First Horizon Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 12 speakers on the call.

Operator

Morning, and welcome to the First Horizon Second Quarter 2023 Earnings Conference Call. My name is Carla, and I will be the operator of today's call. I would now like to pass the conference over to our host, Natalie Flanders, Head of Investor Relations. Please go ahead when you're ready.

Speaker 1

Thank you, Carla. Good morning, everybody. Welcome to our Q2 2023 earnings call. It's been a few quarters since we've had one of these, So we thank you for taking the time to join us today. Our Chairman, President and CEO, Brian Jordan and Chief Financial Officer, Hope Domchowski, We'll provide some prepared remarks.

Speaker 1

Afterwards, Brian Hope and our Chief Credit Officer, Susan Springfield, will be happy to take your questions. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. On this call, 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 on Page 2 of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, Which excludes the impact of notable items.

Speaker 1

These are non GAAP measures, so please review the GAAP information in our earnings release and on Page 3 of our presentation. Lastly, our comments reflect our current views and we are not obligated to update them. With that, I'll turn things over to Brian.

Speaker 2

Thank you, Natalie. Good morning, everyone. Thank you for joining our call this morning. We are pleased to announce our 2nd quarter results. It'd be an understatement to say that 2023, especially the Q2 has been unusual, both for our company and the industry as a whole.

Speaker 2

I'm incredibly proud of the tremendous resilience our company and associates have shown. Despite some of the unprecedented events in the banking sector, We continue to focus on serving our clients and communities and the results of those efforts are reflected in our strong quarterly results. On Slide 5, you'll find some of the key highlights from this quarter, which Hope will provide more detail on later. On an adjusted basis, we delivered EPS of $0.39 per share and a return on tangible common equity of 14.6%, While maintaining robust capital levels, we ran a very successful deposit campaign. Our bankers made over 50,000 prospecting calls to new and existing clients, bringing in almost $6,000,000,000 in new to bank funds And growing our client base by 4%.

Speaker 2

Credit performance continues to be strong Nonperforming loans declining $21,000,000 from the Q1 and net charge offs of 16 basis points coming in at the low end Our capital position is very strong with CET1 increasing 72 basis Points to 11.1%. Though the industry is facing headwinds from increased Deposit competition, macroeconomic uncertainty and impending regulatory change, I am confident in our ability to earn top quartile returns Through the cycle. Our commitment to prudently managing interest rate risk, liquidity and credit Has positioned us well to navigate the current environment. Our business model is diversified by industry, geography and product, Which provides consistent returns and greater ability to manage through a range of market conditions. We are investing in our people and infrastructure to enhance our products and services so that we can take advantage of the opportunities We see in our attractive footprint.

Speaker 2

Our associates have gone above and beyond in serving our clients during these uncertain times. A benefit of the disruption in the Q2 was the opportunity it provided our associates for proactive outreach to our clients. As you can see the extraordinary results of this effort and I'm grateful for the confidence our clients have demonstrated in us this quarter. As we move forward, I am very thankful for the dedication and hard work of our associates as they continue to deliver value for our clients, With that, let me hand the call over to Hope to run through the financial results and our outlook. Hope?

Speaker 3

Thank you, Brian. Good morning, everyone. Turning to slide 6. We have the highlights on our adjusted financials and key performance metrics for the quarter. As interest rates have risen over the past year, our net interest margin has expanded significantly, up 64 basis points.

Speaker 3

Despite some moderation this quarter, the margin continues to be very strong at 3.38% and our balance sheet remains asset sensitive. Adjusted fee income and expenses were both essentially flat to the prior quarter after netting the offsetting impact of deferred compensation. Credit quality continues to remain very strong. Provision expense this quarter was $50,000,000 resulting in an ACL coverage ratio of 1.35 flat to the prior quarter. Tangible book Value per share of $11.50 is up $0.61 The Series G conversion added $0.50 The merger termination fee added $0.23 after netting out the $50,000,000 foundation contribution.

