Q1 2025 First Horizon Corp Earnings Call
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Thank you for watching!
Lucy: Hello everyone and thank you for joining the First Horizon First Quarter 2025 earnings school. My name is Lucy and I'll be coordinating your call today.
Speaker Change: During the presentation, you can register a question by pressing Star Fuller by one on your telephone keypad. If you change your mind, please press Star Fuller by two on your telephone keypad. I will now hand over to your host, Tyler Craft, Head of Investor Relations to begin. Please go ahead. Thank you very much.
Tyler Craft: Thank you for joining us. And we're especially appreciative at how minimally everyone adjusted the conference call number as we had an unforeseen outage this morning from a carrier and were able to get a new number in place very quickly. So we appreciate you all making the call. Thank you for joining us.
Tyler Craft: Today our Chairman, President and CEO , Brian Jordan, and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks after which will be happy to take your questions.
Tyler Craft: We're also pleased to have our Chief Credit Officer, Thomas Hung here, to assist those questions as well.
Tyler Craft: 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 presentations and in our FEC file.
Tyler Craft: 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 gap information in our earnings release and don't page three of our presentation.
Tyler Craft: And last but not least, our comments reflect our current ease and you should understand that we are not obligated to update them.
and with that I'll hand it over to Brian .
Brian Jordan: Thank you Tyler, good morning everyone, and thank you for joining the call [inaudible]
We appreciate your continued interest in First Horizon. Thank you very much.
Brian Jordan: As we sit here today, the economic environment is being shaped by heightened macroeconomic uncertainty as the impacts of tariffs and related policies contribute to a wait and see mindset among many.
Brian Jordan: The efforts by the Trump administration to address tariffs and trade-in balances have created a period of near-term uncertainty.
Brian Jordan: Over the coming weeks and months, we will all gain greater clarity about how these moving parts come together to impact the overall economic environment.
Brian Jordan: While there is much we do not know today, we remain optimistic that we can avoid a recession.
Brian Jordan: In my view, the risk of recession is likely to increase the longer current levels of market volatility and uncertainty persist.
Our focus remains on safety and soundness, profitability and growth.
Brian Jordan: Our discipline approach has positioned us well, particularly given our strong Southeast footprint and diversified business model.
Brian Jordan: I'm extremely pleased with the results we achieved in the first quarter, as we carried forward the momentum from the end of last year.
Brian Jordan: We successfully delivered solid three-provision net revenue growth through continued margin expansion and deposit pricing discipline.
while consistently prioritizing our criticality.
Brian Jordan: We once again demonstrated our ability to deliver steady returns despite shifting economic expectations and market uncertainty throughout the year, throughout quarter.
Brian Jordan: On Slide 5, we have shared a few highlights from the quarter. We delivered an adjusted EPS of 42 cents per share, which was a one cent decrease from the prior quarter.
Brian Jordan: These results include prepervision that revenue growth of $16 million from the fourth quarter.
Brian Jordan: We achieve nine basis points of net interest margin expansion as we continue to manage deposit rates.
Thank you for watching!
Brian Jordan: We also maintained our focus on efficient expense management, lowering our expenses by $20 million, excluding deferred compensation.
Brian Jordan: We continue to strategically deploy excess capital through our share repurchase program, repurchasing $360 million of stock in the first quarter.
Brian Jordan: Our credit performance is once again a highlight of our results, with our charge-offer ratio of 19 basis points remaining in line with the strong performance in 2024.
Brian Jordan: We did increase our coverage ratio for potential losses reflecting macroeconomic uncertainty.
Brian Jordan: and we will continue to prioritize prudent management of our portfolio to ensure that we maintain our outstanding credit culture.
Brian Jordan: 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.
Hope Dmuchowski: On 5-6, you will find our adjusted financials and key performance metrics for the quarter.
Hope Dmuchowski: Our net interest income was up 1 million this quarter, as our continued focus on deposit repricing resulted in a 38 basis point reduction to interest bearing deposit costs, offsetting lower low yields as well as the impact of two fewer days.
Hope Dmuchowski: Our fee income, excluding deferred compensation declined 5 million, while our expenses decreased 20 million, which was driven by typical levels of fluctuation and have to use specific expenses in the prior quarter.
Hope Dmuchowski: Provision expense increased by 30 million as are ACL to loans ratio increased by two basis points to account for an increased macro economic uncertainty and a probability increase of potential recession.
Hope Dmuchowski: Our CET-1 ratio ended the quarter at 10.9% reflecting the $360 million of share repurchases.
Hope Dmuchowski: On Slide 8, we will take a closer look at the factors contributing to our 1 million increase in NII and 9 basis point expansion of net interest margin.
Hope Dmuchowski: Our net interest margin expansion to 3.42% was driven by a 27 basis point decline in average total deposit costs, which more than offset a 20 basis point reduction in average loan yield.
Hope Dmuchowski: which is predominantly driven by customer deposit pricing reductions, a testament to our bankers and their ability to work with clients to price deposits in the current rate environment.
Hope Dmuchowski: Our results also include 8 million of incremental NII in the first quarter as the result of the portfolio restructuring that we executed at the end of last year.
Hope Dmuchowski: On Slide 9, we provide more information about our deposit performance in the quarter.
Hope Dmuchowski: The decline in period and balances was largely driven by the payoff of 559 million of brokerage CDs.
Hope Dmuchowski: Our base rate and non-interest bearing deposits remain stable compared to last quarter, and the remaining balance changes occurred in promotional and index price deposits.
Hope Dmuchowski: We continue to see strong retention in our promotional deposits as we have retained 95% of the 16 billion of deposits and CDs which repriced in the first quarter while achieving a 34 basis point reduction in the weighted average rate.
Hope Dmuchowski: The average rate paid on intersparing deposits decreased to 2.72% down from the fourth quarter average of 3.10%.
Hope Dmuchowski: Our continued pricing discipline resulted in an 80% interest-faring deposit data since the Fed cut the game-cutting rates in 3 Q2 024.
