We had a conversation with our business the other day. If rates go down another 75 basis points this year, they've already talked to some clients that locked things that earlier this year late last year that are thinking about restructuring again. And so I do think there'll be continued momentum in a decreasing rate environment.
Ebrahim Boonawala, Analyst, Bank of America: Understood. And just the other question was around the loan to deposit ratio. I think you call out the decline from 97 to 94 partly driven by the some of the actions you took during the quarter. I know we've talked about this in the past. Just remind us, when we look at the 94 loan to deposit ratio, is there a certain level to which you're managing to?
And as a result, is that kind of making a little bit more cautious in terms of how quickly you flex deposit pricing lower?
Hope Domchowski, Chief Financial Officer, First Horizon: We continue to monitor our loan to deposit ratio, but we also monitor our loans plus securities to deposit ratio. We run a much smaller securities portfolio than most of our peers. And our belief is that as much as we can use deposits to help our clients, that's where we want to put it first. As we move forward, we continue to see loan and deposit ratio does tend to change as we have to fund up mortgage warehouse. And you'll see we did put additional brokerage on.
We're comfortable generally with where it's at in the near term, but of course we want to continue to work it down over time. I would say it's not the biggest piece of our competitive pricing. What we're trying to do is defend our home front. We want to make sure that clients that are with us are staying with us. And so I would say, the new to bank absolutely comes in at a higher rate, but it's really the back book and the current clients that are being made offers by other banks that are out there looking for the same deposit growth that we're looking for.
And to retain them in order to continue to have deposit growth quarter over quarter does come in a little bit higher of a premium.
Brian Jordan, Chairman, President and CEO, First Horizon: Ebrahim, I'll add. We look at our deposit activity and deposit pricing largely through the customer acquisition lens. We don't think about it in a significant way around loan to deposit ratio. So while that is important over time, we look at growing customer relationships. And you'll note that we grew customer deposits about 3% during the course of this quarter, about $1,000,000,000 or so on the customer side.
And we want to continue to grow in what are very attractive footprints with high quality customer relationships. We're pricing attractively versus wholesale funds and we're pricing attractively to gain market share. So, while the 2 are somewhat related, we spent more time focusing on how do we grow our customer relationships, relationships, particularly in our retail, private client, high net worth businesses.
Ebrahim Boonawala, Analyst, Bank of America: That's helpful. Thank you, both.
Brian Jordan, Chairman, President and CEO, First Horizon: Thank you.
Carly, Call Coordinator: Thank you very much. Our next question comes from Michael Rose of Raymond (NS:RYMD) James. Michael, your line is now open.
Michael Rose, Analyst, Raymond James: Hey, good morning, everyone. Thanks for taking my questions. Hope, I just wanted to dig into your comments on the margin a little bit. Certainly understand a little bit more pressure in the Q4 just given the mismatch of timing that you referenced. But as we think about the margin into next year with some of the tailwinds, as you mentioned on the deposit side, some additional repricing opportunities, I think the slide deck mentioned a chunk of deposits that was eligible for repricing, dollars 18,000,000,000 of promotional clients deposits that are eligible for repricing in the Q4.
Are we at a point where the Q4 do you think is the inflection point for the NIM and we can move higher despite your rate sensitivity or is the expectation that it's going to be a push and pull each quarter and we shouldn't expect the margin to really move at least over the next couple of quarters? Thanks.
Hope Domchowski, Chief Financial Officer, First Horizon: Michael, thank you for the question. I would say it's probably going to be more of a push and pull quarter to quarter. It really depends on how quickly we do the rate cuts. We see back to back rate cuts in November, December and then we see some stabilization. Our margin can stabilize, but we continue to see month after month or quarter after quarter repricing down.
As I mentioned in my comments, our loans are going to 59% of our loans are going to reprice down their deposits. We're going to have to work through that as they come off promotions and new to bank. So I don't think it will necessarily be a sort of steady trajectory one way or the other based on the current forward curve in 2025. But we are doing everything we can to put things in place to make sure that we can take some of that asset sensitivity off of the table as we see a very uncertain rate cut environment. For example, we just shortened our new to bank promos that you see a 90 day guarantee to 45 days guarantee.
Hence that allows us a little bit more flexibility quicker. And we are less asset sensitive currently because of that deposit repricing. It's just maybe the lag quarter to quarter, especially depending on how late in a quarter we get the loan repricing before we get the deposit side.
