First Horizon Corporation

Good morning all and thank you for joining us for the First Horizon Third Quarter 2024 Earnings Conference Call. My name is Carly and I'll be the call coordinator for today. If you'd like to register a question during the call, please press star followed by one on your telephone keypad and to remove yourself from that line of questioning, it is star followed by two. I'd now like to hand over to your host, Natalie Flanders, Head of IR, to begin. The floor is yours.

Thank you, Carly. Good morning. Welcome to our third quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President, and CEO, Brian Jordan, and Chief Financial Officer, Hoke 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 two of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release and on page three of our presentation. And last but not least, our comments reflect our current views, and you should understand that we are not obligated to update them. And with that, I'll turn things over to Brian.

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 will remain heavily engaged in the rebuilding process. On slide five, we've 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 42 cents per share, which was a 6 cent increase from the prior quarter. Pre-provision net revenue increased $11 million, improving our adjusted return on tangible common equity to 13.2%. We continued to deploy capital through share repurchases, buying back $75 million of stock in the third quarter and over $440 million 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 million or 15 basis points of net charge off this quarter. I'm proud of the dedication 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?

Thank you, Brian. Good morning, everyone. On slide six, 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 million 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 million of provision expense. ACL coverage increased modestly to 1.44%, including $8 million of qualitative reserves for potential losses related to Hurricane Helene. The improved revenue and lower reserve bill drove an increase in our adjusted return on tangible common equity to 13.2%. 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. Third quarter pre-tax notable items include a $2 million credit to expenses that was trued up to the FDI special assessment accrual, a $15 million of visa derivative valuation expenses related to the escrow funding that occurred in September, and lastly, $2 million of restructuring expenses associated with the operational efficiencies we have continued to identify. All of this totals an $11 million reduction to net income. On slide 8, you will see that NII of $631 million was relatively stable to the prior quarter, benefiting slightly from a higher day count. The net interest margin compressed seven 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 billion of new client growth. Loan yields expanded three basis points from second quarter, benefiting from new and renewing floating rate spreads and repricing of fixed rate cash flows. As we move into the fourth quarter, we expect modest margin contraction due to the lag between the loan and deposit repricing. On slide nine, We take a closer look at our strong deposit group. Period end balances increased 3% with client acquisition driving almost $1 billion 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% spot rate we saw at the end of June. This was driven in part by the higher use of brokers' deposits as seasonality and 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 billion of deposits which are market-indexed. Deposit rates have declined another five basis points in October, with a spot rate today of 3.28%. We will continue to make progress on repricing the deposit portfolio, as we have approximately $18 billion of promotional deposits that are set to reprice over the remaining of the year, in addition to the $1 billion 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 and loans to mortgage companies. Period end loans declined 1% or $335 million from last quarter. This included an opportunistic sale of approximately $340 million 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 three basis points from second quarter due to wider spreads and fixed cash flow repricing. As we move into the fourth 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 million from the prior quarter. Average daily revenue in our fixed income business improved 22% to $593,000, driving a $7 million increase in fee income. July was a relatively muted month, However, as the markets, confidence, and rate cuts increased, we saw increasing momentum in the business in both August and September. Lastly, other non-interest income increased $5 million 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 million. Personnel excluding deferred comp was down $1 million 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 million reduction to incentives included the continued step-down in retention award that took place at the end of the second quarter and outweighed the incremental incentives associated with the higher fixed income reductions. We are constantly evaluating options to improve operational efficiency. This quarter, we implemented two items that impacted headcount. First, we optimized the retail staffing model across our footprint to more efficiently serve our clients. We also recently outsourced our property management 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 million 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 million reduction to outside services driven by lower advisory services as certain strategic initiatives enter the production phase. I'll cover credit on slide 13, which continues to perform very well. Net charge off decreased by 10 million to 24 million for 15 basis points of average loans. Loan loss provision was 35 million this quarter, increasing ACL coverage to 1.44%. The 11 million of reserve bills included 8 million 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 million, with an increase in C&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 MPLs are still current on their payments. Overall, we are very pleased with the 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 a composition driven by what the Fed chooses to do over the next couple of months. Our counter-cyclical 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 arrive 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.

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. Carly, we can now open it up for questions.

Thank you, Brian. If you would like to ask a question, it's star followed by one on your telephone keypad. And to remove yourself from that line of questioning, it will be star followed by two. Our first question comes from Ibrahim Bunawala, Bank of America. Ibrahim, your line is now open.