Speaker 3

Adjusted earnings added $0.39 partially offset by our common dividend of $0.15 The mark to market on the securities portfolio and hedges drove a $0.27 reduction. On Slide 7, we outlined the notable items in the quarter, which netted to $98,000,000 after tax impact or $0.17 per share. Our pretax notable items include the merger termination fee of 225,000,000 Merger related expenses of $30,000,000 primarily related to the employee retention awards, which remain in place following the termination. Other notable items include a $50,000,000 contribution to the First Horizon Foundation as well as $15,000,000 derivative valuation adjustment related to prior Class Visa Class B sales. On Slide 8, you can see that over the last year, we've benefited from our asset sensitive position with the net interest Margin expanding 64 basis points year over year.

Speaker 3

The positive response from clients to our deposit campaign Quarter exceeded our expectations. We brought in $5,800,000,000 of new to bank funds From the more than 50,000 customers, which brings our ending deposit balances up 3% year to date, The positive deposit momentum modestly accelerated the timing of the increase in deposit betas. However, Our net interest margin of 3.38 continues to be very strong despite some moderation in the quarter. As marginal funding costs have risen, loan spreads have also widened out with new production spreads approximately 50 basis points Higher than we were seeing in the Q4. On Slide 9, you can see the success of our deposit campaigns, Demonstrating the confidence our clients have in our franchise, we grew period end deposits by 6%, Added over 32,000 new clients to the bank and deepened relationships with almost 19,000 of our existing clients.

Speaker 3

Our competitive offer and targeted client outreach generate historically strong acquisition with 60% of balances coming from new to bank clients. This deposit campaign provide a great opportunity to connect with our clients. Our bankers made proactive outreach And the clients who took advantage of the deepening offer increased their balances with us by 37% on average. Mix shift continued into the 2nd quarter with non interest bearing balances declining from pandemic highs. We are beginning to see signs that the pace of that mix shift is starting to slow down and DDA balances are stabilizing in the second half

Speaker 4

of the

Speaker 3

quarter. Non interest bearing balances at 29% still comprise a higher proportion of total deposits today than pre pandemic, which was 27%. Like a lot of banks, we saw clients looking to maximize coverage on their deposits driving higher utilization of our collateralized repo suite product. In addition to the $4,000,000,000 of deposit growth, we added $782,000,000 of repo balances, which are incremental funding. On slide 10, we show the trends in our loan portfolio with loans up 3% on average and 4% at period end.

Speaker 3

Growth was diversified across our markets and portfolio types. Loans to mortgage companies grew $650,000,000 from 1st quarter seasonal lows. This is a great business for us. It's our highest yielding business line. And as others have pulled back in this space, we've been able to deepen our relationships, Widen spreads and negotiate for more deposit business.

Speaker 3

We also had growth in our CRE portfolio, which was primarily driven by fund ups on existing loans, primarily in our multifamily space. We cover our fee income trends on Slide 11. Overall, fee income has remained stable for several quarters Despite the macroeconomic headwinds impacting fixed income and mortgage, we had $5,000,000 of increases in deferred compensation, which is offset in expense. We saw $8,000,000 of growth in other fees, partially driven by higher treasury management fees due to the decline in non interest bearing deposits and Seasonal factors. On Slide 12, we review our expense trends.

Speaker 3

We have maintained expense discipline across the company As evidenced in our results with adjusted expenses down $1,000,000 when you exclude the $5,000,000 increase in deferred compensation. The advertising investments made this quarter were to support our client promotions, brand awareness initiatives and client outreach programs. Other expenses declines include $2,000,000 of lower fraud losses from implementation of additional curie solutions as well as lower franchise and realty tax expenses related to the disposal of properties. Turning to slide 13, I'll cover asset quality and reserves. Credit quality continues to be strong With non performing loans down $21,000,000 from the prior quarter and net charge offs remain near historic lows.

Speaker 3

We had $50,000,000 of provision expense, resulting in a reserve build of $27,000,000 Supporting 3% loan growth excluding loans to mortgage companies. Our allowance coverage ratio remains healthy at 1.35 Flat to the prior period. If the industry experiences a credit cycle, we expect our portfolio to outperform Due to the benefit of operating in attractive markets, underwriting loans for all stages of the credit cycle and Turning to capital on Slide 15. Our capital position is very strong With CET1 ratio of 11.1 percent, up 72 basis points. The Series G conversion added 71 basis points.

