First Horizon Corp Q1 FY2024 Earnings Call

Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, Natalie Flanders, Head of Investors Relations, to begin. Natalie, please go ahead.

Thank you, Carla. Good morning. Welcome to our first quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President, and CEO, Brian Jordan, and Chief Financial Officer, Hope Domchowski, will provide prepared remarks and then we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, here to assist 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 and therefore we ask you to review the factors that may cause our results to differ from our expectations on page 2 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 and thank you for joining our call the first quarter of 2024 was another strong quarter for first-horizon demonstrating our ability to produce consistent returns for our shareholders We grew revenue both through expanding our margin and improvement in our counter-cyclical businesses while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate. In honor of our 160th anniversary, we recently announced our Grants for Good campaign, which will award $1.6 million in grants to non-profit organizations within our 12-state footprint. We believe that the communities where we do business are the foundation of First Horizons' long record of success, and we are proud to continue to support the clients and communities in our markets. On slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.35 per share, up 9% from the prior quarter, with pre-provisioned net revenue up $25 million. Adjusted return on tangible common equity improved to 11.6%, driven by positive operating leverage as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our counter-cyclical businesses. We grew the net interest margin 10 basis points from the fourth quarter from improved pricing on both loans and deposits, driving a $7 million increase in net interest income. FHM Financial had a stronger quarter as well, with a $15 million increase in fixed income fees. In January, our board approved a $650 million share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150 million of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near-term target. As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter after quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint to allow us to profitably navigate the ever-changing economic outlook of the upcoming year. With that, I'll hand the call over to Hope to run through our financial results in more detail.