Hope Dmuchowski: The interest bearing spot rate ended March at 2.70%, down 10 basis points from the 2.80% at the end of December .
Hope Dmuchowski: Hedding additional changes in fed rates, we anticipate some leveling off of deposit rates in the short term, which may also reflect the pickup of any deposit acquisition campaigns that typically occur in the spring and summer months.
On Slide 10, we have an overview of loans.
Period and Lone were down 1% from the prior quarter.
As we saw, continued paydowns with commercial real estate.
Hope Dmuchowski: This includes payoff of some criticized and classified loans in the corner that contributed to the balance decline.
Hope Dmuchowski: While minimal, it was good to see growth within our CNI portfolio. While the current environment has created some pause for borrowers, we see encouraging pipeline activity and engagement with our bankers.
Hope Dmuchowski: Average balances saw a slightly larger decline quarter over quarter as January and February are typically lower months for loans to mortgage companies causing seasonality to have an impact on our average balances.
Hope Dmuchowski: As I mentioned a moment ago, loan yields were down 20 basis points from fourth quarter due to the full quarter impact of lower short term rates on our 55% index portfolio.
Hope Dmuchowski: On Slide 11, we take a look at our fee income performance for the quarter.
Hope Dmuchowski: C-income, excluding deferred compensation decreased 5 million from the prior quarter.
Hope Dmuchowski: Six income remains flat compared to last quarter, despite an 11% decline in ADR. As this decline was offset by an increase in revenues from other products, compromise of investment advisory fees
Hope Dmuchowski: loan trading, derivative, and other service-related businesses which are not included in ADR. [inaudible]
Hope Dmuchowski: The ADR decline reflects a particularly volatile March. As we note in our appendix, a moderate amount of volatility is generally positive for FHN financial. However, extreme volatility, like what we saw in March, becomes a headwind for fixed income revenue as clients take a cautious approach and reduce trading activity.
Hope Dmuchowski: The income declines in areas like brokerage, wealth and trust and other fee income reflect normal fluctuation levels that we see quarter to quarter.
Hope Dmuchowski: On slide 12, we show that excluding deferred compensation adjust expenses decreased by 20 million from prior quarter personnel excluding deferred compensation increased by 9 million from last quarter
Hope Dmuchowski: The increases in salaries and benefits totaled $2 million as annual merit adjustments and the seasonality of benefits resetting were partially offset by the lower day count in the quarter.
Hope Dmuchowski: Incentives and commissions contributed $7 million to the quarterly increase as we make our annual adjustments to long-term awards during the first quarter
Hope Dmuchowski: Outside Services Decline by 8 million as we saw a reduction in third party expenses associated with recently completed technology projects. These expenses will fluctuate over time as we have third party needs with different technology projects in the future.
Hope Dmuchowski: Lastly, other non-interest expense with down 22 million, with the largest item being a $10 million contribution to the foundation that occurred in the fourth quarter, as well as the expenses associated with customer incentives that we noted last quarter.
I'll cover credit on slide 13.
Hope Dmuchowski: Net charge-offs increased by 16 million to 29 million or 19 basis points of average loans.
Hope Dmuchowski: Lone Lost provision was 40 million this quarter with our ACL to loan ratio increasing two basis points to 1.45% as outlook turned less favorable on broad macroeconomic uncertainty.
Hope Dmuchowski: Non-performing loans increased slightly by two basis points from the fourth quarter. [inaudible]
Hope Dmuchowski: Overall, we are pleased with how well our portfolio continued to perform to start 2025. We believe that our discipline through the years has us well positioned to withstand challenges. The economy may face over the remainder of the year. [inaudible]
Hope Dmuchowski: We will continue monitoring the portfolio closely and working with our clients to identify any emerging credit risk in their businesses.
Hope Dmuchowski: On slide 14, you can see that we successfully deployed capital and lowered our CET-1 ratio to 10.9%. As we mentioned earlier, this quarter we deployed 360 million of capital through Sherry Purchases is...
Hope Dmuchowski: which was equivalent to 51 basis points of CET-1 impact. Our priority for capital utilization remains safety and soundness followed by proximal deployment of excess capital with organic lung growth remaining our top choice.
Hope Dmuchowski: We will discuss our capital outlook more on the next slide.
Hope Dmuchowski: On slide 15, you will see that our 2025 guidance remains unchanged as we remain competent in our ability to adapt and pull the necessary levers in order to achieve the targets we laid out coming into this year.
Hope Dmuchowski: We are focused on delivering PPR growth while prioritizing ongoing safety and soundness.
Hope Dmuchowski: Our outlook face case coming into the year was built upon three rate cuts beginning in March. As we have seen, rate expectations are rapidly evolving in our current economic environment.
Hope Dmuchowski: Although there is a lot of uncertainty at this time on the macroeconomic outlook, we still expect our total revenue growth to fall within the provided ranges.
Hope Dmuchowski: The Revenue Guidance covers a range of possible interest rates scenarios that result in various revenue mixes between NII and our counter-cyclical businesses
Hope Dmuchowski: Our balanced business model creates a resilient earning stream across economic environments with their counter-sickical businesses providing a natural revenue hedge to our somewhat asset sense of balance sheet.
Hope Dmuchowski: Continuing with our adjusted expense guidance, we expect year-over-year increases between two and four percent. This range is most impacted by the proportion of revenue driven by fixed income and mortgage production, as these businesses have higher degrees of variable compensation. .
Hope Dmuchowski: Our approach to underwriting and our deep client relationships continues to give us confidence in our ability to deliver strong, risk-adjusted outcomes.
Hope Dmuchowski: Reflecting this, our net charge of guidance for the year remains at 15 to 25 basis points as increased macroeconomic uncertainty is partially offset by possible interest rate cuts
We will continue monitoring our loan portfolio as conditions evolve.
Hope Dmuchowski: above or below this target. A secure Capitol Foundation through any business cycle is a top priority for First Horizon. [inaudible]
I'll wrap it up as we turn to slide 16.
Hope Dmuchowski: While short-term economic conditions and market factors may create quarter-to-quarter fluctuations, we focus on the value created by having our diversified business model in one of the country's best focus.
