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Text: To kick things off, our CEO, Bryan Jordan and CFO, BJ Losch will provide an overview of our results and then we're going to open things up for question.
We're really pleased to have Susan Springfield, our Chief Credit Officer with us to help with that effort.
Our statements reflect our views today and we aren't obligated to update them.
And with that, I'm going to hand it over to Bryan.
This has been a very significant quarter for us.
We closed our merger of equals with IBERIABANK, we acquired the 30 branches from SunTrust Truist, really excited about that.
That integration was done in mid-July.
We've made significant progress during the quarter.
We are very pleased with the performance of the organization, the great work that our associates did to serve their customers and their communities in what has been a challenging and trying time.
We see good momentum in our business, we proved out again the counter cyclical benefit of our businesses, mortgage, mortgage warehouse lending and our fixed income business.
Our balance sheet continues to perform well.
And as we've talked about over the last ten years or 12 years, we have really significantly restructured the balance sheet and the focus is more on C&I.
We had net charge-offs of 44 basis points during the quarter and we saw a slight tick up in nonperforming assets, but we ended the period with about $1.3 billion of capacity for loss taking.
So very strong balance sheet.
We had a good quarter in terms of deposit activity.
We had good customer inflows and the balance sheet feels good and we saw some progress made in adjusting our pricing to compensate for the lower interest rate environment.
Also during the quarter, we made good progress on our expenses.
We captured another $8 million of run rate, excuse me of run rate in our quest for $170 million plus in expense savings.
We feel very good about our progress in controlling costs and are planning for the integration.
There is a couple of good slides in the investor deck, which you can reference that lay out the expectations around expense efficiencies over the next couple of quarters and year.
Our capital base continues to be strong.
Very, very pleased with the positioning.
We came in with a CET1 ratio of 9.15%.
Our tangible book value dilution was very slight from the acquisition of the branches and the completion of the merger, largely offset by our earnings during the quarter.
Our planning around the integration continues to go well, we expect that the significant integration work will be completed by the fall, early fall of 2021.
We are on target and on track for completing that integration.
We have a lot of work to do between now and then.
We have associates all over the organization who are working to make sure that we do it in a seamless fashion and minimize, absolutely minimize adverse impact on our customers and our communities.
Clearly, the progress of the PPP programs, of fiscal stimulus has been positive to date on the economy, but there is still uncertainty.
I feel like we're well positioned in terms of a strong balance sheet, strong while taking capacity, strong capital and also positioned with a tailwind in the sense that we have our non -- our counter-cyclical businesses and we also have the ability to realize a significant amount of cost savings over the next 18 months to 24 months.
So with that, I will stop.
We think it's important to note that the impact of merger accounting on our financials are overall in line with the estimates we provided you during the second quarter call and in the pro forma released during the quarter.
We've provided the detail on the marks and other impacts related to the merger in the appendix for your review.
On Slide 6, we provide a summary of our adjusted financials for the quarter compared with FHN stand-alone adjusted results in the prior quarters.
So obviously, the trends here largely reflect the net impact of the IBERIA merger and the branch acquisition.
Moving on to Slide 7 for a look at net interest income and net interest margin.
We generated net interest income of $532 million in the quarter, up $227 million linked quarter, driven by the impact of the merger.
NII remains fairly stable with second quarter combined levels, despite the impact of the challenging rate environment.
Third quarter results included a $44 million benefit from accretion or about 12 basis points on the NIM which was modestly higher than we originally expected given higher prepayments.
Reported NIM came in at 2.84% in the quarter, down 6 basis points, reflecting the impact of low rates and continued elevated levels of liquidity, somewhat offset by accretion.
We also continue to take action to improve our deposit pricing profile.
Our deposit rate paid was down again this quarter with interest bearing deposit costs down to 36 basis points.
Our goal is to manage down interest bearing deposit cost toward the levels we saw in a prior zero interest rate cycle back in 2015 of around 24 basis points.
In this quarter, we plan to align our deposit pricing across the expanded franchise, which should provide additional benefit as we enter 2021.
Our NIM also continues to reflect the impact of much higher levels of liquidity.
We estimate excess cash to lower the third quarter margin approximately 12 basis points.
We averaged about $3 billion of excess cash, which grew to $4.5 billion at quarter end.
As you know, while this excess cash position lowers the margin, it does not impact our net interest income.
We continue to look opportunistically for more attractive reinvestment alternatives going forward and expect to put more of that money to work over time.