Thank you, Brian. Good morning. On slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre-provisioned net revenue of $323 million, up $25 million from the prior quarter. Net interest income increased $7 million from fourth quarter, driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Fees, excluding deferred comp, were up $13 million from last quarter, driven by higher revenues from our fixed income business, which saw a 58% increase in ADR. Expenses, excluding deferred comp, were down $4 million linked quarter, driven by a significant reduction to outside services, which, as previously mentioned, were elevated in the fourth quarter. That reduction was partially offset by personnel increases for annual merit, seasonal benefits, and revenue-driven incentives within our fixed-income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Provision expense was $50 million this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On slide 7, we outlined a couple of notable items in the quarter which reduced results by two cents per share first quarter notable items include incremental expense of 10 million for the fdic of special assessments which stemmed from revised estimates of the fdic provided in february we also had five million of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies we also noted an upcoming event in second quarter. On April 1st, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on the Series D shares were acquired during the Iberia merger of equals and do not qualify for capital treatment as the first call date was in a five-year window. The interest rate was set to convert from a fixed coupon to a three months so far, plus 4.12% in May. Second quarter will include an approximately $7 million non-cash charge associated with retirement of this instrument. On slide eight, you will see that margin expanded 10 basis points from the prior quarter to 3.37%, improving MII by $7 million. First quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023, with interest-bearing deposit costs declining nine basis points from prior quarter. Loan yields also expanded nine basis points from the benefit of wider spreads on new and renewing loans, as well as the ability to redeploy lower-yielding fixed-rate cash flows. The path for deposit costs over the rest of the year will depend on when the Fed decides to cut rates, as well as the level of competition we see in our markets. Meanwhile, loan yields still have room to modestly expand as fixed cash flows continue to reprice. As you can see on slide 9, we've successfully maintained deposit balances while reducing our deposit costs. Period end deposits are flat quarter to quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest bearing rate paid. we continue to see strong retention on the promotional deposits repriced last quarter with about 90 retention on both the number of clients and the balances we had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately 800 million of broker cds maturing in the second quarter though we continue to see some rotation out of non-interest bearing in January, balances were relatively flat since February. So, I've got a loan portfolio on slide 10. Period end loans were up 1% from the prior quarter. Loans to mortgage companies are up 17% or $343 million at period end. So, average balances were down slightly due to typical seasonality in the business. CRE loans are up $210 million, driven by fund-ups, primarily in multifamily. We added some additional CRE detail in the appendix this quarter, including a geographical breakdown that illustrates the granularity and attractive footprint of the portfolio. Loan yields are up nine basis points, continuing to benefit from wider spreads on new and renewing loans as well as continued repricing of fixed-rate cash flows. Spreads on new loans increased 46 basis points year over year. Cash flows should continue to be a tailwind, as we have $4 billion cash flows coming back over the next year, with a roll-off yield of approximately 4.4%. In 2011, you can see that our counter-cyclical businesses had a relatively strong quarter. Average daily revenue in our fixed-income business increased $268,000 from fourth quarter, contributing an additional $15 million of fee income. The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market's expectation that short-term rates had peaked and were likely headed lower. Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business warming solid, though not as strong as first quarter levels. mortgage revenue also increased by $4 million primarily due to higher volume service charges and fees decreased $2 million due to seasonality and overdraft card and digital banking fees rebounded $3 million as fourth quarter included a non-recurring impact from accounting methodology adjustment on interchange rebates lastly our non-interest income declined $6 million mostly due to lower FHLB dividends as well as a modest reduction in letter of credit and swap fees. Slide 12. We show that excluding deferred compensation, adjusted expenses are down $4 million. Personnel excluding deferred comp was up $17 million from last quarter with a couple of drivers. First, salaries and benefits are up $9 million due to our annual merit increase, which were effective January 1st, and seasonality in certain benefits lines, such as 401k match and unemployment compensation. Second, incentives and commissions increased $7 million driven by incentives on the fixed income revenue growth. Offsetting these personnel increases is a significant decrease to outside services. As a reminder, our fourth quarter marketing expense was elevated for deposit and brand campaigns, as well as third-party services engaged on our strategic investments. As 2024 progresses, we expect technology investment expenses to moderately increase over the year, but those costs will be offset by lower retention expenses and continuing to identify and implement operational efficiencies. The quality reserves on slide 13. Loan loss provision was 50 million this quarter, flat to prior quarter. Net charge-off were 40 million or 27 basis points. Our largest charge-off this quarter was a 9 million C&I loan to a consumer goods company for which we were already fully reserved. We also had 12 million partial charge down on three commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio. We have remained disciplined in underwriting in our approach to client selection. While we have seen some additional negative grade migration in the first quarter, overall we continue to see stable credit performance across markets and industries. On slide 14, you can see that we have maintained strong capital levels while successfully deploying capital to shareholders through the repurchase of almost 11 million shares, utilizing approximately 150 million of our 650 million of share repurchase authority. Share repurchases drew a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. Adjusting for the marks on our securities portfolio and loan book, our pro forma CET1 ratio would be 8.8%, which is well above the regulatory threshold. We will continue to opportunistically deploy capital above our 11% near-term target. First quarter tangible book value per share increased to $12.16, benefiting by $0.35 of net income, offset by $0.15 of dividends, $0.15 from higher mark-to-market impacts, and $0.04 of share buyback. Slide 15, we've updated our 2024 outlook slightly to reflect better-than-expected performance in our counter-cyclical businesses. We continue to expect our full-year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September, and November. Though the market's expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact to our outlook. We saw strong performance from our counter-sacredible businesses in the first quarter, with fixed income fees up $15 million and mortgages up $4 million from prior quarter. We expect these businesses to continue to form well, which has improved our outlook for non-interest income growth from a range of 4.6% previously to an updated 6 to 10%. The expense outlook remains unchanged, despite increases to revenue-driven incentives in our counter-cyclical businesses due to the benefit of the operational efficiencies we have implemented. I will wrap up on slide 16, which is a slide that you have all seen a few times now, but it really drives home that we are focused on a company in order to maximize shareholder value. First quarter was a great start to 2024, and I believe this is the beginning to a strong year for First Horizon. We expect to deliver better revenue performance than we laid out in our original guidance while finding operational efficiencies to maintain our expense guidance. We are making tremendous progress on the strategic investments we have been talking about for almost a year now, and these initiatives will allow us to offer our clients and associates better products, better service, and improved efficiencies. First Horizon has a diversified business model that can provide top quartile results throughout any cycle. We are well positioned to capitalize on our 160-year legacy with our passionate and dedicated bankers, clients, and communities. We will continue to demonstrate our commitment, strength, and resiliency while increasing shareholder returns. Now, I'll give it back to Brian.

Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress in strategic investments, which will allow our associates to serve our clients more quickly and efficiently. I continue to remain confident that this company has the people, the clients, and the enthusiasm to build an unparalleled bank. My expectation is that the next few months for the economy will look similar to the first quarter, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout. Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield, has decided to retire later this year. We have named Tom Hong as her successor. Tom currently runs our franchise finance business and brings a wealth of credit and client experience to the role. We have already started the transition process with Tom serving as Deputy Chief Credit Officer as he prepares to officially step into the role on October the 1st. Susan will remain with the company until the end of the year to help ensure a seamless transition. Susan's decision to retire is bittersweet, and she will be greatly missed. She has been with the company for nearly 30 years, having served as chief credit officer for 11 of those years. She led us adeptly through a number of credit cycles, maintaining strong credit quality. She has been a vital member of our executive management committee, as well as a mentor and role model to countless young professionals. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Thank you, Susan. We can now open it up for questions.

Thank you, Brian. If you'd like to 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. Our first question comes from Ibrahim Purnuala from Bank of America.