Now I will turn it over to Brian .
Thank you, Hope [inaudible]
Brian Jordan: Our team did a tremendous job capitalizing on the momentum that we brought into 2025.
Hope Dmuchowski: Even though the economic outlook for our country and even the world has become a lot less clear over the last three months, our teams have remained focused on delivering value to our clients and continuing to make First Horizon a top tier regional back.
Hope Dmuchowski: Our diversified business model provides us with a notable edge, offering counter-cyclical revenue support that allows us to maintain stability during economic fluctuations.
Hope Dmuchowski: First Horizon continues to have unique lovers we can pull that will allow us to remain successful in a changing environment.
Hope Dmuchowski: We remain committed to our clients. We are deeply invested in understanding their credit needs and working closely with them to navigate the current economic cycle.
This partnership mentality extends across all aspects of our business.
Hope Dmuchowski: You see evidence of it in the level of deposit retention we see amidst our successful deposit price management.
You see it in our expense management.
Hope Dmuchowski: You see it in our own going credit performance and you see it in our ability to generate returns.
Hope Dmuchowski: As we look forward to the future, we remain focused on achieving a 15-plus percent return on tangible common equity over the next few years.
Hope Dmuchowski: We believe this target is achievable and sustainable and it reflects our confidence and our strategic initiatives and the resilience of our business model.
Hope Dmuchowski: Thank you to our associates for all that you do to take care of our customers, shareholders, and each other.
Lucy, please open it up for questions now.
Speaker Change: Thank you. If you ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally.
Speaker Change: Our first question is from Michael Rose of Raymond James. Michael, your line is now open. Please go ahead.
Michael Rose: Hey, good morning, everyone. Thanks for taking my questions. Maybe we want to just start on the PPRR.
Michael Rose: Growth Outlook, just given some of the uncertainty and volatility. Specifically, if you on the revenue side, I think you talked about a bunch of different scenarios, you know, last quarter, I think you had baked in.
Michael Rose: Three rate cuts into kind of the baseline outlook, so just on the upper and lower end, what is it assume in terms of...
Michael Rose: of Potential Rake. Then on the expense side, just to even get to the low end, it seems a pretty big ramp over the next three quarters. I assume that's going to come with revenues as well, but just wanted to dig into the confidence in the ability to generate PP and our growth, and then maybe some of the puts in text. Thanks.
Michael Rose: Good morning, Michael. Thanks for the question. We are confident in the guidance we ran a go. As we've mentioned before, we ran a whole series of different opportunities for what could happen in 2025 coming into the year.
Michael Rose: We did land with kind of a base case or the middle of the guidance being a three-rate cut with the first being in March. We didn't see that first rate cut, and so that does help us on an asset-sensitive balance sheet.
Michael Rose: You also saw our ability to expand margin this quarter by nine basis points, both of those leaders into a strong beginning to 2025.
Michael Rose: As we think about how rate cuts could play out, you know, more rate cuts would be negative, more than three would be negative for our NII outlook, but we believe that we'd make it up in our FHN financial business as well as mortgage and mortgage warehouse.
Michael Rose: In January , when rates did drop, we did start to see a take-up and applications in the industry. But if you get pulled back when rates went the other way, but we do believe that our counter-cyclicals...
Michael Rose: Will offset any type of economic condition that we can see, that we can see at this time that there's always the...
Michael Rose: Unexpected opportunity that could come up that would push us off this guidance, we don't see it. We also had low longer of faked it. And so when we gave this guidance, we said it was three great cuts with low single-digit longer. We still feel confident that that's achievable, especially with our mortgage warehouse business that's going into, you know, their seasonal time of the year where it starts to pick up. We noted in my prepare remarks, we already saw.
Michael Rose: January , February , or seasonally low, but March has begun to pick up or start to see pick up in April as well as rates have been pretty stable now for the last year.
Michael Rose: on the expense side, as you mentioned, in order to get to the mid-brain of expense, it's got to come a higher proportion of our revenue has to come from those commission businesses.
Michael Rose: If we think about the contribution, it's about a 60% expense on those commission businesses when they ramp up. And so if we saw more rate cuts, we'd see more of our revenue come from the income, which would have our expenses drift a little bit higher. [inaudible]
Speaker Change: Very helpful, I appreciate it, and maybe just as a follow-up, good amount of share by back this quarter, I heard the...
Speaker Change: The color on kind of the near-return CT-1 target, maybe, you know, around 11% could be a little bit lower. Pages discussed the appetite to continue buying back at elevated levels, just, you know, giving your confidence in positive feedback in our growth and just giving where the stock is trading out. Thanks.
A. Michael, this is Brian . Thank you for joining us yet. Look, we...
Speaker Change: We have said that we intend to target 11% CET-1 at some point when the economic environment is appropriate. We'll bring that
Speaker Change: Target down, probably closer to the 10-and-a-half area, but that's a decision that we'll make in conjunction with the board. I don't think given the near term uncertainty that we see. Thank you very much.
We will continue to use that to repurchase shares.
Speaker Change: and we are confident in our ability as Hope said to generate positive PPRR for the year.
Speaker Change: and given people in our growth for the years. And given that, we believe that there will be opportunities for us to continue to repurchase stock over the next several quarters.
I appreciate you taking my questions. I'll step back. Thanks
Alright, thank you [inaudible]
Speaker Change: Our next question is from Jon Arfstrom of RBC Capital Markets. Your line is now open. Please go ahead. Very good morning.
Speaker Change: Warren John , can you talk a little bit more about C&I? It's good to see that the balances were stable.
Brian Jordan: Yeah, thank you Jon, I'll start, this is Brian and Tom, probably all to finish it out, but
It is interesting today... [inaudible]
Brian Jordan: has led to not a pessimism in our borrower base, but simply a let's wait and see. Let's take a minute and understand how all of this is going to play out. What's it going to cost? What are the variable components?
but there is still an inherent optimism. [inaudible]
Brian Jordan: As I said in my prepared comments, the longer the uncertainty persists, the more likely that it leads to something problematic.