In the fourth quarter, we expect to see additional margin pressure likely in the high single-digit to low double-digit range, but expect that level to represent the bottom for NIM going forward.
Moving on to Slide 8 and 9, I would note that here, we have provided our results versus prior period combined results for FHN and IBERIA.
We delivered solid performance in fee income again in the third quarter with relatively stable results on a linked quarter basis and a 23% year-over-year increase as the benefit of our counter-cyclical businesses in fixed income and mortgage banking helped to mitigate COVID related pressure in some of our more traditional banking fee income streams.
Fixed income results came in as expected with relatively stable results linked quarter and a $33 million increase year-over-year given average daily revenues of $1.5 million.
Mortgage banking again delivered standout results with a $13 million increase linked quarter and almost $40 million year-over-year.
Secondary originations of $1.2 billion were up 3% from strong second quarter levels while gain on sale margins expanded over 100 basis points to 3.93%.
As we look into the fourth quarter, while we expect a seasonal slowdown in volumes for both of these businesses, we do expect overall market conditions to remain favorable for both -- for the foreseeable future.
As you can see on Slide 9, we continue on our commitment to expense discipline.
Linked quarter expenses were down $15 million as the reduction in personnel expense and other non-interest expense was partially offset by an expected increase in intangibles, amortization from the Merger and Branch acquisition.
Salaries and benefits increased $7 million, driven by the alignment of benefits across the combined platform, the addition of personnel from the 30 acquired branches and an increase in healthcare costs following the pandemic driven slowdown.
This increase was more than offset by a reduction in revenue based incentives and commissions as well as lower deferred comp costs.
Our results this quarter also reflect the benefit of $8 million in net merger cost saves, giving us a year-to-date total of $18 million.
We understand the importance of remaining incredibly focused on utilizing cost control as a lever in this environment.
We have unique advantages to be able to do so given our merger and we'll continue to look for further expense reductions beyond our targeted merger savings.
Turning to Slide 13 and 14, you see a review of our loan growth and funding profiles relative to combined First Horizon, IBERIA results.
As expected, period end loan growth was modest as customer demand remains muted, pay-offs continue and utilization rates have returned to more normal levels.
Bright spot in the quarter was continued strong mortgage warehouse demand, which drove loans to mortgage companies up $1.6 billion on a spot basis and approximately $430 million on average.
Similar to fixed income and mortgage banking originations, the loans to mortgage companies functioned as a counter-cyclical, high return specialty business for us and we expect continued strong performance.
On the liability side, period-end deposits were up $2.3 billion, driven by the branch acquisition primarily as well as continued strong customer inflows, which enabled us to run off higher cost non customer balances.
Given current levels of excess liquidity and our enhanced market presence, we expect to continue to move our interest bearing deposit costs lower, particularly as we move to align our pricing strategies across the footprint.
We also further improved our funding profile with a $1.2 billion reduction in borrowings from 2Q combined levels as we leveraged our excess liquidity to pay down legacy IBERIA that Federal [Phonetic] Home Loan Bank advances.
Turning on Slide 12, we'll cover asset quality over the next few slides.
Clearly, our results this quarter reflect the impact of the merger with a lot of moving parts.
But if we step back, broadly speaking, overall asset quality continues to remain fairly benign so far outside of energy despite the impacts of COVID-19.
Net charge-offs came in at 44 basis points, up from 20 basis points for legacy FHN driven by energy-related losses and we saw a relatively modest 6 basis point increase in NPLs to 75 basis points of total loans, despite the impact of the merger.
On Slide 13, you see, we continue to add reserves this quarter as the impact of the merger and branch acquisition added $475 million to the allowance for credit losses.
Outside of merger math, we also built reserves by a modest $13 million.
Therefore, we ended the quarter with reserves of $1.1 billion, which is equivalent to 2.15% of the loan portfolio, excluding the low risk PPP and loans to mortgage companies portfolios and about four times annualized net charge-offs.
When you also factor in the unrecognized discount on acquired loans, we have total loss absorbing capacity of $1.3 billion or over 2% of total loans.
On Slide 14, we provide an update of our view around the portfolios that investors have been most focused on in terms of impacts from the pandemic.
We continue to do very detailed portfolio reviews of industries currently affected and in the quarter, we reviewed in detail $9 billion of loans in the commercial portfolio across these various sectors.
As a result of that, as well as other broader portfolio reviews, we believe that just under 11% of our total loans should be and are subject to a heightened level of monitoring.