Good morning.

Morning, Ibrahim.

Hey, Ibrahim, how are you? I guess maybe this first question for Hope around NII Outlook. In the past, Hope, you provided spot rates and deposit costs. Just give us, if you don't mind, if we can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I'm assuming, if we don't get much in terms of rate cuts for the rest of the year.

Thanks, Abraham. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest-bearing and total deposits, but on average kind of flat. Some of it is mixed. Some of it is timing. So I really want to focus on what was our overall deposit cost for the quarter. Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. we're probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us to get that first rate cut, the harder I think it's going to be to continue to drive deposit costs down meaningfully. We could be a couple basis points here or there within a month or a spot rate within a quarter, but I think we're probably close to where the deposit costs will be for the rest of the year within, you know, 1% maybe on the bait on either side. It is really hard to predict. The market is just changing so quick, and competition will flow one month and then take up the next week. And so, you know, it's going to be kind of a month-by-month look for the industry, I think. Brian, I'm going to ask you to do that.

Go ahead.

Go ahead, Abraham.

Yeah, and I guess just taking a step back, when we look at that 1% to 4% NII guide, is it is the Delta going to be around what gets you to 4% is it going to be just loan growth or whether or not we get any rate cuts like what's more

impactful we were definitely happy so less rate cuts put us puts us at the higher end the thing that I can't handicap right now within you know one to two percent on the full year is what are the deposit costs gonna do for the rest of the year we had originally given guidance assuming we see a rate cut at some point early half the year we start to see competition for deposit costs be going down as an industry. And if we don't see any rate cuts, we don't see rate cuts until late in the year, that's where it gets a little harder for me to predict. But think about it as we'll be on the lower end with the current curve and less rate cuts is more positive for us to get to the higher end of that. You'll remember

when we laid out that guidance in the fourth quarter, we laid it out based on four rate cuts. The over and under betting seems to be we're going to mark it as two. So that will dictate it. And so deposit and loan pricing will both be affected by how many cuts we act. As Hope pointed out, the most important aspect of managing the margin is we're not playing solitaire. We're doing this in a competitive marketplace, and we've seen pricing competition increase fairly significantly, and I think you're seeing that show up in some of the earnings And so we'll continue to protect our deposit base. We'll continue to protect our customer base and we'll continue to come long-term basis of growing the franchise I would say we're every bit as focused on managing both sides of the balance sheet You saw improvement on loan spread and we think that will continue to we just think it's good. Thanks for taking my question

Thank you. Our next question comes from Michael Rose from brain bone James

Hey, good morning, everyone. Thanks for taking my questions. I think in the prepared remarks you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you give us a sense for what the magnitude of that could be? And Brian, if you can just generally comment on loan demand in some of your markets at this point. Obviously, I think some areas of commercial real estate are a little bit weaker, but you are seeing some fund ups from existing commitments and just what you're seeing generally on the CNI side. Thanks.

Thanks, Michael. As I mentioned, my prepared comments, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we're forecasting kind of flat to maybe slightly up. As we look at where to redeploy that, mortgage warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3, and it's our highest yielding assets that we have. So when we look at kind of how will the year projected, you need to look at the seasonality of that business. We continue to see on renewing business and new business expanding margins anywhere from 150 basis points and some above 300. We think about our specialty on the lower end of that, but feel confident that we will be able to even with slowing the loan demand, that we'll be able to put this into our portfolio on the client side and be able to be there for our existing clients and bring new clients into the first rising franchise with an expanding loan. Michael, I'll pick up on loan

demand. Loan demand is okay. It's not great. It really is in pockets that you see real strength. You have some aspects of the Carolinas where loan demand has been very good. As you mentioned, we do have the benefit of some fund up on some, and you started this, and that's usually. But overall, we're still seeing good opportunities, very selective, but we're looking for long-term loan demand is likely to remain somewhat more modest economy, simply because we're in that up anymore and rates not coming down. And I think people are going to take a little bit more certainty about when the Fed is going to move, and I think people will start to lean in. The economy moving up. And as you know, we benefit from being in a sector of, we think loan demand will be fairly soft. That's great caller. And maybe just as my follow-up, maybe one for Susan

and congratulations on your upcoming retirement well deserved. Can you just describe what drove kind of the increase in non-performers? And then if you have an update to the criticized balances at quarter end. I think they were a little over $2 billion at the end of the fourth quarter.