Speaker 3

The termination fee added 19 basis points net of the foundation contribution. We accretively deployed 30 basis points of capital into loans, including $60,000,000 of lower risk loans to mortgage companies. CET1 would still be 9.5%, well above the 7% well capitalized threshold Even adjusting for the unrealized losses in the securities portfolio. On Slide 16, we've reaffirmed our full year guidance, which remains unchanged from what we shared with you at Investor Day in early June. As we're all experiencing, there's been a lot of volatility in the market's expectations for interest rates.

Speaker 3

Our current outlook It's for 25 basis point rate hike in July and then rates flat through the rest of the year. The positive Deposit momentum modestly accelerated the timing of the increases in deposit betas and we remain asset sensitive. We still expect our NII guidance to be in range with what we provided at Investor Day. We continue to invest in our businesses And our expense outlook reflects the impact of those investments as well as the remaining retention awards moving into core expenses. We are pleased with the momentum we had this quarter and are excited to continue to deliver on the strength of our franchise.

Speaker 3

To wrap up on slide 18, we are well positioned to capitalize on our diversified business model, Highly attractive markets and asset sensitive balance sheet. As we continue to prudently manage capital and risk, We are committed to delivering top quartile returns through the cycle. I am proud of the work our team has accomplished over the last few years and especially as the last We have built a balance sheet that we believe in and have demonstrated our ability to execute even in challenging times. And with that, I'll give it back to Brian.

Speaker 2

Thank you, Hope. We strongly believe our second quarter results reflect the strength of our franchise. Our associates accomplished a lot in the last 60 or so days. That dedication combined with our attractive footprint and We have an established team. We're excited about the opportunities that we have to deliver value added advice Clients with improved products and technology.

Speaker 2

I am confident that we are well on the way to becoming a top performing regional bank And delivering enhanced returns to our shareholders. This concludes our prepared remarks. Carla, we'll now open it up for questions.

Operator

Call. Our first question is from Jon Afstrom from RBC Markets. Your line is now open. Please go ahead.

Speaker 2

Good morning, everyone. Good morning, John.

Speaker 5

Question on deposit pricing expectations. Curious if you see them changing at all. You alluded to Slowing non interest bearing migration. Can you talk a little bit about that? And then on your deposit campaign, Do you need to do more or is that essentially over at this point?

Speaker 3

Good morning, John. Thank you for the first question. Good to hear from you again.

Speaker 5

Yes. Good morning.

Speaker 3

We on the deposit campaign, we did have a promo rate that ran through June 30. That promo rate has expired, and we have gone out with a new 3rd quarter promo rate, which is much lower. We do expect to continue to need to raise deposits in the industry, But we don't expect to have to run the aggressive campaign we did in May June. We continue to believe that we are well positioned To grow our deposit base, especially in deepening relationships with the new clients we brought on board. As far as the DDA, we really saw in the second half of the quarter almost no migration.

Speaker 3

Coming out of the beginning of the year and especially in March April, we saw significant focus by clients on moving DDA into interest bearing as they became aware of how lucrative that is and the outreach Calls that we were all doing during that time as a result of the failures in the industry. And so we believe the 29 That we're at now is has been stable for the second half of the quarter and will remain stable as those are really operating accounts and there's not much more that can migrate into interest bearing.

Speaker 5

Okay. Very helpful. And then can you touch on the pricing pressures on some of the larger depositors? You touched on it at Investor Day, but are you seeing that ease at all Some of the bigger deposit balances?

Speaker 3

Yes. I would say in June, we did definitely towards the end of the quarter saw not the Significant pressure we were seeing. I think a lot of people settled down, had changed banks already moved their money, and we're starting to see a little bit more Normalized bidding in the industry as well as clients not looking to move money as quickly as they were following the 3 bank failures.

Speaker 2

John, I'd add the following, which is I think where you'll see more pressure in the coming quarters, Not that it's going to be easy anywhere, but more on the commercial lending side. As you look at commercial lending transactions, The entire industry is looking to deepen and broaden relationships. You're seeing that in participations in club deals. You're seeing that in syndicated transactions. And I think you'll see more of the pressure emerging on the commercial side in all likelihood in the back half of this year.