We've shown the sub sectors of the portfolio that may be more stressed such as real estate lending, energy, retail, trade and the non-fast food portion of our accommodation foodservice portfolio.
It's important to note that other sectors such as essential services, recreational goods, manufacturing and home improvement are continuing to perform well, and additionally our higher quality consumer portfolio is performing well as well with a weighted average FICO score of 750 on a refreshed basis.
As we've mentioned to date, customers are proving to be more resilient than originally feared and overall stress appears to be declining.
We've provided data in the appendix on the reserve coverage across our portfolio, as well as on deferrals which have now declined meaningfully to around 2.4% of federal loan balances from a peak of almost 13%.
Overall, we continue to feel very comfortable with our risk profile and reserve levels, particularly after going through the very detailed process of marking the IBERIA loan book, which represents about 45% of the portfolio.
Moving on to capital and tangible book value per share on Slide 15, as we mentioned, TBV per share of $9.92 remained relatively stable to second quarter as strong earnings were offset by the impact of the IBERIA merger and the Truist branch acquisition and the CET1 ratio ended the quarter at $9.15.
Near term, we expect to continue targeting a CET1 ratio in the 9% to 9.25% range.
Turning to Slide 16 for Merger Integration Update, we continue to be very energized as Bryan said by the opportunities ahead of us in connection with our merger of equals.
In the year since we announced the deal, we've established a strong merger integration framework to help ensure that we capitalize on the opportunities in a highly efficient manner even in the face of the pandemic.
We've already done a great deal to align our cultures, processes and systems to ensure a successful integration.
We've completed much of HR related integration by identifying leadership and converting payroll systems.
And on the customer side, we've built out our go-to-market and organizational models, as well as finalizing our customer experience dashboard.
We're on track to convert various other platforms and are currently planning for the full systems conversion to occur in the fall of 2021.
Again as Bryan said, in the third quarter, we delivered $8 million of cost savings, bringing the year-to-date total to $18 million.
And in the table on the right, we provided a modestly updated view of our expected saves over time.
We continue to be highly confident in our ability to deliver at least $170 million of annualized savings in 2022, but the path of the save got shifted by a quarter or so.
This largely reflects the fact that we now believe it's prudent to target a September-October system conversion versus the previous year of the late second quarter conversion.
In the table on the right as well we've provided the estimated timing of our merger savings on an annualized basis.
In third quarter 2020, our annualized expense base excluding incentives and commissions totaled about $1.52 billion, and based on our expectations for the timing of the merger sales, we believe that our 2021 expenses excluding incentives and commissions should reflect a low single-digit decrease.
Wrapping up on Slide 17, we believe we're well positioned to capitalize on the benefits of our more diversified business model over time and through our IBERIA merger and the branch acquisition, we now have an expanded franchise across some of the most attractive markets in the south.
As we've demonstrated this quarter, we have a revenue mix that helps us offset NII pressure from the low rate environment.
We also have the advantage of merger cost saves and through prior acquisitions and efficiency initiatives, we've proven our commitment to expense controls.
Our prudent approach to risk management should help us mitigate credit losses going forward, and we have the benefit of the marked loan book and significant loss absorption capacity.
While the economic environment remains challenging and loan demand is needed, it gives us the ability to focus on merger integration for the next year, and we believe our business model will result in outperformance and shareholder value creation in the quarters and years ahead.
Since I know they're listening, I want to give a quick shout out to all those on our various teams across IR, accounting, finance, credit and technology in particular that have done an extraordinary work and have spent long hours getting us to this point.
This is my 47th quarterly earnings call with First Horizon and I've seen a lot over the years, but the complexity and the uniqueness of this quarter and the year take the cake.
We believe our strong balance sheet capital and liquidity will serve us well in this difficult operating environment.
We've maintained strong underwriting standards and built a diversified portfolio focused on profitability and performance in a downturn.
Despite the economic headwinds, we are uniquely positioned to capture merger opportunities with enhanced scale, better efficiency and improved earning power to create significant shareholder value.
We are incredibly committed to continuing to assist our associates, communities and customers in efforts to overcome the impact of COVID-19 and revitalize the economy.
Again, we are very well positioned.
I'm very, very excited about the combination of IBERIABANK and First Horizon, and we think we have unprecedented opportunities ahead of us.
With that operator, we'll be happy to take any questions.

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first horizon national corp - qtrly net interest income $532 million versus $301 million.
first horizon national corp - three-year strategic plan to be finalized in q4 2020.

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