Ebrahim Boonawala, Analyst, Bank of America: One of
Brian Jordan, Chairman, President and CEO, First Horizon: the key variables, Michael, is, as Hope said, the pacing of rate cuts. And as she properly noted, the more significant rate cuts are, the more impact you will see on net interest income, but the more offset you'll see in our fixed income business, etcetera. And that's why we focused on the total revenue where we think we're significantly more balanced and less sensitive to interest rate cycles than it might appear if you focus on one line item or the other. But we do believe that we've got the balance sheet positioned in such a way that we can manage through interest rate volatility and we will adapt to whatever pace the FOMC sets for moving rates in the rest of this year and into 2025.
Michael Rose, Analyst, Raymond James: Certainly understand that. Maybe just as a follow-up and I know the backdrop is difficult to project and I know it's early for next year, but is the plan or the expectation that you can grow kind of adjusted PPNR year over year? And are you planning at this point for positive operating leverage? And I ask that because I certainly understand you pulled some levers on the cost savings front, but we're hearing more and more banks looking to hire bankers. I assume that would be some of your expectations to drive some balance sheet growth.
But just wondering just initially, if you had any comments on how we should kind of think about that? Thanks.
Brian Jordan, Chairman, President and CEO, First Horizon: Yes. We'll provide a little more guidance in the remainder of this quarter or outlook for next year. But I sit here today, I expect that we will drive positive PPNR next year. And we're still working through the various line items, but I do think you will see us growing our PPNR in 2025.
Michael Rose, Analyst, Raymond James: All right. I'll step back. Thanks for taking my questions.
Brian Jordan, Chairman, President and CEO, First Horizon: All right. Thank you.
Carly, Call Coordinator: Thank you very much. Our next question comes from John Armstrong of RBC Capital. John, your line is now open. Hey, thanks. Good morning.
Brian Jordan, Chairman, President and CEO, First Horizon: Good morning, John.
John Armstrong, Analyst, RBC Capital: Brian, one for you. Give us your thoughts on loan growth expectations. It looks like you guys referenced some CRE stability, but C and I was a bit weaker, but talk about what you're seeing, how much of this is self imposed and what kind of an outlook you have for growth?
Brian Jordan, Chairman, President and CEO, First Horizon: Yes. I would say very little of what we're seeing is self imposed. We're not limiting the size of the balance sheet. There's one caveat to that that I will come back to in a second. The loan growth in the marketplace is somewhat muted at this point.
It has not picked up. I couldn't tell you how to weight the parts, but I suspect some part of it is what happens in the elections that are coming up in the next month. It's partly weighted on what the Fed is going to do with interest rates and in particular when deals start to look better financially. And then just overall, are we going to have a soft landing or something else? And I'm somewhat optimistic that we get through the next 90 days.
We'll have greater clarity maybe on all three of those. And if we do, I think there's some pent up loan demand, at least we hear that in our customer conversations. The marketplace is still somewhat muted and it's still very, very competitive at this point. I mentioned the one exception. There are a few places where we have taken some participations where we had been in participations for a period of time.
We had not broadened or deepened the relationship as we thought we might, and we've used the opportunity to exit out of some of that. But other than that, we're looking to grow with our client base. We're looking to grow and lean in when customers are ready to make investment.
John Armstrong, Analyst, RBC Capital: Okay. Fair enough on that. So maybe a little more optimism potentially. I know that's a lot of hedging there, but it feels like you're still somewhat optimistic on growth.
Brian Jordan, Chairman, President and CEO, First Horizon: I didn't mean to hedge as much as I meant to convey uncertainty about what's going to happen.
John Armstrong, Analyst, RBC Capital: Okay. Hope, follow-up on fixed income. Are you willing to share what the ADRs looked like in August September? How big of a step up that was? I think that would help us with maybe a run rate.
Hope Domchowski, Chief Financial Officer, First Horizon: John, I actually don't have that in front of me. August September were generally pretty equal as I recall, but the end of September following the rate cuts was a significant uptick and right before the rate ticks were kind of quiet. So I would say the months were not materially different, but the weeks told a much different story. Nobody really wanted to buy anything right before the rate cut and after the rate cut. We finished the quarter really strong.