Speaker 5

Okay. So you're saying tied to more tied to credit?

Speaker 6

Yes, yes.

Speaker 2

Tied deeper more than just a credit transaction, it's a relationship.

Speaker 5

Yes. Okay. Okay. I'll step back in the queue. Thank you.

Speaker 5

Appreciate it.

Speaker 2

All right. Thank you.

Operator

We have our next question from Casey Haire from Jefferies. Please go ahead. Great. Thanks.

Speaker 4

Good morning, guys. So just maybe following up on some of John's questioning. On the it sounds like the DDA is near Which is great. I was wondering, is there a ceiling on CDs as a percentage of mix? I know you guys are Stepping away from the promotion, but just wondering how much CDs you can make of the deposit franchise?

Speaker 3

Casey, we're getting a little bit of feedback, but I think you asked is there a ceiling on CDs As to what we're targeting in our portfolio, and I would say, I think we're still significantly underweighted in CDs versus our peers when I look back at Q1 and where we grew in Q2. So I think we still have a lot more room that we could grow CDs if we aggressively were to price there. I would tell you, in the quarter, CDs were not, our leading. We really in a lot of money market funds was where we saw a lot of the new to client Money come in.

Speaker 4

Okay, great. And then just following up, any updated thoughts on Where cum deposit beta apologies if I missed this, where cum deposit beta settles?

Speaker 3

In Investor Day, we said that we thought our cumulative deposit betas would be around 55. I think that's still a good range. I think we'll look at Depending on what the rate environment is, one of the things that I mentioned in my comments, I do believe that we accelerated our deposit betas this Order as a result of our deposit gathering campaign. And so future rate hikes do not require us to reprice our book the way We would have had to in the past. I think we just accelerated that.

Speaker 4

Okay, great. I think we started

Speaker 3

at Investor Day and I think we're still in that range.

Speaker 4

Okay, excellent. And just lastly on the expense front, up 5% year over year tracking a little bit Below your $68,000,000 guide for the year, just wondering if that's conservative? Or is there going to be more Have your expense pressure on the back half?

Speaker 3

I think that's realistic. I think one of the big things you need to add back We have $22,000,000 of retention coming back into operating that was previously charged to the merger center, which is a big part of it. And we also have some hiring that we need To do, coming out of just being a little bit low thinking that we were going to close on a merger shortly, and there is some hiring that we need to do back Significant portions with just some pockets that we need to backfill.

Speaker 4

Great, thank you.

Speaker 3

And as we mentioned in Investor Day, we are So the third one is we are starting to invest in our technology, and that takes a quarter or

Speaker 4

2 to come up.

Speaker 3

So I expect we start to see some of that really hit our run rate in 4th quarter with Full run rate impact in 2024 as we invest $75,000,000 to $100,000,000 in our technology platforms over the next 3 years.

Speaker 4

Thank you.

Speaker 2

Thanks, Casey.

Operator

Our next question comes from Michael Rose from Raymond James. Please go ahead when you're ready.

Speaker 6

Hey, good morning everyone. Thanks for taking my questions. I just wanted to touch on this quarter's loan growth. I think if I'm doing the math right, the guide was reiterated, but this quarter was obviously much stronger than I think many of us were Anticipating. Does that imply kind of a shrinkage in the back half of the year?

Speaker 6

Or is the guidance conservative? Just trying to Kind of square the guidance. And then maybe if you could touch on the warehouse. It looks like one of your larger competitors got out of the space. Just wanted to see what the potential benefit to you all would be.

Speaker 6

Thanks.

Speaker 2

Yes. Michael, this is Brian. I'll start. We think that loan growth will probably flatten out some in the back half of the year. You had some continued pull through of pipelines in the residential mortgage.

Speaker 2

You mentioned mortgage warehouse lending. There has been some changes in the competitive landscape there and we've seen some opportunities Both on the pricing and the line utilization side to pick up some very nice relationships there. And broadly speaking, we saw utilization in commercial real estate as we saw a fund up of Some existing projects that were done many, many quarters ago. So we think that will start to level out. We think Clearly, the positive trends we saw in deposits and deposit gathering positioned us well to support our customer needs and to grow the franchise attractively and we'll take advantage And the growth of franchise attractively, and we'll take advantage of those opportunities.