Thanks. Sure. Thanks. And thanks, Michael, for the nice comments. As it relates to new non-performing, we saw non-performing go up about $43 million. There were a few new non-performing loans, that increase was largely driven by two credits. One was a senior living facility, a senior living assisted living memory care facility, and the other was a consumer finance company. Again, so when we're seeing some slight movement in NPLs, we're still seeing it kind of not any specific industry or sector. And as it relates to criticize, we have had a continued focus on conservative grading. And as we somewhat seasonal getting in year-end financials on borrowers, we did see criticized balances go up about 20%. But much of that was in special mentions, kind of a watch status. So those are not defined weaknesses at this point there. There are more potential weaknesses where we're just taking a more frequent look, working with borrowers. The other thing I'm really pleased to see, and this is in commercial real estate as well as C&I, is borrowers really coming to the table, wanting to work with us. We're wanting to work with them. We've seen good opportunities to bring in additional equity, reserves, et cetera, as we have loans that may be temporarily challenged due to interest rate environment. And then classified loans were up less than 10%.

Thanks for taking my questions. Appreciate it.

Thanks, Michael.

Our next question comes from John Harfstrom from RBC.

That's close. John Harfstrom. Good morning, everyone. Hey, John. How are you? It's like trying to pronounce Hope's last name. It's just as challenging. Susan, for you, just to follow up on Michael's question, anything new or surprising that you're seeing on credit? And what do you think we should expect on non-performing trends for 2024? Can you just set the expectation there?

Yeah, I'm not really seeing anything that surprises me. Again, each one kind of has its stories. We're talking borrower by borrower. We've had a number of deep dives and portfolio reviews across lines of business in different regions. Great conversations with our bankers about what's going on. Our bankers are having great conversations with clients. As I mentioned earlier to Michael's question, I'm still really pleased to see how we're able to be at the table, talk about price-sizing a loan or what do we need to do, what do you think is going to happen, getting updated projections from clients. So we still feel good about the ultimate performance of the portfolio. I think depending on what happens with interest rates, John, that's probably going to affect. Obviously, if we start seeing rates start to go down. I think you'll see non-performing loans start to slow in terms of any increases. The good news about not having any increased rates right now though, you're seeing a lot of borrowers who have adapted to this new interest rate environment. Whether it's able to pass along costs in their businesses or just learning how to do things differently, being more efficient,

learning how to operate in a higher interest rate environment.

So with this, we're still being cautious. Brian mentioned we're always selective with discipline in how we underwrite, discipline in client selection, and so that's serving us well, but we're keeping an eye on the portfolio.

John, I would add to that. I'm not really surprised. You're getting what you would expect. would say Sue's teams are transactional being very proactive. Susan also said we've had a tremendous I'm not surprised on in the underlying economy and the way we structured this loan portfolio I'm very comfortable that and then hope for you on slide eight the bottom of slide eight

you're highlighting five billion and loans and securities that are rolling off you talk about from that. And I think the message here is that you expect the margin to grind higher because of some of this repricing, the deposit repricing opportunities are probably done. So it's more about this asset repricing that's going to grind the margin higher over time. Is that the right

message? That's the right message, John. I think deposits, I think, could go a couple basis points lower, a couple basis points higher, and quarter to quarter, it may change until we see that first rate cut, but, you know, we have $4 billion rolling off at 2.25% yield, and, you know, you're seeing 6% and 7% yields pretty steadily in the market and some 8% in our specialty businesses, and so absolutely putting that to work on the client side of the balance sheet versus parking and securities or something else is our intention.

Thank you very much. Thank you.

Our next question comes from Casey Hare from Jeffries.

Good morning, everyone. Question for you on the NIL look. The DDA attrition a little bit lower, as you guys kind of highlighted, in January. Just wondering, what does this guide presume for DDA mix going forward?

Guide is a range, you know, a four basis point range there. So it is, you know, assuming today we're assuming kind of flat balances with non-interest bearing. If we were to see a larger pickup in that, again, that could help us get to the higher end of the range. But I don't see any risk to that taking us below the range if we saw, you know, immaterial runoff. We think we're at the bottom, right? We saw some January outflows that February and March are really stabilized. First quarter does tend to be a little bit more seasonally low and then come back through the year.

Okay, very good. And then just a big, big picture question on, you know, getting ready. When I compare you guys versus the Cat4 group, you guys are in pretty weak link. It's on the liquidity side, and I'm just wondering when do you guys start to, I know you have time, but when do you start to address that and build out the securities book and or drive down that loan-to-deposit ratio?

Yeah, there's a lot of work going in all around the industry to understand the impact. I know, Casey, we've done a lot of work around it, and I think we are in pretty good shape. We have continued to run stress testing. We have some of the infrastructure, two major categories, TLAC, and we don't have absorbing capital. As you said, we do.

Just last question for Susan. You mentioned, or Hope mentioned, a handful of losses within the CRE bucket on updated appraisals. Just wondering if you could provide some color as to what the price decline was on those underlying properties.

