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spk01: 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. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Natalie Flanders, Head of Investor Relations. Please go ahead.
spk03: 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, Brian Jordan, and Chief Financial Officer, Hope Demchowski, 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 risks 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 filing. 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 Brian.
spk02: 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 planned merger. We've detailed some of our highlights on slide five. Despite all the disruption this year, our 2023 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 countercyclical 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-promise efforts with the clients we acquired in 2023. We have some of the financial highlights of the quarter on slide six. We delivered adjusted EPS of 32 cents 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 normalized pricing on our promotional deposits, reducing our interest-bearing deposit cost by approximately 15 basis points at the end of the quarter. We generated 29 basis points of common equity tier one 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.
spk05: Thank you, Brian. 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 repricing 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. These, excluding deferred comps, were flat slinked quarter, benefiting from higher fixed income, which was offset by the timing of a couple discreet items. As expected, expense excluding deferred comps 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 four 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 8, we outline a couple of notable items in the quarter, which reduced our results by one penny 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 adjustments. 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 Iberia Bank 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 H-8 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. CNI production was fairly muted as we entered into the quarter, though we saw that stabilize as 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 comps, remains stable at $173 million. Our fixed income business saw an increase of $9 million as the market's expectations that the Fed is 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 in 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 cost 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 four 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 72 cents from lower mark-to-market impact and 34 cents of net income, partially offset by 15 cents 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 the 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 Brian 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-provision 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 Brian.
spk02: 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 associate for all that you have done for our company, our clients and communities, and our shareholders in 2023. Bruno, we now open up for questions.
spk01: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. To withdraw your questions, start followed by two. And please do also remember to unmute your microphone when it is your turn to speak. We do have our first question. It comes from John Armstrong from RBC Capital Markets. John, you may proceed with your question.
spk06: Hey, thank you. Good morning. Good morning, John. Maybe a question for you, Hope, on the net interest income outlook. You made some comments on 23 performance against your guidance. And I wanted to ask about the 24 NII outlook range. And curious, what kind of an impact do the four cuts have on your net interest income and margin outlook? And you know, what kind of puts and takes do you have for getting the company to the kind of the lower end of the higher end of the range? Thanks.
spk05: Thanks, John. 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 others with different rate scenarios. We did use the four rate cuts 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 re-price 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.
spk06: 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?
spk05: That's correct, John. 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.
spk06: Okay.
spk05: Depends on what that lag is.
spk06: And then just, yep, 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?
spk02: John, this is Brian. We feel pretty good about loan growth expectations. We expect to see the balance sheet grow 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, 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, and the Fed's comments were interpreted as pretty significant cuts and the market implies. 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.
spk06: Yeah, okay, that's helpful. I'm more near Camp Brian, but the framework you provided helps. So thank you for that. Sure.
spk01: Our next question comes from Michael Rose from Raymond James. Michael, your line's now open.
spk11: Hey, good morning. Thanks for taking my questions. Just wanted to go to the slide 24 in the appendix as it relates to FHN financial. I appreciate it. you guys putting that in there. You guys had a nice uptick in ADRs this quarter. Certainly understand the way this business works. But can you just give us, you know, kind of what your baseline expectation is for ADRs as we kind of 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.
spk02: Yeah. FHN is, as you just implied very sensitive to what interest rates do. We did see a little pickup in the fourth quarter of this year and 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. 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 sort of laid out in terms of rate cuts next year. We don't expect that FHM Financial is going to bounce back to 2000 and 2021 levels, but we do expect some modest improvement next year.
spk11: That's helpful. And maybe just as my follow-up question, Just assuming that, you know, I just want to get a sense for how much flex there would be in the expense space if the revenues, you know, don't necessarily come through. You know, for instance, like, is there some technology costs that you could, you know, maybe push out or, you know, what other areas could you look to, you know, maybe kind of address if the revenue expectations come in at the lower end of expectations? Thanks.
spk02: Yeah. 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. Even when you reach the lows in the cycle, we still make money in the business. 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.
spk11: Brian, I appreciate that caller. I meant holistically for the firm, not just FHN Financial. Sorry if that wasn't clear.