And I think we'll see that same type of momentum as there's uncertainty about rate cuts in the coming few months.
Brian Jordan, Chairman, President and CEO, First Horizon: John, the 10 year rate curve has moved around a good bit as people's expectations for the economy have changed. I'll give you the last 2 weeks. If you look at the 1st week of October, we were a little over $1,100,000 last week, we were a little over $500,000 So, 2 weeks does not make a trend and it moves around based on what interest rates and sentiment in the market are doing. On the whole, we were a little over 5 I think we're 5.63 for this quarter and just passed. And our outlook is to be slightly better for that than the remainder of the year.
And you have to keep in mind, as you well know, that at some point, the markets tend to shut down as you get into the back part of the year. So we're optimistic on activity for the remainder of this year.
John Armstrong, Analyst, RBC Capital: Yes. Okay. That's helpful. Thank you very much. Yes.
Carly, Call Coordinator: Our next question comes from Jared Shaw of Barclays (LON:BARC) Capital. Jared, your line is now open.
Jared Shaw, Analyst, Barclays Capital: Hi, good morning, everybody.
Brian Jordan, Chairman, President and CEO, First Horizon: Good morning, Jared.
Jared Shaw, Analyst, Barclays Capital: Maybe just going back on the deposit side, the $18,000,000,000 that you referenced, that's coming due in Q4. Could you give us an update on the pricing of those deposits now and where you expect to see that moving to? And also, is there a
Samuel Vargas, Analyst, UBS: term
Jared Shaw, Analyst, Barclays Capital: change in that promotion?
Hope Domchowski, Chief Financial Officer, First Horizon: Jared, yes. Starting at the end of your question, we have changed the terms as recently as last week. As we continue to look at how to bring down rates, it is really a sensitivity analysis of how sensitive are our clients to how quickly the rates are falling. And so we did just roll out at the end of last week new rates that as I mentioned earlier only guaranteed for 45 days versus our prior 90. Our money market is currently at 425.
Percent. That compares to 5.05 percent last quarter when you asked me on the earnings call. Our retention offer is now 3.5%. And so what we've been walking it back ahead of the rate cut and after, and we have quite a few scenarios for how that might walk back depending on the rate cuts we see in Q4. December rate cut is really hard for us to make much headway with deposits.
And so the November rate cut will have the most meaningful impact on how much we can walk it back.
Jared Shaw, Analyst, Barclays Capital: Okay. Okay. Thanks. And then as we look at the deposit composition, what's the appetite for additional brokered from here? I heard your commentary that you built that up in anticipation of the mortgage business.
Should we expect to see brokered be a bigger part of the overall deposit mix? Or are we near the top?
Hope Domchowski, Chief Financial Officer, First Horizon: Jared, our goal is always use client money first and brokered second. So let's start with that being our goal. The more we can bring and retain client money, the less brokerage we need. Brokerage for us is always kind of a match funding for mortgage warehouse. We saw mortgage warehouse on average up about $400,000,000 last quarter, which I'll note is against past years typically Q3 comes down and we actually saw it come up with some of the rate cuts and we saw our refi activity actually increase 5% quarter over quarter.
So as we think about that is really going to be more about Mortgage warehouse and how much we continue to have balances there in the short run. But yes, our goal is to always try to get out of it quarter over quarter when we can, whether we see decreasing mortgage warehouse balances or increasing client money. But I am comfortable where it's at. We're well below our peer group the last couple of quarters when compared to our growth group versus theirs.
Carly, Call Coordinator: Okay.
Samuel Vargas, Analyst, UBS: Thanks. And then just finally
Jared Shaw, Analyst, Barclays Capital: for me, I know you're guiding us more towards total revenue versus NII versus fees. But with the expectation, how should we think about the dynamic between continued margin pressure, but potentially some balance sheet growth? Are we at a trough for NII here? Or trying to gauge or what the how we're ending the year, what the exit of NII is for 2024?
Hope Domchowski, Chief Financial Officer, First Horizon: Jared, for 2024, I don't see much of a change from our prior guidance. When you look at the new revenue guidance we gave, it is in line of both revenue and NII. It's just that we're going to come in the low end of 1, high end on the other. For us, not just for Q4, going into next year, as we think about NII, the big unknown for us is how much mortgage are we going to see. It's our highest yielding asset.