I'd say on average, we saw probably about a 20% decline. I did talk to Captain Close Contact with our chief appraiser just on a larger perspective, Casey, just on what we're seeing in terms of reappraisal, both on non-performing properties, but also just office in general. And it really varies a good bit by market, you know, strong markets like Florida you're seeing small funds of 3% to 5%, 3% to 5%, and then some markets are certain office properties that may have had a major tenant that they haven't yet replaced. You can see it in the 25% range. So it is kind of on an individual basis. As it relates to the credits where we took a partial charge related to new updated appraisals this quarter, it was in three different markets, and one was actually more of a mixed-use facility, just that office had the most space, and so we classify that as office. All three were in our footprint.

Okay. So it sounds like most were office. One was a mixed use, or are these the property type?

Of the $12 million that we took in charge-offs in commercial real estate, two were pure office, and then one was a mixed use that had some office space, which was the predominant space, but it also had some retail and multifamily.

Thank you.

Our next question comes from Jared Shaw from Barclays.

Hey, good morning. Good morning, Jared. And, you know, maybe sticking with Casey's question on the CRE, what drove the revaluation? Is that because, you know, you saw individual credit migration, or is this part of a broader revaluation of all CRE? I guess if it's not broader, what, you know, what happens to drive a revaluation?

Yeah, there are a number of things, Jared, that, first of all, whenever we downgrade loans, to non-pass, we have a policy where we do updated appraisals on commercial real estate loans that get downgraded to non-pass within several months of a downgrade. And then if we start to see further deterioration, and in this case these were non-performing loans, then we'll, in these three cases, these were, we reappraised six months later, just having to look at what may be going on. The other thing that can trigger it is if there's something in an individual loan. It could be the loss of a tenant that was, maybe it was being renegotiated, thought it was going to come up, or maybe it was renegotiated at a lower rate. That could cause the need for an appraisal. So we believe in being conservative, and if we need to reappraise, like in this case, within six months of the last one, then and we'll do that to make sure we've got the valuations correct.

Okay, so those three loans you talked about, they were previously non-performers, and they hit the six-month, so you did an additional reappraisal. I guess what happened with that first reappraisal? So if these are down, you know, call it 20%, what was that first reappraisal step down from maybe peak to current?

Oh, on one of them?

Well, I guess on those three loans that were previously non-performer, You talked about a 20% markdown now from what I'm assuming is the six-month prior reappraisal. What's the magnitude of sort of origination to current markdown?

Right. So in terms of – I have to look back at that. But, again, on average, what we're seeing – and I hate to do averages because it really does vary by property. So in one case, it was down 20%, 25% from an original appraisal, but then our charge was not nearly that much because we've got significant equity that we've gotten these properties when we underwrite them. In other cases, we're seeing appraisal changes of 10%. So there's a different number for each building.

Okay. All right. That's a good caller. And then maybe shifting to the fixed income business, really good trends in ADRs this quarter. I guess in a stable rate environment, what's driving the expectation for lower ADRs going forward? Was that just you saw some maybe a spurt of activity early on and then it tapered off? Or how should we be thinking about the pace of that for the rest of the year?

Jared, first is there was a pent-up demand, right? There had not been a lot of balance sheet repositioning. There had not been a lot of liquidity put to use. So we started to see it happen in December. We had a really good December, which we talked about in our last earnings call, and that just carried. And so we think some of that is behind us, and it was more of just kind of a catch-up. Additionally, the current week has given us a little bit of pause in that we are talking about not if we'll see rate cuts, but could we see a rate increase this year? What will it look like? And that will stall that business for a period of time. And if you run the current guidance, I know you all do after this call, it assumes kind of a 500K-ish ADR for the rest of the year, which is still significantly stronger than we saw last year.

Okay, thanks. And then finally, just for me on the buyback, strong activity this quarter, should we be thinking that you continue being pretty aggressive on that $650 million authorization? Or was there anything unique in first quarter that may have accelerated some of that?

No, we'll continue to be very opportunistic, but we still believe that the stock is and has been on sale. And we'll look for opportunity to manage our exit. And the buyback is a great vehicle for doing that in the absence of a significant pickup.

Great. Thanks a lot.

Our next question comes from Chris McCready from KBW.

Oh, great. Thanks. Good morning. Just wanted to follow up on Jared's question on the buyback. Brian, you mentioned 11% is the near term. I guess what would lead you to change that directionally, either up or down? And maybe is there something you could consider this year?

Right now, I don't think inflation at that point. So we'll manage to the end of this year.