Speaker 2

But our expectation For loan growth over the full year, it flattens out some in the back half of this year.

Speaker 6

Great. And then maybe just switching to the fixed income business. I think this is the lowest quarter of revenue that I have, at least in my model, going back many, many years. Can you just give us an update on kind of the competitive positioning of that business? And Yes.

Speaker 6

Is this kind of an inflection point quarter? Are we going to get to some sort of inflection point if the Fed hits Terminal rates here in the next couple of months, just wanted to get some updates there. Thanks.

Speaker 2

Yes. Look, It's been a series of very tough quarters in that business and average daily revenue has suffered as a result. We're still very confident in our ability to serve our customers in a very unique way. We're very uniquely positioned with a broad customer base, a huge distribution, We position with a broad customer base, a huge distribution model, and we're very confident that when We do reach terminal rates, and we start to see some transition and steepening of the yield curve. We're likely to see that business recover nicely.

Speaker 2

We've always described it as somewhat countercyclical and we expect that we'll continue to do that. In the meantime, Our teams are working very, very hard to deliver value through other channels, portfolio advisory, asset management, Research things of that nature and we're going to control cost and we'll be positioned for the turn when it comes.

Speaker 6

All right, great. Thanks for taking my question.

Speaker 2

Sure. Thank you, Michael.

Operator

We have our next question from Brady Gailey from KBW. Please go ahead when you're ready.

Speaker 2

Thank you. Thanks. Good morning, guys. Good morning, Brady.

Speaker 3

Good morning.

Speaker 7

The initial deposit promotion It's over. I think you said it wrapped up June 30th. And then you mentioned there was a new deposit promo going, but at lower rates. What is the new kind of pricing of deposits for this quarter?

Speaker 3

Since money market has kind of been the one that we've had the most success with, I'll do that one. We were at 525 for money markets and starting July 1, we're now at 425. We decreased 100 basis points there. And I would say that that's pretty directionally similar for our other products as well.

Speaker 7

Okay. And the loan to deposit ratio ticked down a little bit in the second quarter. It's now at kind of a mid 90% range. Is there a goal that you would like to see that ratio at? Are you actively trying to get that ratio lower?

Speaker 2

This Brady, we don't have a goal around that. We're mindful that we have Fund our loans with deposits and our securities portfolio, we think it's useful to look at both loans and securities portfolios Because they both have to be funded in a similar fashion. We are mindful that we don't want that ratio to get too high. We're not uncomfortable with where it is in our outlook and our ability to gather deposits. It doesn't give us any concern that we're going to be Overly constrained by our loan to deposit ratio.

Speaker 2

We're not going to get let it get wildly out of around, but right now we're very comfortable with how it's positioned.

Speaker 7

And then finally for me, just an update on the share buyback. If you look at your common equity Tier 1, you're supposed to finish the year around 11.5%. That's a lot higher than your Goal of 10% to 10.5%. Is there any update on the willingness to consider a share buyback especially with the stock at 110 of tangible?

Speaker 2

Yes. I don't have any new information. We still have authorization to buy back stock. We believe Right now, capital provides a really nice degree of optionality. We think It's important to see how this economic environment plays out and we like being positioned with a strong capital base.

Speaker 2

We'll have plenty of opportunity to deploy it And capital repatriation, whether it's dividend and or buyback, but in the meantime, we're going to use it To support our customers and look at opportunities to grow the balance sheet where appropriate. Okay, Great. Thanks guys. Thank you.

Operator

Our next question comes from Brody Preston from UBS. Please go ahead.

Speaker 8

Hey, good morning everyone.

Speaker 2

Good morning.

Speaker 8

I just wanted to ask, it seems like the interest bearing deposit growth was a little bit back half weighted When comparing the period end and the average. And so I just wanted to maybe ask on the Spot rate of the interest bearing deposit cost, do you happen to have what that is at quarter end?