And so we did see a large refi boom and it moved from a 22% to the historical 30% or 40% or 50% we've been seeing. That would help NII significantly. So as we talk about countercyclical, FHN Financial is in the fee income line, but the majority of mortgage warehouse and mortgage is in the NII line. So that also is as we talk about embedded hedges, we do have an embedded hedge with hopefully loan growth going into 2025 of both of those businesses.
Samuel Vargas, Analyst, UBS: Okay, great. Thanks very much.
Carly, Call Coordinator: Thank you. Our next question comes from Samuel Vargas of UBS. Samuel, your line is now open.
Natalie Flanders, Head of Investor Relations, First Horizon0: Hey, good morning. I just wanted to switch over to deposits a little bit. I wanted to see if you could give some color on any initiatives you might have going on to attract some non interest bearing deposits whether it's through retail or commercial?
Brian Jordan, Chairman, President and CEO, First Horizon: Yes, this is Brian. We're looking to really grow across the entire deposit base. We have had very been very active in growing our non interest bearing deposits. They've been stable, which it was it sort of follows along with what we articulated earlier in the year, which is you get to a core level as a percentage, it drops a little bit, but that's because we grew non interest bearing. But we're looking to grow customer relationships and growing core checking accounts, non interest bearing low cost deposits is an important part of that.
So, we have had a number of efforts across our entire franchise to grow those deposits, and we will continue to lean in and look to grow client customer relationships on the commercial and the consumer side.
Natalie Flanders, Head of Investor Relations, First Horizon0: Understood. And then Hope, the 12% of loans that are ARMs, can you give us a sense for what sort of weighted average yield that part of the book currently has? And I understand that over the next year, there's not much of a reset on any of those, but I guess as you think about late 2025 and 2016, are there sort of bigger chunks that we should be aware of as main model NII?
Hope Domchowski, Chief Financial Officer, First Horizon: I don't have the weighted average of where they're at currently, from the rate, but we don't have a large wall of them at any time in the next 3 years. They've kind of been steadily added to our balance sheet over the last 2, 2.5 years. What I'll say though is we expect a lot of them to get prepaid. Being fixed for 5, 6, 7 years, whatever they have left at a 6%, 7%, if we really see rates get cut 100% to 200%. That is one of the items that I think we will that I mentioned earlier that we could see a large amount of refi in the ARM space for what we have on our balance sheet today.
Brian Jordan, Chairman, President and CEO, First Horizon: If I remember correctly, and I'll look to Natalie because she remembers these numbers better than I do, but you can use as a proxy, I think our consumer loan portfolio yielded in the 5.8% or so range, maybe a little higher in the Q3. And that's largely driven by ARM. So that's a proxy for that number.
Natalie Flanders, Head of Investor Relations, First Horizon: Agreed.
Natalie Flanders, Head of Investor Relations, First Horizon0: Awesome. Thank you very much. I appreciate it.
Carly, Call Coordinator: Thank you very much. Our next question comes from Chris McGratty of KBW. Chris, your line is now open.
Thomas Hung, Chief Credit Officer, First Horizon: Good morning.
Natalie Flanders, Head of Investor Relations, First Horizon1: Hope, maybe a question or Brian on the PPNR, dollars 25,000,000 being above $24,000,000 I guess a couple of questions, maybe a comment between is that more of a revenue comment or an expense control given your steps? And secondarily, does that currently factor in the forward curve right now? Thanks.
Natalie Flanders, Head of Investor Relations, First Horizon0: Yes.
Brian Jordan, Chairman, President and CEO, First Horizon: So, if I break that yes down, we can prognosticate about rates, but it's probably most efficient to always use the 4th curve. So, that's sort of our point of reference and it's been in flux. And we're always focused on growing revenue. We're always focused on controlling expenses. I think we have a number of catalysts that we are working to leverage that are really, really important in terms of our ability not only of driving PPNR in 2025, but creating long term shareholder value, essentially taking our returns a little over 13% on tangible common equity, back north of 15 plus percent.
And those initiatives that we're focused on are really the logical follow on of the work associated with the merger of Equals that didn't get done during the integration period. And so, we see a number of opportunities once we get the systems investments made at a very tactical level to grow revenue, to deepen relationships, to drive additional loan growth and to control our costs, centralizing further centralizing processes, things of that nature. So, I'll circle back around to yes, we think it's going to be across all of the levers that you mentioned.