Okay, great. And just maybe one more on the fee income business. A lot of talk about the fixed income. The mortgage banking is a smaller line item, but directionally had a decent jump link quarter. Maybe what's in your assumptions in your guide hope for the mortgage just to gain

on sale business? Yeah, from here, Q1 was coming off a pretty record low last year, and Q4 was somewhat anemic in that space. And so we're not expecting a big upturn, but just a continued

originations. Okay, thank you. Our next question comes from Stephen Alexopoulos from JPMorgan.

Hey, good morning, everyone. Brian, I wanted to go back to your answer to Casey's question of crossing $100 billion. And I'm curious, given how this New York community situation played out, how has that impacted how you think about crossing this threshold? You know, previously you said that you thought a transaction was a preferred method. I'm curious if you still feel that way.

say the last part again it broke up a little bit I still feel what way about

what well in the past yeah the past you indicated that you know you didn't want to crawl over a hundred billion you wanted to more or less you leap over it via transaction I'm just curious if you still feel that way just seeing how your

community played out well yeah that's a yeah I guess you have to couple of a couple of thoughts. One, if you put M&A in a separate bucket, I still have significant reservations about, one, what can get approved, and two, how long it takes to get it approved. And so that's not something without greater clarity that looks like a good idea independently. And then you couple it with crossing the $100 billion threshold. And in particular, regular, how much readiness do you have to have? Is there really a three-year phase of an M&A transaction? I would tell you, while I don't have any inside information, my gut would tell me that what happened recently is likely to make it more difficult to cross, and I think you'll have to show a significantly greater degree of preparedness to be a category for a bank or a very near-term path for achieving that. So I think it makes it, and said another way, it makes it more likely that if you cross the 100% in the near term, it's likely to be in an organic fashion, and then you sort of, and does it make sense?

That's helpful. That makes sense. If I could shift gears and talk about T&I loan growth, when I look at balances, they're pretty flat versus the prior quarter, up a bit versus last year. It's funny, when I look at your markets, whether it's what's going on in Nashville or Texas or Florida, they're on fire. GDP is probably 4% in your markets. Why are you not seeing stronger commercial loan growth here? I'll take

care of that, Stephen. In terms of seeing our loan growth, first of all, we have been focused on making sure that we're taking care of existing clients first. We're also very focused on full relationship businesses. And as Brian said earlier, we continue to remain selective in terms of new underwriting and bringing on new clients. That being said, we are open for business and we are seeing some good opportunities and have brought in both new to bank as well as some increased opportunities with existing clients. And we are hearing, when we have pipeline calls, we are hearing some additional opportunities for us to, again, lend existing customers, but also bring in some generational opportunities in our communities as well as in our specialty lines of business. So I think that you will continue to see some opportunities for loan growth across our markets and our business.

As I pointed out earlier, Steve, there are pockets that are stronger than others and some that are a little softer, and Susan is exactly right. If you step back, we are looking to build relationships and do relationship banking. We really want to move and bank relationships. Doing the transaction, lending money, getting it out the door is the easy part of the business. It's really how you build relationships and long-term nature of the banking business. And I think our teams are doing an outstanding job of working for a relationship. And we've taken some opportunities where there is not the opportunity for a long-term relationship to step away from some transactions. So we're trying to manage our balance sheet in a way that manages the balance between profitability and growth.

That's fair. Maybe, Susan, if I could squeeze one more in for you on commercial real estate. I see the maturity schedule here on the slide. Can you tell us what was the balance of commercial real estate loans that you do here in the first quarter, and how did those work out in terms of refinance, extensions, things like that?

Oh, in terms of things that came up through, we've had, in terms of things that have come up, we have been, again, as I said earlier, we've had good, really good outcomes in terms of working with borrowers on the appropriate way to refinance when there is a maturity. It could be things are clicking along like they should, then we look at just kind of a traditional renewal, looking at rates and structure. Sometimes we do talk with borrowers about bringing money to the table, either in terms of a pay down or some reserves. So, again, we're having, I think, really good success. One of the things I do want to emphasize is that we can, and I mentioned this earlier, we've been very disciplined in our underwriting really through all the cycles. And if you look at things like our office portfolio, and this is with updated appraisals in them, our stabilized loan to value on office is about 60%. There's a lot of cushion that we have in our commercial real estate business. And that allows us, one, to continue to have good outcomes, but also the ability to work to work with borrowers, and when borrowers have that kind of equity in front of our debt, there's even more of an incentive to work with us. The last thing I would add is that we've also seen in certain cases where we have been able to, as Brian talks about exiting things that aren't relationships, but I would tell you I've also still will occasionally see us get refinanced out of something that might not hurt our feelings that we're being refinanced out of, either because of a credit grade or potentially of a borrower that didn't come to the table with quite the right approach that worked for us. So, it's good to see that there are still some opportunities out there, too, when it doesn't set our risk from going forward that there are opportunities for them to refinance. So, all in all, I feel good about things that have come up for maturity, our ability to