Brian Jordan: and potentially even a recession, but given the inherent optimism that we see and hear from our customers and what we hear our communities.
Brian Jordan: that pipelines are still reasonably strong, and we're optimistic that once these things get settled down, that the economy can continue to do what it's been all track to do over the last-
Brian Jordan: really several years which is to reach soft landing and that we can have very strong and stable economic growth.
John Armstrong: Hey Jon, thanks for joining the call. I would just add...
Speaker Change: We have had and continue to have a lot of conversations with all of our customers across the entire footprint.
John Armstrong: across a lot of different industries. And I would characterize the general sentiment as being there's a pretty wide range in terms of how people are thinking about things. A lot of factors come into play, including how that specific industry is affected by potential tariff impacts. A lot of factors come into play, including how that specific industry is affected by potential tariff impacts.
How they're responding to these actions. [inaudible]
John Armstrong: How long people expect the character has to laugh? Some people believe it's more.
John Armstrong: Short Suns, I'm gonna believe it's more long term, but I would say the overall impact I've had to sum it up is really more of a temporary pause effect.
John Armstrong: If there are major investments in terms of CAPEX or M&A, given just the amount of uncertainty in the economy right now, a lot of these types of projects are being paused until there's more clarity around the long distance and impact [inaudible]
John Armstrong: But the General Semin as Brian mentioned is actually quite remained quite optimistic. It's more just really waiting for the dust to settle before making major commitments.
John Armstrong: Okay, good, that's helpful. Then Thomas, as long as you have the mic, can you talk a little bit more about the reserve increase? I know maybe it's hard to quantify, I think we all get it, but
John Armstrong: You've seen any evidence of deterioration and how are you feeling about reserve levels from here if you know we're maybe kind of stuck in the same spot in a quarter thanks. [inaudible]
John Armstrong: Yeah, yeah, no, sure, happy to address that. As you saw in our first quarter performance, having 19 basis points of net charge us, you know, I believe that is absolutely...
John Armstrong: Strong performance, considering the overall economy and its consistent with what we have delivered over the last 12 months.
John Armstrong: In terms of outlook, the reason we did increase results by two basis points is really just around the uncertainty.
John Armstrong: We felt like the prudence move was to make sure where I adequately reserved and I believe we very much are if you look at our H.D.L. relative to our last five years. [inaudible]
of average annualized net charge often, and so this is including...
2020 when we were going through COVID impact.
Weber's though, but over nine times, our average annualized. [inaudible]
John Armstrong: Chargers, and that's among the strongest and out here set.
Okay, thank you very much.
Speaker Change: Our next question is from Ebrahim Poonawala of Bank of America. Your line is now open, please go ahead.
Hey, good morning.
I guess maybe just first Brian for you, Big Picture, as we think about...
Speaker Change: What this bank should deliver from our ROTC perspective, you've talked about the 15% target for I think the last year.
Speaker Change: Just give us a sense of the timeline of when you see that happening, is it just...
Speaker Change: Operating Leverage, is it a certain type of macro environment that gets us there? Instructurally, do you think a bank of First Horizon size business mix is that the right level or as a shareholder should you expect that this can do better than 15% of the same?
Speaker Change: Yeah, thank you, Ebrahim. We've said 15 plus percent and, you know, if you go back.
Speaker Change: Pre-Pandemic, we're clearly doing that and more. And I think it is appropriate for a mid-sized regional banking organization, part of what we've talked about is...
Speaker Change: And over time, that coupled with the strong foot print, the economic.
Speaker Change: drivers that we have just in the footprint that we served coupled with.
Some of which we demonstrated in the first quarter. [inaudible]
Speaker Change: gives us a high degree of confidence that we can deliver 15-plus percent returns and...
Speaker Change: and we are very focused on driving a very profitable and efficient use of capital, and that's where we start our conversations, and we will continue to do that. So we're confident in that regard.
Understood, Ed?
Speaker Change: Maybe Ryan or Hope, just tell us about how you're thinking about the Morton Red House business.
Speaker Change: It feels like all these rates are not budging lower. You added a lot of a sort of client commitment over the last I guess year or two in that business. Give a sense of what's going on in absent a big drop off in rates like how you're thinking about
Speaker Change: Decise how to build this structure and what drive growth there in the absence of a big move lower in interest rates.
Speaker Change: a very efficient business for us. It does have some cyclicality in it. The fourth and first quarters tend to be cyclically the lowest. [inaudible]
Speaker Change: More true in environments where the business is driven by purchased money, origination versus refinance, which the current market has been for several quarters.
Speaker Change: We think that, as you pointed out, that we have really expanded the base of that business, we are very comfortable.
with...
Speaker Change: The broadening of that base, and we think we've picked up some market share, so we think...
Speaker Change: One we've raised the floor on the business in terms of balances and we think there's a tremendous amount of opportunity if in fact rates start to fall for refinance activity to pick up.
And we think that benefits. This is Hope said. Thank you very much.
Speaker Change: You know, falling rates while negative to our margin would be very positive for businesses like this, our fixed income business and our mortgage business. So we think it's a great counter-cyclical play. It has very good efficiency and very high returns. Thank you very much.
Speaker Change: But in just one, if I could follow very quickly on the falling rates, given the persistently sort of relatively high rates, is there any sort of discussion internally to protect the margin a little bit to the downside or you just don't want to take?
Put that out.
in terms of hedging. [inaudible]
Speaker Change: Yeah, in terms of hedging the margin for downside, like by adding duration or swaps, like is that even in consideration?
Speaker Change: Yeah, so we have those conversations and we have as sort of pointed out with the current countercyclical, we have some natural hedges in our margin, our balance sheet is
Speaker Change: is less asset sensitive at times and it appears and is less impacted by falling rates and it appears because of the countercyclicals. Now we do have conversations about the long tail events and when we sit here today. Bye.
Speaker Change: You know, I can make almost as good argument for higher rates with inflation as I can for lower rates with a slowdown and economic activity. And we have those conversations. We will continue to have those conversations and make appropriate decisions. Thank you very much.