Ibrahim Bunawala, Bank of America. in terms of talking about total revenues versus NII fees, given the cyclicality of your businesses. But just talk to us. I guess the question is, at least in the very near term, NII, I hope you mentioned some margin compression over the next quarter or two, will impact NII. When we look at the fixed income business, the $47 million 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 restructuring at banks, rates got cut, or is there another leg higher to go on additional rate outlook certainty? Would love for you to address that.

Good morning, Ibrahim. 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 and August were much stronger than July. And we've seen strong momentum ending the quarter. But one thing you mentioned was, you know, 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 in 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.

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 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 you a little bit more cautious in terms of how quickly you flex deposit pricing lower?

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, you know, 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, you know, 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.

Ibrahim, 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 a billion dollars 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 two are somewhat related, we spend more time focusing on how do we grow our customer relationships, particularly in our retail, private client, and high net worth businesses.

That's helpful. Thank you, Bob. Thank you.

Thank you. Thank you very much. Our next question comes from Michael Rose of Raymond James. Michael, your line is now open.

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 fourth quarter, 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 TAB, Mark McIntyre, Additional repricing opportunities, I think the slides I mentioned. TAB, Mark McIntyre, A chunk of deposits that was eligible for repricing 18 going to promotional. TAB, Mark McIntyre, clients deposits that are eligible eligible for pricing in the fourth quarter, are we at a point where the fourth quarter, do you think is the inflection point for the name and we can move, 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 quarters. Thanks.

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 comment, 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 banks. So I don't think it will necessarily be a 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 used to be a 90-day guarantee to 45 days guarantee. And that allows us a little bit more flexibility quicker. 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 can get the deposit side.

One of the key variables, Michael, is, as Hope said, the pacing of rate cuts. And 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, et cetera. 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.

Certainly understand that. Maybe just as a follow-up, and I know the rate 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 PPR 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 wanted to just initially, if you had any comments on how we should kind of think about that. Thanks.

Yeah, 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.

All right, I'll step back. Thanks for taking my questions.

Thank you.

Thank you very much. Our next question comes from John Armstrong of RBC Capital. John, your line is now open.

Hey, thanks. Good morning. Morning, John. Brian, one for you. Give me some thoughts on loan growth expectations. Looks like you guys referenced some CRE stability, but CNI 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.

Yeah, 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 is 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 investments.

Okay. Fair enough on that. 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.

I didn't mean to hedge as much as I meant to convey uncertainty about what's going to happen.

Okay. Hope, follow up on fixed income. Are you willing to share what the ADRs look like in

august and september how big of a step up that was i think that would help us with maybe a run rate john i actually don't have that in front of me um you know august and september were generally pretty equal as i recall but the end of q 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 that Months were not particularly 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 two months.

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 two weeks. If you look at the first week of October, we were a little over a million one. Last week, we were a little over 500,000. So two 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, I think we were 563 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, 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.

Okay, that's helpful.

Thank you very much. Thank you very much. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. And to remove yourself from that line of questioning, it will be star followed by two. Our next question comes from Jared Shaw of Barclays Capital. Jared, your line is now open.

Hey, good morning, everybody. Good morning, Jared. And maybe just going back on the deposit side, the $18 billion that you referenced, that's coming due in fourth quarter. 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 a term change in that promotion?

Jared, yes, starting at the end of your question, we have changed the term 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. That compares to 505 last quarter when you asked me on the earnings call. Our retention offer is now 3.5%. And so 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. a December rate cut is really hard for us to make much headway with deposits. And so November rate cut will have the most meaningful impact on how much we can walk it back.

Okay. Okay. Thanks. And then, you know, as we look at the, the, the deposit, uh, composition, what's, what's the appetite for additional brokered from here? I heard your, your commentary that you built that up in anticipation of the mortgage business. Um, Should we expect to see brokerage be a bigger part of the overall deposit mix, or are we near the top?

Jared, our goal is always use client money first and brokerage 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 million last quarter, which I'll note is Again, 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, it's 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 clients. But I am comfortable where it's at. We're well below our peer group the last couple quarters when compared to our brokerage versus theirs.

Okay, thanks. And just finally for me, I know your guidance 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 what the how we're ending the year, what the exit of NII is for 24?

Jared, for 2024, I don't see much of a change from, you know, our prior guidance. And you look at the new revenue guidance we gave, it is in line of both revenue and NII. It's just, are we going to come in the low end of one, high end on the other? For us, you know, not just for Q4, going into next year, as we think about NII, the big, 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 the 22% to the historical 30% or 40% or 50% we've been seeing. That would help NII significantly. So as we talk about counter-cyclicals, 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 in both of those businesses.

Okay, great. Thanks very much.

Thank you. Our next question comes from Samuel Varga of UBS. Samuel, your line is now open.