work with them and the options that we have. Thanks for the color, and Susan, congratulations

on the upcoming retirement. Thank you. I really appreciate it. Our next question comes from Timo Brazile from Wells Fargo. Hi, good morning. Good morning. One more for you, Susan, on commercial

real estate. Just looking at the allowance build over the last couple of quarters compared to the coverage ratio on the CRE book. The coverage ratio looks like it's 115% today. That's been tracking lower. I guess, how should we be thinking about the coverage ratio here? And if we don't get any kind of improvement in rates and we see some broader kind of degradation in that space, are you modeling it to a coverage ratio? Are you modeling it to an allowance ratio? Maybe just

give us the puts and takes of those two. As it relates to the allowance process, I would tell

you, we don't really, we don't shoot for a specific number. We go through a process, a discipline process each and every quarter and look at various scenarios such as different economic outlooks, things that are base case, things that are ultra stress cases. We don't, we don't put a lot of emphasis on upside cases, but there are those out there as well. And then we have qualitative overlays related to certain segments that we may decide that may need more than what just an economic outlook would look like. As you know with CECL, CECL is considered a lifetime loss approach. So based on what we know today and what external economists and our own internal experts are saying we believe this is the right reserve coverage based on several different outcomes that could emerge. But as I mentioned earlier, each quarter we're reevaluating that, and as you know, as we all know, things like interest rate outlooks can change pretty dramatically quarter to All that being said, I do think the economy, Brian talked about this, I think the economy remains strong. We're still seeing borrowers being able to adapt to higher inflation, higher interest rates, but this is something that we take a look at each and every quarter.

Great, thanks. And then my follow-up, looking at slide 22 on the C&I loan buckets, the 12% of C&I, that's to finance and insurance companies. Can you just give us a reminder what that composition is and maybe more specifically what component of that balance is to borrowers other than using those funds as leverage for commercial loans?

So, the finance and insurance bucket has a number of different things in it. Probably one of the things, you know, our asset-based lending business, we lend to companies that lend to others. A good part of that is consumer finance companies. And we've had, we've been in that business for many, many years. We've got very sophisticated borrowers. I would tell you, just as a sidebar, we've also seen them adapt nicely to higher interest rate environments as it relates to how they deploy. I don't have the exact number with me on how much of it is to then further commercial It's not a big number for us. We do have some of that, kind of a business-to-business site lending arrangement, but it's not a significant portion of that finance and insurance bucket. So those are the ones I would highlight in that bucket.

Okay, thanks. Thank you for the question.

Our next question comes from Ben Gerlinger from CT.

Good morning, everyone. Good morning, Ben. I was curious. I know we've belabored quite a bit here on guidance change. And it seems like the uptick in fees, one, that's a big positive. So I think going from $4,000 to $6,000, now $6,000 to $10,000, should we kind of assume the expenses are closer to that $6,000 given you've cited being fixed income and mortgage, which are typically higher for essentially ratio businesses? Or can you also see fees at the high end and expenses on the low end? Just kind of think about the cadence of the two throughout the year.

Ben, thanks for the question. You know, I would not say that the expenses will be on the high end, but that's a forward-on conclusion. As we mentioned, we are continuing to look at operational efficiencies. We are looking at, you know, what is the right way to run the organization in a lower loan growth environment. We have spent, you know, a significant amount of technology that's going to go into place this year that creates additional efficiency. We're looking at every contract that's coming up and looking at what we're doing for it. And so our goal would not to be on the high end of that, but things can change. But, no, I would not make that assumption. If I thought we were going to be on the high end of that, honestly, I probably would have just increased guidance. At the same time, I told you to increase revenue and de-risk it.

Okay, that's great. That kind of leads to my next question, actually, because I know you're at the sense of it. You took out a cut in your guidance. To me, it kind of implies that you're closer to a higher end. Like, if we get to the middle of the year, would it even be worth going from plus one to four to something like two to five? or is that too nuanced to think about?

Ben, I wish I could. If you saw the number of models we run every single month and as soon as we get to ALCO every month, somebody has said something, Powell's released something, there's new CPI data which puts it out. And so I just don't think we're in an environment where we could be that specific. If we thought it was going to be kind of like our fee income, we knew that the high end of the guidance was probably the low side, so we immediately let you guys know that we don't expect to, you know, we don't expect to come in. We could have said we expect to be on the high side. Instead, we said previous high sides are low side. Forecasting NII in this environment is very, very hard, even within a 3% range with as much moving parts as we have.

Okay, I appreciate it. For what it's worth, I run over one model, and we'll come up with similar numbers, so I appreciate the heavy lifting you guys are doing on your end.