Natalie Flanders, Head of Investor Relations, First Horizon1: Okay. That's really helpful. Thanks, Brian. And then maybe on regulation, your target of 11% on CET1, you're slightly above it. I would expect you're saying you're going to continue with the buyback, but just any changes over the medium term that you might be contemplating now that Basel's been a little bit watered down?
And also maybe a comment, Brian, about where you are on the investment for $100,000,000,000 Thanks.
Brian Jordan, Chairman, President and CEO, First Horizon: Yes. We look at capital and clearly, our Board is involved in any discussions about buyback and authorization. We feel like we have sufficient authorization to get us through the Q4. We will talk to the Board in the early part of 20 25 about further authorization. We don't see any short term catalyst to bring the CET1 ratio below 11%.
What we've said is we're looking at the economy and how things play out. And I would circle back in some ways to what I said earlier that customers have uncertainty about soft landing and interest rates and the election process. That clarity they get will also be clarifying to us. And the more certain we get about continued strength and improvement in credit performance and things like that, the more comfortable we get as we approach a soft landing to bring that ratio down. We do think that the CET1 ratio is above where we need it through the cycle.
So, we will look at that probably it will be sometime in the early part of 20 25 before we really start to reassess it in a meaningful way. The second part of that is regulatory hurdles, particularly around becoming an LFI at $100,000,000,000 dollars We are doing a fair amount of work in making investments in the near term to prepare for crossing that threshold. As we look at it, we think we've got a number of years to do that work and we will feather those costs in over time and build those capabilities, that infrastructure. But given the markets that we're in, given the strong client relationships that we have, we do believe that leaning forward and growing the balance sheet is an important part of it and it's not a matter of if we hit the $100,000,000,000 threshold, it's really a matter of when and that we are going to build the preparatory infrastructure to get it in place so that it won't be an obstacle to our ability to continue to grow on the other side of that. I also think that in the event that you have a more difficult landing, building that infrastructure gives us the opportunity to be opportunistic if they're strong deposit base that we have the opportunity to pick up in a more difficult financial set of circumstances, I.
E, you have more troubled institutions.
Natalie Flanders, Head of Investor Relations, First Horizon1: Great. Thank you very much.
Brian Jordan, Chairman, President and CEO, First Horizon: Sure thing.
Carly, Call Coordinator: Thank you very much. Our next question comes from Timur Braziler of Wells Fargo (NYSE:WFC). Timur, your line is now open.
Samuel Vargas, Analyst, UBS: Hi, good morning. Maybe one for Hope, just following up on some of your comments relating to mortgage outlook for next year. I guess, what's the rate environment need to look like for mortgage to get back to some of the type of performance that maybe you were implying on the upside?
Hope Domchowski, Chief Financial Officer, First Horizon: Our overall belief is that we have to be at a sub-six percent mortgage rate. How that will play out is a little bit uncertain. This last 50 basis point cut barely touched mortgage rates as the board as the curve became less inverted and actually had a steepened curve for a little while there. What I think it will be the telling thing and the thing that we continue to see is new home purchases, so not refi, just first time home purchases, second homes has been historically low for the last 2 years. So a lot of the data we're seeing from the mortgage industry says we have the highest supply we've seen and that they think buyers will start getting back in.
So I think it's going to be a combination of new purchases when we get under a 6% as well as a refi for the people that are in their fixed rate part of their arms.
Samuel Vargas, Analyst, UBS: Okay. And then maybe just on the revenue guide, it implies a pretty wide range of outcomes in the Q4. I'm just wondering where the greater variability is? Is it on the NII side? Is it on the fee side?
And then maybe more specifically on fees, you called out some of the other fees this quarter as being one time in nature. Can you maybe give us a starting run rate for 4Q kind of ex one of the some of
Thomas Hung, Chief Credit Officer, First Horizon: those one time fees?
Hope Domchowski, Chief Financial Officer, First Horizon: Sure. What I would say is start with we did not intend to change our range. It really comes down to rounding is we would have had to say like point instead of flat, would have been 0.33. The intent is not at all to change our revenue range for Q4 or for the year. It is there's probably more upside on fee income and more downside on NII if the forward curve plays out.