Speaker 2

Yes. No doubt it was back half weighted. With the termination in early May, we Started the program in the back half of May. Our spot rate at the end of the quarter would run-in about 3.10

Speaker 8

Okay. Okay. Great. And then, Hope, Just within the net interest income guide, I guess how much of the I think you were just a little bit below the low end of 2Q guide, but you maintained and I know you changed the forward curve outlook that you were using as it evolved. So I just wanted to kind of ask How much did the removal of the I think you had a couple of cuts or a handful of cuts in the back half of the year kind of baked the previous guidance, how much did the removal of those cuts add to the net interest income guidance?

Speaker 3

We did miss our guidance just slightly and that's all on deposit growth. We sat up at Investor Day on June 6 and everyone thought we were going to have deposit runoff. Said no, we're seeing deposit momentum. We didn't expect June to be a better month than May at that point. So we were really, really excited to see how strong June came in, which did give us Higher beta and a little lower net interest margin.

Speaker 3

But I will mention the rate we're paying for deposits is paying off wholesale funding. So it is Positive to our overall net interest margin over the horizon as we pay down wholesale funding as it matures and can continue to Use client deposits as our primary way to fund our balance sheet. When we look at the way the rate curve has moved, bringing a rate increase Earlier in the year versus 2 decreases later in the year is very positive to our margins since we're asset sensitive and it does help to offset the increased

Speaker 8

Okay. And then I wanted to ask one just on the fixed rate loan portfolio. Do you happen to know what the dollar amount of fixed rate loans is That's repricing over the next 12 months. And do you know what the current yield on those loans that are repricing is?

Speaker 3

Brody, I don't know the yield on those. I can try to get them and have Investor Relations get that to you at the end of the day. I don't have that. But it is $5,000,000,000 that we have repricing in the next 12 months.

Speaker 8

Okay, great. And what are current origination yields? I'm sorry if you mentioned that and I missed it.

Speaker 3

We've seen our spreads significantly widen out to about 150 to 30 spreads, 300. 150 to 300 is what we're seeing new originations at. Got it. Okay. And then

Speaker 8

Got it. Okay. And then last one for me, just within the AFS portfolio, do

Speaker 9

you happen to know what

Speaker 8

the effective duration Is of that portfolio? And then I guess within that duration calculation, do you know what conditional prepayment rate You guys are using to come up with that duration?

Speaker 3

Yes. Our effective duration is 5.2 And then we assume a 5 prepayment rate.

Speaker 8

Awesome. Thank you very much for taking my questions. I appreciate it.

Speaker 2

Thank you.

Operator

Our next question is from Jarrod Shaw from Wells Fargo. Please go ahead.

Speaker 10

Hi, good morning. This is actually Timur Braziler filling in for Jared. Just a couple of questions here. The excess liquidity that was generated in the Q2 looks like it's sitting in cash right now. Just curious what the use of that liquidity is going to be.

Speaker 10

Are you going to pay down some borrowings with that? Is that going to go into the bond book? Any color we can get on that?

Speaker 3

We plan to pay down our borrowings on that. We had laddered out our borrowings and the deposits came in a little bit quicker. So it wasn't intentional to have that Cash at the Fed, but as we FHLB matures, our debt, we will pay it off with that excess fund.

Speaker 10

Okay. And then the it sounds like you're going to continue building liquidity throughout the rest of the year. Is that going to be The strategy there as well or could we see some additional layering into the bond book?

Speaker 3

At this time, we have no intention of putting any additional securities on the books. Our intention is to improve our liquidity position, as you said and as Brian said earlier, Use our strong capital position and liquidity we generate to be there for our clients and customers during this time and Support our loan growth that we still we have moderating loan growth in the back half of the year, but still loan growth.

Speaker 2

In fact, our expectation is that the securities portfolios, Because we're making very limited reinvestment, they'll continue to trend down.

Speaker 10

Okay. That's helpful. Thank you. And then Maybe from a bigger picture standpoint, the deposit growth that you generated in the Q2, can you just talk about kind of the geographic Diversity there and that's how that plays into the broader strategy, as a standalone company once again is Kind of the near term strategy to further penetrate diarrhea markets, kind of with a more broad product offering, is it on working to gain market Sure. In Tennessee, namely Nashville, kind of all of the above, maybe just give a sense on how you're thinking about geographic strategy here?