Speaker Change: and uncertainty is clearly uncertainty, and we will be much smarter about all these things in the next three, four, five months as some of this settles down.
Thank you.
Speaker Change: One thing I'll add to that is, you know, in the last 1824 months, we used to think of interest rate sensitivity as a 100 and 200 basis point shock. We do now for Alko and with our board discuss 300 and 400 up and down. So we're constantly monitoring what that would mean to our balance sheet. [inaudible]
Speaker Change: and what is the hedging strategy that we should have to make sure we stay inside the interest rate sensitivity that we're comfortable with?
Thanks, all.
Speaker Change: Thank you. Our next question is from Chris McGratty of KPW. Your line is now open. Please go ahead.
Chris Mcgratty: Great morning. Brian , or Hope, does a question on the reserve of the scenarios that you're using? I think you touched upon the tweaking to some of your scenarios. Could you share what to baseline scenario for unemployment in your basis? Thank you.
Speaker Change: I'm sure I'd be happy to take that one, Chris, and thanks for joining our call. For our overall suitable modeling, we use nudies, nudies analytics, running on macro scenario.
Speaker Change: and then within that, we have our waiting that we assigned it, baseline and appropriate upside and downside scenarios.
Speaker Change: potentially decreasing GDP over the next couple of years, but not into recessionary levels, and then also an increase in unemployment over the next couple of years as well, up to around the 5% mark.
OK.
Hope Dmuchowski: Great, thanks for that. And hope, in terms of this dial-in in the balance, the earning asset levels, given the seasonality in the mortgage warehouse and...
Hope Dmuchowski: and the effects of, you know, long growth. How should we think about different asset trajectory relative to the first quarter levels? Ultimately, I'm trying to get it with NII if you're right on the three cuts. Well, NII grow off these levels from here. Thanks.
Yep.
Hope Dmuchowski: Let me start with a question you didn't answer is as we think about mortgage warehouse we do match from that with wholesale funding so you see and my prepared remarks on the deck we do talk about paying off, you know. [inaudible]
Hope Dmuchowski: A significant amount of wholesale debt this quarter, which matches almost dollar for dollar is what we saw on average mortgage warehouse compound. And so we do have that natural hedge and when that seasonality happens, we take away the funding cost, not sitting our amount, she long-term.
on the second piece of that. [inaudible]
Hope Dmuchowski: as we think about where the margin can go from here, Chris.
Hope Dmuchowski: You know, one of the lowest mortgage origination years in the last 20 years on record. We were supposed to, you know, mortgage industry coming in expected to be a little higher this year. Now it's come down and said it'll probably look similar to last year.
Hope Dmuchowski: When we look at that mix, as Brian mentioned earlier, we see about 25% of that still being re-five people that were in arms or people at Haire had a higher rate, they're now re-fighting down, then 75% of it is new homes [inaudible]
Speaker Change: We have a MD program that we talk about, you know, pretty frequently when Brian and I are in front of you all and on calls which is we go and match data doctors and they still want to buy homes now that they have a paycheck and are coming out of med school and so we feel competent in our balance sheet really having that built in growth regardless of which economic scenario plays out this year and being a natural hedge. [inaudible]
Speaker Change: On the security side, we note in our deck that we do have a billion dollars of roll-off at approximately two and a half percent, 2.6 percent, and we are currently actively reinvesting that.
Speaker Change: The current yield was a little bit less quarter or about 5% [inaudible]
Speaker Change: Okay, great. I mean, it's your point to grow the Ben I.I. Yeah [inaudible]
Sorry, Chris. Yeah, the growth in it. Yeah, I think it's growth in it. Yeah, okay.
Yep.
Speaker Change: The growth in NNI will be all of those factors kind of coming together along with rate cuts, not having rate cuts definitely allows us to grow NNI easier than having to overcome 55% of our balance sheet being met down. But again, for us, if we see...
see a enriched future for the Khr ?
Speaker Change: You know, circling back to what Hope said earlier in terms of the guidance, we laid out, we still expect love, single-digit long growth during the course of the year, and...
Speaker Change: We don't sit around and claim that our crystal ball is any more polished than anybody else's. There's a tremendous amount of uncertainty and things can take a lot of direction. [inaudible]
from here.
Speaker Change: but given what we see, what we're hearing from our customer base. [inaudible]
and the myriad of scenarios that Hope described earlier.
we still feel very confident in our ability. Thank you very much.
Speaker Change: with the mate of guidance that we laid out last December and deliver positive VP and Argrove over the course of the year.
That's great, thanks so much.
Sure. Thank you. Thank you.
Speaker Change: Our next question is from Jared Shaw of Barclays. Your line is now open, please go ahead.
Hey, good morning.
Morning.
Speaker Change: Maybe just going back to the question on the Moody Scenarios,
Speaker Change: Just tell us what the percent weight to the downside is now versus 4Q. Was that just a little bit of a tweak or more substantial?
Speaker Change: Hey Jared, we don't get into specifics in terms of the percentages we use in each scenario.
Speaker Change: But what I will say is, you know, this is a process that obviously we are, it involves management judgment and our views on potential variability in the economic outcomes.
Speaker Change: that are unique to the composition of our portfolio and both been buried.
Speaker Change: quarter to quarter, and I would say in totality also this quarterly process.
Speaker Change: and all of the results are approved through a credit risk governance committee.
Speaker Change: that has made up of multiple functions throughout the bank, and so we believe the scenarios we're using and the weightings we're using is an accurate reflection of where we believe the economic outlook is. [inaudible]
Okay, great. So, it's like-
I was just gonna add you to look this.
I think.
Speaker Change: It was stated earlier in a week, Cecil implies a degree of precision that doesn't really exist but December 31
Speaker Change: It's supposed to be a reflection of anticipated losses in the portfolio and the same is true in March and given that we built reserves with essentially a flat balance sheet you can infer that we applied more to the downside.