spk02: 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. You mentioned specifically technology costs. 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 up. So that's a potential lever, but it's not one I expect us to pull. Our overall cost consciousness and the effort we have in the organization I think gives us the ability to control costs as we move 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.
spk11: Appreciate it, Tyler. Thanks for taking my questions.
spk02: No, my pleasure. And sorry I misinterpreted the first time.
spk01: Our next question comes from Casey here from Jeffrey's. Casey, your line's now open.
spk08: 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?
spk05: Morning, Casey. Good to hear from you on 2024. Yes, we are fully through that repricing of the second quarter ProGo campaign. And that 96% retention is an up-to-date number as of yesterday. And 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 this cycle, you know, when we think about deposit rates, we really think it's through the cycle of when do you start cutting rates. And, you know, 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 this 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 marks, we saw 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 a billion dollars, you know, in each of the last two quarters for a lower rate than we saw second quarter.
spk08: Gotcha. Okay. And just as a follow up, trying to gauge buyback appetite. It's, uh, you know, it seems you want to at 11 for your, your comfortably above your 11% target. You do mention organic, um, uh, capital deployment, but it doesn't, it doesn't seem like, I mean, to Brian's point, long growth sounds kind of muted. Um, it is, is there, it just seems like you guys being a little vague on the buyback given, given the strength, um, you know, do we, Do you manage CET1 back to that 11% level or are you going to run above that?
spk02: Yeah, Casey, this is Brian. 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.
spk01: Our next question comes from Ben Gerlinger from CT. Ben, your line is now open.
spk09: Hey, good morning. Good morning, Ben.
spk00: Good morning.
spk09: 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 like up the income line item or bringing over a relationship in general in terms of a lending opportunity?
spk02: 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. 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. That doesn't happen instantaneously, but we see early indications that are encouraging.
spk09: embedded in anything or is that kind of just icing on the cake for a 24 if they start to bring over wealth or something like that?
spk02: 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.
spk09: Gotcha. And then just completely switched gears here in terms of just lending appetite. I get there's so many competitors here in the Southeast, um, or let's just say pulling back or reorganizing or something that might have them take their eye off the ball. Are you seeing additional client ad potential? Um, 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 as an easy, low-paying group to call up, but just anything more granular than that would be helpful.
spk02: 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 and things like mortgage warehouse finance and mortgage warehouse lending and restaurant finance and things of that nature. The market 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 peaking 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. It's probably gotten a bit more competitive. There are one or two examples of folks who are not taking new to bank relationships that are now back into the market. 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 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 or 30 days by our estimate. 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?
spk04: I agree with what Brian was saying. And we do take a through the cycle approach. As Brian 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 and 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. We also do think, 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.
spk09: Got you. That's a really helpful call. I'll actually email help. I have a couple of just real small modeling questions, but I'll send that to you. Thanks. All right.
spk02: Thank you, Ben.
spk01: Our next question comes from Brady Gailey from KBW. Brady, your line's now open.
spk07: 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, you know, it feels like credit is normalizing here, but just updated thoughts on how you're thinking about credit into 24.
spk04: Hey, Brady, it's Susan. I'll take that. We are being, as I just said on the 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 really do it all the time, especially in a higher interest rate environment. We're making sure that we're touching 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 and how we're grading and servicing credit. So 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.
spk07: 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. But 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.
spk02: 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. While it's not clear what becoming $100 billion or LFI entails, 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 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. And we have a few years of flexibility. And as I 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.
spk07: Okay. All right. Great. Thanks, guys. Thank you.
spk01: As a reminder, to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. Our next question comes from Timur Braziler from Wells Fargo. Timur, your line's now open.
spk12: 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?
spk04: Yeah, it was really, we had several different industries reflected. On the top kind of four that were added, you had one that's kind of an online retailer. We had one Cree hotel project that was added, and then a couple of other just kind of general C&I credits, kind of the drivers of the, bigger drivers of the increase. One was a and then one franchise finance restaurant credit.
spk02: 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, that's stressing some borrowers more than it's stressing others. So 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.
spk04: Yeah, as an example, the hotel project that we added experienced some construction delays, and so they're just a little behind on where we thought they would be according to plan. So that's an example, like Brian said, where it was related to something not necessarily industry related, and the others would have similar stories of kind of one-off situations.