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.

Yeah, 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 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.

I just 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 25 and 26, are there sort of bigger chunks that we should be aware of as we model NIA?

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 three years. They've kind of been steadily added to our balance sheet over the last two, two and a half years. What I'll say, though, is we expect a lot of them to get prepaid. being fixed for five, six, seven years, whatever they have left at a six, seven percent, if we really see rates get cut 100 to 200 percent, that is one of the items that I mentioned earlier that we could see a large amount of refi in the arm space for what we have in our balance sheet today.

If I remember correctly, and I'll look to Natalie because she remembers these numbers better than I do, but You can use it as a proxy. I think our consumer loan portfolio yielded in the 5.8% or so range, maybe a little higher in the third quarter. And that's largely driven by ARMS. So that's a proxy for that number.

Agreed.

Awesome. Thank you very much. I appreciate it.

Thank you very much. As another reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. And to remove yourself from that line of questioning, hit star followed by 2. Our next question comes from Chris McGrathy of KBW. Chris, your line is now open.

Good morning. Hope, maybe a question, or Brian, on the PPNR-25 being above 24. Just I guess a couple 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 yeah yes um so if I break that yes down um we we

We can prognosticate about rates. It's probably most efficient to always use a four 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're working to leverage that are really, really important in terms of our ability, not only of driving TPNR in 2025, but creating long-term shareholder value, essentially taking our returns a little over 13% on tangible common equity back north at 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've circled back around to, yes, we think it's going to be across all of the levers that you mentioned.

Okay. That's really helpful. Thanks, Brian. And then maybe on regulation, you're a 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 has been a little bit watered down? And also maybe a comment, Brian, about where you are on the investment for $100 billion. Thanks.

Yeah. 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 fourth quarter. We will talk to the board in the early part of 2025 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'll be sometime in the early part of 2025 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 billion. We are doing a fair amount of work and making investments in the 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 billion 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 a 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.

Great. Thank you very much.

Sure thing. Thank you very much. Our next question comes from Timo Brasile of Wells Fargo. Timo, your line is now open.

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?

Our overall belief is that we have to be at a sub-6% mortgage rate. How that will play out is a little bit uncertain. This last 50 basis point cut barely touched mortgage rates 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 home purchases so not refi just first time home purchases second homes has been historically low for the last two 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 six percent as well as a refi for the people that are in their fixed rate part of their arms okay um

And then maybe just on the revenue guide, it implies a pretty wide range of outcomes in the fourth quarter. 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 X some of those one-time fees?

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, you know, 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 two 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 when the current board curves at 75 basis points, but most of the market doesn't believe we'll get more than 25. Okay.

And then just the one-timers this quarter for fees, is that the full increase on the other line?

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 slug that those dividends pay in a quarter or years. So 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 million range quarter to quarter.

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.

You're talking about paydowns on MPLs?

No, just commercial real estate.

No, no, paydowns on commercial real estate.

Okay. Sorry, I thought you were talking about the ones that we mentioned that were in non-performing that we're still paying.

Yeah, I think this is Tom and Tom here. I think that's going to be a little hot for Dick right now because For us, a lot of our commercial real estate is – we're heavier on the construction side than probably a lot of our peers. And so in terms of paydowns, it'll really come down to the plan financing market, how much appetite there is for that plan takeout financing. That's what will really drive the level of paydown that we see.

Okay. Thank you. Thank you very much. Our next question comes from Christopher Maranek.

jay montgomery scott christopher your line is not open 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 you know inflows of mpas or more importantly uh charge-offs as we move into q4 and q1 yeah hi this is thomas time again um i don't expect so uh you know overall shed national credits

It's run a little under $8 billion for us overall. And if you look at kind of the relative performance of our SNIC books or our CNI book, the metrics are all generally about the same in line. There's not really a material difference in terms of classified assets, NTLs, or year-to-date net charge-offs and that. So my expectation is that SNICs should continue to perform about the same as the overall book. We haven't really seen a variance.

Great. Thank you for that. And then hope just a quick one for you. I know you broke out a lot of information on the other expense numbers this morning. Um, is there anything in there for operational losses or customer fraud, things of that nature that would stand out?

There's nothing that stands out now, as I said, it was, it was a bunch of small items that added up to 5 million. We did not have, you know, significant fraud change quarter over quarter. or any large one-time gains on any sales of property or things like that.

Okay, great. Thank you very much.

Thanks, Chris.

Thank you very much. We currently have no further questions, so I'd like to hand back to Brian Jordan, CEO, for any closing remarks.

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.

As we conclude today's call, we thank everyone for joining. You may now disconnect your lines.