We really see 75 basis points of cuts in 2 successive months. NII will be on the lower side and fee income will pick up. If we don't see any cuts, NII is going to come in better and I think fee income would look similar to this quarter. It's really hard to handicap whether when the current board curves is 75 basis points, but most of the market doesn't believe a little bit more than 25.
Samuel Vargas, Analyst, UBS: Okay. And then just the one timers this quarter for fees, is that the full increase in the other line?
Hope Domchowski, Chief Financial Officer, First Horizon: The other items, it always bounces around. BOLI is something that just comes when it comes and you don't know. So we often have to comment on BOLI since we do run a portfolio of that moving quarter to quarter. I can't really predict what's going to happen next quarter. Obviously, you can figure out flow of that those dividends pay in a quarter arrears and the more that we're borrowing, the more we get those dividends.
I don't expect it to be materially up or down, if I'm honest. It tends to go about in a $5,000,000 range quarter to quarter.
Samuel Vargas, Analyst, UBS: Great. And if I can sneak one more question in. So the comment on commercial real estate that the funding schedule has kind of stabilized out. I'm just wondering as we do get rate cuts as paydowns start to accelerate, is there any way you can quantify maybe what historical paydowns have looked like, what they've looked like more recently and what type of headwind that might be to broader loan growth?
Hope Domchowski, Chief Financial Officer, First Horizon: You're talking about pay downs on NPLs?
Brian Jordan, Chairman, President and CEO, First Horizon: No, just commercial real estate.
Samuel Vargas, Analyst, UBS: No, no, pay downs on commercial real estate.
Thomas Hung, Chief Credit Officer, First Horizon: Okay. Sorry, I thought
Hope Domchowski, Chief Financial Officer, First Horizon: you're talking about the ones that we mentioned that were in non performing that we're still paying.
Thomas Hung, Chief Credit Officer, First Horizon: Yes. I think this is Thomas on here. I think that's going to be a little hard to predict right now because for us a lot of our commercial real estate is a way heavier on the construction side than probably a lot of our peers. And so in terms of pay downs, it will really come down to the perm financing market, how much appetite there is to that perm take out financing. That's what will really drive the level of pay downs that we see.
Okay. Thank you.
Carly, Call Coordinator: Thank you very much. Our next question comes from Christopher Marinac of Jan Montgomery Scott. Christopher, your line is now open.
Samuel Vargas, Analyst, UBS: Thanks. Good morning. I had a follow-up credit question as it relates to the Shared National Credit Exam this year. Is there anything that could fall out on that in terms of either inflows of NPAs or more importantly charge offs as we move into Q4 and Q1?
Thomas Hung, Chief Credit Officer, First Horizon: Yes. Hi, this is Thomas Hung again. I don't expect so. Overall, Shared National Credits, it runs a little under $8,000,000,000 for us overall. And if you look at kind of the relative performance of our SNC book throughout C and I book, the metrics are all generally about the same in line, there's not really a material difference in terms of classified assets, NPLs or year to date net charge offs.
And so my expectation is that Snix should continue to perform about the same as the overall book. We haven't really seen a variance.
Samuel Vargas, Analyst, UBS: Great. Thank you for that. And Hope, just a quick one for you. I know you broke out a lot of information on the other expense numbers this morning. Is there anything in there for operational losses or customer fraud, things of that nature that would stand out?
Hope Domchowski, Chief Financial Officer, First Horizon: There's nothing that stands out, no. As I said, it was a bunch of small items that added up to $5,000,000 We did not have significant fraud change quarter over quarter or any large one time gains on any sales of property or things like that.
Samuel Vargas, Analyst, UBS: Okay, great. Thank you very much.
Brian Jordan, Chairman, President and CEO, First Horizon: Thanks, Chris.
Hope Domchowski, Chief Financial Officer, First Horizon: Thank you
Carly, Call Coordinator: very much. We currently have no further questions. So I'd like to hand back to Brian Jordan, CEO for any closing remarks.
Brian Jordan, Chairman, President and CEO, First Horizon: Thank you, Carly. Thank you all for joining our call this morning. We appreciate your time and your interest. Please follow-up with any additional questions that you may have. Hope everyone has a great day.
Carly, Call Coordinator: As we conclude today's call, we thank everyone for joining. You may now disconnect your lines.
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