spk12: Okay, thanks for that. 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?
spk05: Timmer, thanks for the question. Technology spend tends to kind of be back-loaded, and so as the project's gearing up, you know, you're capitalizing costs, the software doesn't go into maintenance yet, and so it is a little bit more back-loaded. We started to, as we talked about in Q3, kind of undershooting our expenses in the quarter. We've seen that hit in Q4, so the projects have started up. And 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, though, we are, as we continue to say, looking at operational efficiency just to figure out how we can offset some of that investment. But we do expect, you know, 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, you know,
spk12: at how we do that 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 borrower or those clients roll into are those back in CDs did that move to money market And I guess, what is the current CD specials out there right now for you guys?
spk05: That was all money market that repriced in Q4. Our CDs were actually a 9 or 11-month CD, but were not as material. They were repriced in Q2.
spk02: Those rates were down 75, 76 basis points from the special rates.
spk05: The second part of your question was, what was the current offers? So our current offer is a deepening relationship of 425. And so as you're coming off promo, if you bring more money to the bank, you deepen your relationship with us, the offer's 425. You can see, you know, we ended up at about 75, 76 basis points down. So we've gotten pretty far to kind of that 425 rate. There's always some negotiation in the discussion, but we believe that, you know, overall that 425 is the target for new money coming in. Great.
spk12: Thank you.
spk01: Our next question comes from Christopher Merak from Janae Montgomery Scott. Christopher, your line is now open.
spk13: Hey, thanks. Good morning. Just one more credit question for Susan. Do you think that the CNI specifically would see some deterioration this year, or should this quarter still kind of stay intact?
spk04: You know, I think that, Chris, the interest rate outlook of kind of stable rates may be going down. Again, I think you'll see mostly stability is what based on the fact that we've done deep dive portfolio reviews really throughout different sectors, C&I, inquiry. I'm not, I feel like we've got things graded in the right place. We're continuing to talk to clients. We're stressing, you know, doing stress projections when we underwrite our service credits. And so I think absent something really changing in the economy, if it were to worsen, Obviously, we take another look, and it could impact clients soon, 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.
spk13: Great. Thank you for that. And then, Brian, 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 in the footprint?
spk02: 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 LFI. I don't expect a tremendous amount of pickup during the course of this year. In terms of First Horizon, our priorities are executed 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 merger of equals integration and then the pre-termination period. So we really want to use this period of time 2024 to continue to prove out the power of the franchise that we built. And we think we have plenty of opportunity to deploy capital there.
spk13: Great Brian. Thanks for sharing that. I appreciate it.
spk02: Sure thing.
spk01: Our next question comes from Brody Preston from UBS. Brody, your line is now open.
spk10: Hey, good morning everyone. I wanted to circle back on the buyback commentary. Brian, 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?
spk02: Well, as a matter of fact, our next board meeting is next week. 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, and 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.
spk10: 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?
spk05: Freddie, we do have a small, you know, the NII guys have 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.
spk10: Got it. And what does it take to pay off further, you know, further pay down broker deposits? Is it an ability to grow other deposit sources or would you look to kind of, you know, pay down some of that with the securities cash flows that you have on a quarterly basis?
spk05: The answer is yes to all of that. So we want to continue to bring client money in to brokers 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 of 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. You know, for us, it's number one is creating client deposits so we can lend them to clients. And if we have to be a little bit in brokerage for that, we will be. The bigger thing for us when we look at brokerage 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.
spk10: 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. was just on that 325 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?
spk05: We're anticipating it to decline in Q1 modestly. We do have additional brokerage we can pay off that was laddered out if you look at our cash balance at the end of the quarter. what does low growth look like in Q1, right? Can we pay down broker with the excess money when it comes due, or do we put it to low growth? But I would say, you know, 325 is definitely, you know, it's a high point, 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, you know, basis point here and there each quarter is what we're targeting.
spk10: Got it. All right. Thank you very much for taking my questions.
spk02: Thank you.
spk01: We currently have no further questions, so I'd like to hand back the call to our CEO, Brian Jordan. Please go ahead.
spk02: 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. Hope everyone has a great day.
spk01: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
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