Speaker Change: Got it, got it. So it is sort of a combination of a weighting change as well as that qualitative or quantitative fun overlay.
Speaker Change: Yeah, that's right, and that's consistent with our process quarter to quarter in any environment.
Jared Wolk, and then movies also done.
Speaker Change: Cherish, one more comment, Moody did because you're asking not to, or Moody did get slightly worse from...
Speaker Change: Moody's increased their risk of a recession, which is the baseline of our model and their GDP assumptions and employment assumptions, got worse, quarter of a quarter.
Yeah, okay, so that, so, okay, got that. Thank you.
Speaker Change: and then separately looking at the at the fixed income business and that dynamic between the ADRs down a little bit and then some of the revenue from the other areas. Should we think of that going forward as maybe a little bit of an inherent natural hedge or is that other revenue growing just because of
Speaker Change: more of a focus of growing that business. So if we do C80 RS up, could we see maybe some of those other fees stay elevated or should we think those is moving around?
Speaker Change: Yeah, sure, typically we see between 8 to 10 million in other um-
Speaker Change: The income in the fixed income business, it's not ADR-related. [inaudible]
Speaker Change: From time to time, we see a take-up. If you look back over a lot of few quarters or a couple of years, we've had a couple quarters where we spiked up like this, had to talk about it. There's nothing.
Speaker Change: Unusual that happened this quarter. There's not anything that I would say that this is, you know, a new high level, but some quarter you just get more of advisory fees, one portfolio sales, and we just happen to have that fall in our favor this quarter. But I don't see you indicative of any type of macroeconomic environment, just kind of timing of the way those deals can sometimes come our way. [inaudible]
Speaker Change: Okay, any updates are recorded to date on how 80 hours are shaping up in April ? Okay, let's go.
. . .
Speaker Change: And Ben's on which week you're looking at last week was a really good week. First quarter was a little slower. First week, the quarter was a little slower. [inaudible]
Speaker Change: and it's moving all over the place and as you would expect customer activity and ADRs are seen to some extent those volunteers show up in ADRs.
Speaker Change: I understand, thanks. And then just finally for me, you know, looking at the outside services going down, are there other projects?
Speaker Change: near-term that are going to be implemented to sort of rebuild that expense or that comment of future expenses more just as projects come up, they'll backfill.
I think it's a little bit of both.
Speaker Change: The run the bank, specifically my very exciting and very, you know, adds benefit to our investor, General Ledger.
Speaker Change: We've placed that after four years. We also went through a Treasury Management Conversion. Both of those projects were two of the most expensive projects we have in the pipeline that did require a lot of third-party expenses that can't be capitalized.
Speaker Change: as you go to hosted software, as we did with VoltGL and BBL, what you can capitalize is just a lot so it's really going to be dependent on what type of projects are in the pipeline and what type of labor can be capitalized versus not but I do think I don't expect that we'll see that spike up in the future near term future quarters. .
Speaker Change: We just had some very large projects that we had to get through following the Iberian merger and the hold coming out of the TD merger.
Hope Dmuchowski: We laid out, and again, as Hope talked about earlier, sort of an outline of where our expenses are, and-
Speaker Change: and we think expenses are one of the levers that we have an opportunity to pull.
Speaker Change: over the course of the year, and at the economic cycle turns bad, we think there's some opportunity for us there.
Speaker Change: We did not come into the year with a bare bones budget. We recognized that we needed to continue to invest in building the franchise and there were some things that were residual following the termination of the merger agreement. Thank you very much for your time, and I'll see you in the next one.
Speaker Change: We are comfortable with our expense levels. We think there are some opportunities there, or levers if necessary. And if the economic environment supports it, we're going to continue to invest in the franchise and build it out for the long term. Thank you very much.
Thanks a lot.
Thank you, Jared.
Speaker Change: Our next question is from Casey Haire of Autonomous. Your line is now open, please go ahead.
Casey Hare: Thanks, good morning. Brian , I wanted to follow up on that because that was kind of the course of my question here. So you guys sound pretty optimistic on the revenue front and the founding from here, but it sounds like, if that long growth doesn't materialize and fixed income, we kind of model through it, you know. [inaudible]
Speaker Change: Extreme Volatility that you can pull the expenses below this guide to 60ppp in the hours. Is that a fair way of some
Yes, let's fair with summarizing.
Okay, right, and then...
Speaker Change: I'm going to focus on the deposit cost. The loan deposit ratio at 97%, obviously if we get Fed cuts, there's more leverage on the deposit cost, but if we don't, you know...
Speaker Change: How will that loan deposit ratio be managed by way of the plot of the cost given its screen a little high relative payers?
Casey Hare: Yeah, Casey, we've been in the 94 to 97 pretty consistently over the last few years. You'll see that kind of swing, especially if we get in that upholstail funding.
Speaker Change: Our deposit ratio did take up, but it's because we paid off wholesale funding as our loan balance sheet strong quarter to quarter, and that's a pretty typical lever for us.
Speaker Change: That being said, we're always looking at loan deposit ratio. We'd like to stop answering this question, so we're continuing to bring deposits in, but we want to bring them in for relationship business. We focus, we focus for the last two years on talking about what the new to bank campaigns we are and what the retention rates are. So we don't focus on. We're going out.
really buying deposits.
Speaker Change: What we call heart money, which comes in, and when we reprise it down at least, we focus on a client relationship.
Speaker Change: starting with a new debate deposit, how do we get a loan relationship or a wealth relationship, and so that is how we're running our business, and that's how we're going to continue to grow our deposit franchise in line with our loan franchise.
Gotcha. Thank you.
Speaker Change: Thank you. Our next question is from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.
Hi, good morning.
Following up on the deposit [inaudible]
Speaker Change: Good morning, following up on the deposit line of questioning, just some of the campaigns that you had mentioned that are going to hit in kind of 2-3-3-Q.
Speaker Change: I'm just wondering the ability to further bring down deposit costs, and I hope you had mentioned that the deposit cost kind of stabilized here.