Speaker 2

Yes. The breakdown, if I recall the numbers, it was about 20% of the deposit growth was in the state of Tennessee and 80 And so it's fairly broad based and diverse. We think that As we look at the next several quarters, realizing the benefits of the promise of the Iberia Bank First Verizon Merger Vehicles, we think we have a great opportunity to continue to grow out our presence in these very attractive higher growth markets We're in all across the South. And one of the areas of emphasis for us will be in the coming quarters will How we continue to build out that retail presence and retail focus in what would have been the legacy Iberia Bank Markets. So We see there being a huge opportunity for us to capitalize on a unique business model and value proposition For our customers, at the same time, drive attractive deposit growth and the ability to serve our customers more broadly in these higher growth markets.

Speaker 10

Great. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Steven Alexopoulos from JPMorgan. Please go ahead when you're ready.

Speaker 9

Hi, everyone. This is Anthony Elion on for Steve. My first question, at Investor Day last month, you indicated that you were able to retain Nearly 90% of associates through the Q1 of this year while waiting for the TD deal to move forward, what did banker retention look like in the 2nd quarter And since Investor Day. And are there any notable changes from the retention statistics you provided at Investor Day?

Speaker 2

No notable changes. Our banker and client retention have continued to be very, very good, and We're encouraged with the excitement, enthusiasm we see in both groups, our associates, our bankers As well as our clients. So our retention has been good, and I would I haven't seen the final numbers, but my Estimate would be that it's probably improved from what you saw in the Q1.

Speaker 9

Okay. And then on the deposit gathering promotion, I guess from a high level, why did you feel like you needed to be aggressive with Engaging in deposit gathering promotions, not just from existing clients, but also from new to bank clients.

Speaker 2

Well, couple of thoughts. Clearly, we had maybe one of the more unique Situations in mid April with the termination excuse me, mid May with the termination of the merger. And we wanted To do a couple of things, one, that was a period where there was an awful lot in play and we all know that the deposit base in the U. S. Has been volatile and contracting.

Speaker 2

So one, we wanted to be very well positioned to Not only to protect the home field, but to be aggressive and front footed in terms of Demonstrating our commitment to the markets that we serve, it was a great opportunity to get our bankers On the phone talking to customers having a positive conversation about First Horizon, how we're positioned, what we're looking to do over the foreseeable Future and how we continue to be committed to serving them and their needs. And then thirdly, Hope mentioned wholesale funds And sort of an alternative of wholesale funds, even at the same cost, you certainly get a relation Benefit when you do it with a client versus a Federal Home Loan Bank borrowing. So we looked at it and said it was appropriate period to So we're going to reset, we're going to draw a line under the termination of the merger. We're going to get very front footed. We're going to demonstrate our commitments to customers, Our marketplace and our commitment to delivering on the value of the First Horizon model.

Speaker 9

Okay. And my last question of the 5,800,000,000 Deposits you added in the Q2 from the campaign, how much would you say is sticky? And how does this break down into the $3,500,000,000 From new clients and the $2,300,000,000 deposits from existing clients. Thank you.

Speaker 3

New to bank clients, we saw 80% of that in consumer and 20% of that in commercial. And on the deepening relationships, it was 51% consumer, 49% commercial. We see every one of these as an opportunity to introduce new clients to the First Horizon franchise. And so Now that we have a deposit relationship with them, we're calling on them and trying to deepen relationships in other spaces. So we're hoping that the majority of these will be sticky, that we're not seeing them as Transitional deposits, we're reaching out to these clients and trying to build relationships with every single one of them.

Speaker 3

We have 4% more clients this quarter than we had before, and we That's an opportunity to continue to grow relationships with them and create more profitability.

Speaker 2

Yes, the real opportunity in our view, which is We recognize that you attract customers and new customers in any Deposit campaign principally was right, but it is an opportunity to demonstrate our commitment to service and deepening. And if you look at the deposit growth we had with our existing customer base, roughly $2,300,000,000 to $2,400,000,000 My recollection is right, something like 60% of that was with our primary customer base, 58%, something like that. What we want to do is take the opportunity. We have a locked in period here and we'll take the opportunity To deepen the relationship, broaden the relationship with these customers, the 32,000, if I remember the numbers right, it was About 23,000, 24,000 were retail and about 6,000 plus were 6,500 were commercial. So that's a great opportunity for us to broaden relationship, and we have said about doing that, and I expect that we'll have very good results with it.