Our next question comes from Christopher Marienak from Janie Monteguimari, Scott.

Thanks, good morning. Susan, I wanted to ask you about loan modification. How often are you using it now?

Chris, you broke up the last part of that question. Can you repeat it?

Chris, are you there? Well, let's move on to the next question, and Chris can hop back in the queue if he needs to.

Okay, we might be back. Chris, you back?

Yeah, Carla, let's move on to the next question, and Chris can hop back in the queue if he needs to.

All right. Our next question comes from Brennan Crowley from Baird.

Hey, good morning, guys. Thanks for taking my question. And, you know, given to me this guide, and I know at one point last year, kind of 2024, positive operating leverage was discussed, and then kind of walked back a bit. And I know it's difficult with the investment initiative on the way here, but given what you've seen through three months and the elliptic guide today, is that something that's a possibility for this year?

Thanks for the question, Brandon. I think, you know, if you look at where the guide is, it is neutral on operating leverage or slightly positive, depending on which side of the range.

Great. And then just as a quick follow-up, and maybe I missed this in the prepared remarks, but I saw that the investment portfolios yield actually fell sequentially, so just kind of wondering if you can talk about the driver there, and then maybe how you guys plan to manage the portfolio and roll off over the next couple of quarters. Yeah. First, I'll mention we're

currently not reinvesting in our securities portfolio, so we're letting it run off and redeploying that into the loan side of our balance sheet. But a lot of the volatility that you saw this quarter is just the mark to markets with where the market is at the end of the quarter. There was nothing material change. Okay, great. Thanks, guys. Our next question

comes from Samuel Largo from UVA. Good morning. Good morning. I just wanted to ask one last follow

up on NII. I appreciate you touched on the $4 billion of the fixed rate loan repricing. Could you give some color on how even that is through 2024? Is it similar to security where it's pretty much the same every quarter, or is it a bit more front or backloaded? Yeah, it's pretty consistent

through the quarter. There's not a bulge quarter. Okay, great. I appreciate it. Thanks for taking

my question. And our next question comes from Christopher Marinak from Janie Motiko-Maris.com.

Thanks. Sorry for my issue there earlier. Susan, I wanted to ask you about loan modifications and and how often they are a tactic for resolving any type of loan this year or next?

Well, I mean, any time we have either one, if there's a true maturity, we're always looking at, you know, what do we need to do? That's really not a true modification. In terms of modifications, when we have loans that are non-passed or handled in our special assets groups, there are situations where it might be in our best interest if we're the lead bank or the sole bank, to work with them on modifications. And then obviously on some of the deals where we're part of a bank group, and the bank group has to work together on what could be an appropriate loan modification. I would tell you, Chris, that we have a history of, you know, wanting to work with borrowers and figure out the best outcomes. that obviously for us are the best outcomes for our shareholders, but we've also are complimented frequently by our borrowers about our ability to work with them and in some cases keep them in business. And as I mentioned earlier, in many cases they've got a lot of equity ahead of us. So they have a vested interest in working with us to come up with something that makes sense and is economically viable for both the bank and the client.

Yeah, long modifications used to be an accounting term of art, and I'll echo what Susan said. You know, I often say this, and I don't say it lightly to our clients, that we look at it as a partnership, and so we use that long-term relationship, and we work through the ups and downs, and I don't consider that modification. I just consider that supporting the long-term relationships that really drive the profitability of our organization and our balance sheet at the same time makes our customers and our community stronger.

No, that's great. Thank you both for your color on that. And Susan, just a quick follow-up on debt service coverage ratios. How is the stress process going for customers? Are you seeing instances where you have to criticize a loan due to just higher interest rates and the DSCRs falling?

Yeah, Chris, I would say that's actually the predominant reason that we're taking loans to special mention and the initial criticized status would be that debt service coverage, while still able to service a loan, it's less than either a covenant or where the borrower is expected to be at a certain point in time. And we do expect, and I mentioned earlier, that the downgrades mostly had been into that special mention category. That's a very dynamic category, and we do see borrowers come back out of it as they adjust either, you know, their operating expenses or if interest rates do start coming down. I expect you'll see a good bit of a lot of upgrades at that point.

Great. Thank you again, and best wishes for your success, Susan.

Thanks, Chris. Appreciate it.

Thanks, Chris.

We currently have no further questions. I will hand back over to Brian Jordan to conclude.

Thank you, Carla. Thank you, everyone, for joining the call this morning. We appreciate your time and appreciate your interest in our company. Please reach out if you have any further questions or if you need any additional information. We'll be happy to try to help. Hope everyone has a great day.

This concludes today's call. Thank you for joining. You may not disconnect your lines.