Speaker Change: Subsequent, any additional rate cuts, but the ability to maybe bring down deposit costs if loan growth doesn't materialize outside of warehouse and then just talk to the new to bank campaigns that are going to be rolling out here in the summer months and just kind of what types of rates we're looking at for those.
$450, you can go online and look it up and see all the specifics but what you need to qualify to qualify for that.
Speaker Change: That campaign just picked off and we'll run through Q2. We've seen a lot of success with the cash offer last year, and a lot of success with the retention. That is a lever we have to grow deposits and bring down the total weighted...
Speaker Change: Deposit Cost. On the interest bearing, we still are bringing new clients in every month with the new bank offer. We just brought down the duration of our new bank offers.
Speaker Change: Our duty-fanged money market is currently at a 385 for 45 days. So as we bring in new money, it doesn't stay at 385 when it comes in at the end of those 45 days, we have a very...
Speaker Change: Thought Out Walkback Program, which is we don't take them from the promo range down the base right overnight, we look at we know how much [inaudible]
Speaker Change: How much deposits do they have with us? Have we deepened the relationship and really think about relationship pricing there? But I believe we have the ability to continue to maintain this cost of deposits. I don't see it drifting up materially in the near term, especially with they're not being a need for loans the biggest. I don't see it drifting up materially. I don't see it drifting up materially. I don't see it drifting up materially.
Speaker Change: Rift to a deposit cost going back up is a fight for deposits from longer of starts. On the downside, I think you're right, I don't know that we can pick up a, you know, the same quarter over quarter impact that we've seen the last two quarters, unless we see a rate cut, rate cuts, I think will really be meaningful for the public cost coming down. [inaudible]
and Natalie Dmuchowski. Thank you. Have a great day.
Speaker Change: The other thing on my feet is we didn't see a whole lot of competition in Q1 and so I do think it's competition picks up the new to bank offers would have to kind of compete like we saw last summer. [inaudible]
Speaker Change: Okay, and I guess just tying all of that together, looking at demand deposits.
Speaker Change: looking at broader uncertainty versus the new campaigns. Do you think you'll be able to actually grow DDA deposits here in the coming quarters or are some of the...
Speaker Change: Lack of borrowing needs and using your own liquidity is I going to cause borrowers to continue kind of leaning on their own balance sheets and maybe you see additional pressure in that line item, just maybe not at the same extent that we've seen the last couple of quarters. [inaudible]
Natalie Flanders Thank you.
Natalie Flanders: On the deposit side, I think we'll be able to attract new clients we've seen success with that. The question is, what is tariffs due to their cash flow?
Natalie Flanders: If they're spending more of it, there's less sitting in their accounts, both on the consumer side and on the Treasury Management operating account. Inflation has a direct correlation to how much money that they have in their account.
Natalie Flanders: Longer term, absolutely I believe we will continue to grow our non-interest fairing and our operating accounts that are Treasury management operating accounts which are in the non-interest fairing account line for us. [inaudible]
Natalie Flanders: It's a core objective to grow customer relationships and to broaden and deepen.
Natalie Flanders: Loan Customers, or whether it's to further expand our retail consumer customer base, the product line customer base. So we're very focused on growing deposits and and and specials make some difference special rates make some difference.
Natalie Flanders: Depending on what's happening with Long Road, we're always in the market to grow customer relationships and as both lending and deposit taking activities.
Okay, great, and then...
Again, that outside service is lying.
Natalie Flanders: Is that fully reflective of kind of sunsetting the GR related expense and the treasury management related expenses? They're more on the come there and then I guess as we go to the next half of that $100 million spend the change the bank. What's kind of a gap to hitting some of those projects and maybe capitalized versus not how much of that outside service cost do you expect to come back online as some of those projects are going? [inaudible]
Speaker Change: I'm going to start because I'm going to tell you I don't want to spend any more on the G.L. We have, I think we've gotten, you know, the Treasury conversion work largely completed. It's true with the G.L. project and Hope said that's up and running. Thank you very much.
Speaker Change: Cloud-operated environments. Can we take our mainframe operations and get that completely off-premises?
Speaker Change: and so there are a number of investments like that that we continue to make.
Speaker Change: that will better position us to run the banking organization for the long term and make...
Speaker Change: Technology at its base, more efficient, which gives us more capability to invest in other tools and technology. We're building out today the capability to...
Speaker Change: to provide our own online mobile banking tools. So we're continuing to make investments across all of these platforms.
Speaker Change: and that outside services will have them flow a little bit, but all of that is built into our expectations around expenses. And as I said, we have some flexibility there. If the economic environment does not unfold the way we think it will.
Brian Jordan: The other thing on outside services, Brian talked about the technology piece very well is that is where our marketing expense is hit for new client acquisitions.
Brian Jordan: And so if you look back at Q3 and Q4, we did have those elevated, we call them out as seasonality and marketing. And you will see that, I don't think technology in the near term will impact that as much quarter to quarter in 2025 as the seasonality around marketing offers.
Great, thank you for that color, I appreciate it.
Thank you.
Our next question is from
Anthony Elian of JP Morgan. [inaudible]
It's now eight.
Tim, please go ahead.
Speaker Change: Hi everyone, just to follow up on Timur's question on deposits.
Brian Jordan: Could the second quarter actually be a growth quarter for total deposits given the campaigns that Hope you mentioned?
Speaker Change: that are coming, or are there still reductions of broker that you expect which could offset the new deposits coming in? [inaudible]
Speaker Change: Second quarter should be a group quarter for deposits for us. As we mentioned in my prepare remarks, Q1 is seasonally lower for us.
Speaker Change: on the broker side, Mortgage Warehouse is already picking up in March, and I expect that it will be-
Speaker Change: We continue to pick up on Q2 that's the traditional phone buying season. Is that May, June , time frame people want to move over the summer, especially people with kids? [inaudible]
Speaker Change: as well as the Medical MD program people are graduating this spring and we have a very successful partnership there with Private Welles and
Speaker Change: So we will match fun that as we typically do, or at least a portion of that growth for timing, but I do believe, and we look back at Q2 for the last two years, we've shown, we've demonstrated we've been able to grow new to bank deposits with our promotion and sales campaigns that we kick off in this spring.