Speaker 2

Great. Thank you. Thank you.

Operator

Our next question is from Christopher Marinac from Janney Montgomery Scott. Please go ahead.

Speaker 2

Chris, you there? Hey, Brian. Can you

Operator

hear me? Hi, Christopher. Can you

Speaker 5

Yes.

Operator

Yes. We can hear you.

Speaker 2

Go ahead. How are you? Great.

Speaker 10

I'm good. Thanks. I had a credit question for you or for Susan just about the migration of just downgrades on whether special mention or sub Standard however you look at it and how you think that may play out into the corners ahead?

Speaker 11

Yes. Thanks, Chris. We had a little bit of additional downgrades into non pass, but it was very moderate And it's something that we typically do see. As you know, in Q2, we're getting year end financials and some clients. We're We're still very, very pleased with the overall asset quality for the portfolio.

Speaker 11

So in terms of Total classified loan percentage were at 1.7% at the end of the quarter And non accrual is at 0.7 percent as Hope pointed out, we actually had a decrease in our non accrual loan balances. So obviously, we're watching it Carefully, with what's going on in the economy, rising interest rates. But as we talk to our bankers and clients, there's, we feel like that, In many cases, borrowers are getting used to this environment. They're adjusting. Businesses are being able to pass along increases And prices, so again, we believe we're well positioned, but we're watching it carefully and doing the appropriate servicing and monitoring that we need to do and

Speaker 2

It's kind of interesting when you talk to Our bankers and the customers, Chris, this expected recession that's always 6 months off and continues to roll. It still feels like customers, borrowers are in a pretty good place. And as Susan said, they've adjusted very well to higher rates And the changing dynamics around inflation. And we're, as she said, paying an awful lot of attention to grading and Understanding how our borrowers are doing, but at the end of the day, things still feel relatively good at this point.

Speaker 10

Great. Thank you for that. And Susan, would there be any possible reserve release if the On funding commitments come down, is that a possibility?

Speaker 11

Obviously, we have to reevaluate it every quarter, Chris, In terms of looking at what growth we've had in balances and unfunded, things like What's going on in the economy at this point, I feel like the reserve is where it needs to be based on what we know today And we'll gauge that. Obviously, if there are opportunities to release, we take a look at that just like we look at Changing economic conditions when either there's growth or there's deterioration in the economy.

Speaker 10

Great. Thanks again for taking our questions.

Speaker 2

Thank you.

Operator

We have no further questions registered. I will hand back to the management team for final remarks.

Speaker 2

Thank you, Carla. We appreciate everybody joining us on what we know is a busy morning. Thank you for taking time. We appreciate your interest And our company, if you have any follow-up questions or if you need additional information, please reach out to any of us or Natalie Flanders today, And we will get you additional information. Thanks.

Speaker 2

I hope you all have a great day.

Operator

This concludes today's call. Thank you for joining. If you have missed any part of the call or would like to hear it again, a telephone replay will be available shortly. Have a lovely day.

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Key Takeaways

  • On an adjusted basis, First Horizon delivered EPS of $0.39 and a return on tangible common equity of 14.6% in Q2, while expanding its net interest margin to 3.38%.
  • A targeted deposit campaign—with 50,000 banker outreach calls—brought in nearly $6 billion of new‐to‐bank funds, growing the client base 4% and lifting period‐end deposits by 6%.
  • First Horizon’s asset‐sensitive balance sheet drove a 64 bp year-over-year NIM expansion despite rising funding costs, and net interest income guidance was reaffirmed.
  • Credit quality remains robust: nonperforming loans declined by $21 million, net charge‐offs held at 16 bps, and the allowance coverage ratio stayed flat at 1.35.
  • The bank’s capital position strengthened as CET1 increased by 72 bps to 11.1%, providing significant regulatory cushion and capacity for strategic growth.
AI Generated. May Contain Errors.
Earnings Conference Call
First Horizon Q2 2023
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