Speaker Change: Thank you, then my follow-up just on the impact from tariffs on certain trade war. What are the loan portfolios that you're paying a closer attention to today that may have borrowers with outsides exposure to tariffs, trade war, Asia, and can you size these up for us in terms of loans outstanding? Thank you.
Yeah, hi Anthony, I'm acting for the dress light one, I think
Speaker Change: First and foremost, I'll say, depending on where tarantones end up landing and how long they last but in the lift of industries we look at closely can obviously get longer or shorter as it currently stands.
Speaker Change: the sector that we're paying particular attention to would be our retail trade.
Speaker Change: Consumer Finance, Manufacturing and Construction. You'll notice that skews more towards the sea and because that is where we expect to see more of the tyrophim pack.
Speaker Change: In terms of sizing of these portfolios, I think one of the things we've done a really good job of overall is having a very diversified C&I portfolio.
Speaker Change: There is no single industry that is more than 12% C&I exposure and so even within the specific sectors I mentioned these are all well diversified throughout our portfolio.
Thank you.
Anthony, I would add to that, I think.
Speaker Change: Well, it's likely if there are issues, they're likely to start in terra-related areas. I think it's quickly spread. It's going to be because the consumer got knocked out and
Speaker Change: And if the consumer gets knocked out, it's not going to be just who's paying higher prices based on tariffs, it really will be a broader credit cycle.
Speaker Change: And that's why we're still very optimistic and most especially hopeful that...
Speaker Change: that these discussions that are going on today, like what you're paying, that they yield some real tangible results where we can start to see these tear-related issues settle down and more broadly.
Speaker Change: The U.S. economy can get to sort of that stable place around what the rules of the road are, and the economy can build from there.
Speaker Change: Yeah, that's right, but we expect it to probably consume us especially a lower income household, and so that's why a lot of the industries I mentioned are essentially consumer, retail adjacent type of sectors.
That's great. Thank you.
Speaker Change: Our next question is from Christopher Marinac of Janie Montgomery Scott. The line is now open, please go ahead.
Christopher Maranac: Thanks very much, Brian and team, does this sort of second-third quarter remind you at all of the early part of coded back in 2020 from a reserve and uncertain extent point? Does any of that sort of, you know, kind of apply to what we learned five years ago?
Brian Jordan: Well, I think in terms of severity, no, not as bad as 2020, but I do think...
Christopher Maranac: that if anything, we're going to have to deal with the impact of a supply shock, and supply shock is what happened when...
Christopher Maranac: Splotchains got shut down in 2020. So there are some echoes of it, but at this point nowhere near the severity of what we were all trying to deal with in March of 2020.
Yeah, and um...
Speaker Change: Christopher, I would just add, I think I would all use the word, I wouldn't see a lot in this, certainly more than now than there was three months ago, but I would point out.
You know, uncertainty itself is a new, just in the last five years. [inaudible]
We've dealt with COVID, supply chain shortages.
Rapid inflation, high at the longer rates and...
Speaker Change: unique to us, even a pending merger and throughout all of that, we continue to deliver consistent, strong credit performance.
Speaker Change: and I think that really comes back to something Holt mentioned earlier, which is our principles around being a relationship focus working with our borrowers, and that's why we continue to see consistently strong performance working through these cycles and working through uncertainty without customers. Thank you very much.
Great Tom and Brian , thank you, I appreciate it.
Thank you.
Speaker Change: Our last question is from Brennan Crowley of Baird. Your line is now open. Please go ahead.
Brennan Crowley: Hey, good morning guys, thanks for taking my question. I was hoping to hear a little more commentary around trends in CRE lending. Some of your peers have highlighted increased competition. So, just wanted to hear some more detail on your outlook for any potential loan growth this year, or are these kind of ongoing fund ups going to limit upside in that portfolio. [inaudible]
Yeah, it's Dave Brennan, I'm happy to answer that one [inaudible]
Brennan Crowley: You know, within pre-lending, we do see a good amount of competition and you know, that's not new, but if you look at our pipeline, we actually have. Thank you very much.
Brennan Crowley: a pretty solid pre-pipe line that is that we've mentioned on previous calls.
Brennan Crowley: relative to other lenders. We focus more on the construction side and construction financing and so that one caveat I would have is given the tariff uncertainty and what that means for particularly lumber and the old prices. The tariff.
Brennan Crowley: I do think that's going to have an impact at least at Timur recalls until there's more clarity as you can imagine, until...
Brennan Crowley: There's going to be more hesitation for us, the new project starts. [inaudible]
Brennan Crowley: And so to me, that's actually going to be kind of a... [inaudible]
Brennan Crowley: The biggest driver in terms of how much of the creep pipeline we have comes to fruition in the near-term versus being pushed a little further out.
Now, our creative portfolio is...
A little bit of...
Brennan Crowley: Mathematical Anomaly, in the sense that we have very strong pre-growth in the last four or five years and with the open secondary markets a lot of things are prepaid and doing what they should do which is go to more permanent permanent forms of finance. Thank you very much.
and with higher rates over the last couple of years. [inaudible]
Brennan Crowley: The initiation of new projects has been hampered a bit, and then further by the impact that Tom just described.
Speaker Change: We still are very positive on that business. We see very good opportunities and we think that this will level out. We're very optimistic about how we're positioned in our commercial real estate lending broadly speaking across the entire footprint.
Speaker Change: Okay, great, thanks for that. I think the rest of my questions have been answered, so I appreciate the time today.
Thank you, appreciate your joining us.
Speaker Change: We have no further questions, so I'll hand back to Chairman, President and CEO Brian Jordan for closing remarks.
Brian Jordan: Thank you, Lucy. Thank you all for joining us this morning. We appreciate your interest in our company. If you have any further questions or need additional information, please reach out to us and we'll be happy to try to respond. Hope everyone has a great day.
Brian Jordan: This concludes today's call. Thank you for joining. You may now disconnect your lines.