Earnings Call Transcript
FIRST HORIZON CORP (FHN)
Earnings Call Transcript - FHN Q3 2024
Operator, Operator
Good morning everyone and thank you for being with us for the First Horizon Third Quarter 2024 Earnings Conference Call. My name is Carly and I will be coordinating the call today. I would like to now turn it over to your host, Natalie Flanders, Head of Investor Relations, to get started. The floor is yours.
Natalie Flanders, Head of IR
Thank you, Carly. Good morning. Welcome to our third quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President, and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski will provide prepared remarks, after which we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Thomas Hung here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on page two of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release and on page three of our presentation. And last but not least, our comments reflect our current views, and you should understand that we are not obligated to update them. And with that, I'll turn things over to Bryan.
Bryan Jordan, CEO
Thank you, Natalie. Good morning, everyone. Thank you for joining our call. Before we get into the details of the quarter, I want to express our concern and support for those who were impacted by hurricanes Helene and Milton. I'm incredibly proud of our team, how our team prepared for and responded to the needs of our associates, clients, and communities. We were on the ground immediately providing food, water, fuel, and other essential supplies. In North Carolina and Tennessee, all but one of our banking centers are back open, with mobile banking units on site there to provide continuous banking services to our clients. Florida is in the early stages of recovery, but our banking centers fared well and all are open at this time. We've also announced financial commitments to the restoration of these communities and will remain heavily engaged in the rebuilding process. On slide five, we've shared some of the financial highlights for the quarter. First Horizon delivered another strong quarter for our shareholders as we grew revenue; maintained expense discipline; improved credit coverage; and continued to generate capital. Our results this quarter reflect the strength of our diversified business model and our continued focus on growing and deepening client relationships. We achieved an adjusted EPS of $0.42 per share, which was a $0.06 increase from the prior quarter. Pre-provision net revenue increased $11 million, improving our adjusted return on tangible common equity to 13.2%. We continued to deploy capital through share repurchases, buying back $75 million of stock in the third quarter and over $440 million year-to-date. We ended the quarter with a common equity Tier 1 ratio of 11.2%. Our results continue to demonstrate the benefit of our disciplined credit culture as we saw just $24 million or 15 basis points of net charge-offs this quarter. I'm proud of the dedication that our bankers display in serving our clients and communities throughout the Southeast. I believe we are well positioned to capitalize on our attractive footprint and opportunities to grow along with these markets. As we head into next year, I remain incredibly optimistic that our franchise is fully equipped to navigate any economic environment we encounter, while continuing to enhance shareholder value. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?
Hope Dmuchowski, CFO
Thank you, Bryan. Good morning, everyone. On slide six, you will find our adjusted financials and key performance metrics for the quarter. We generated adjusted earnings per share of $0.42, a $0.06 increase from the prior quarter. Pre-provision net revenue improved by $11 million from last quarter, largely due to strong performance from our fixed-income business, while our net interest income and adjusted expenses remained essentially flat. We continue to see solid credit performance from our portfolio with net charge-offs of 15 basis points and $35 million of provision expense. ACL coverage increased modestly to 1.44% including $8 million of qualitative reserves for potential losses related to Hurricane Helene. The improved revenue and lower reserve build drove an increase in our adjusted return on tangible common equity to 13.2%. Our CET1 ratio increased to 11.2%, modestly above our 11% near-term target, driven by lower-than-expected risk-weighted assets due to a late in the quarter portfolio sale. On slide seven, we outline a couple of notable items in the quarter which reduced results by $0.02 per share. Third quarter, pre-tax notable items include a $2 million credit to expenses that was trued up to the FDI special assessment accrual, a $15 million of Visa derivative valuation expenses related to the escrow funding that occurred in September. And lastly, $2 million of restructuring expenses associated with the operational efficiencies we have continued to identify. All of this totals an $11 million reduction to net income. On slide eight, you will see that NII of $631 million was relatively stable to the prior quarter, benefiting slightly from a higher day count. The net interest margin compressed 7 basis points from last quarter to 3.31% with better asset yields partially offsetting higher deposit costs. The increase in average deposit costs was driven by higher use of broker deposits, as well as acquisition costs on the $1 billion of new client growth. Loan yields expanded 3 basis points from second quarter, benefiting from new and renewing floating rate spreads and repricing of fixed-rate cash flows. As we move into the fourth quarter, we expect modest margin contraction due to the lag between the loan and deposit repricing. On slide nine, we take a closer look at our strong deposit group. Period end balances increased 3% with client acquisition driving almost $1 billion of growth. We are also pleased to see that non-interest bearing balances have continued to remain relatively stable over the last few quarters. The average rate paid on interest-bearing deposits increased to 3.44% from the 3.35% spot rate we saw at the end of June. This was driven in part by the higher use of brokerage deposits as seasonality and loan to mortgage companies drove a higher need for funding. Deposit costs are already beginning to improve with the interest-bearing spot rate declining to approximately 3.33% by the end of September, partially due to the $9 billion deposits, which are market indexed. Deposit rates have declined another 5 basis points in October with a spot rate today of 3.28%. We will continue to make progress on repricing the deposit portfolio as we have approximately $18 billion of promotional deposits that are set to reprice over the remaining of the year, in addition to the $1 billion of brokered CDs that are maturing. On slide 10, we have an overview of loans. Average loans were up 1% from the prior quarter driven by seasonality and loans to mortgage companies. Period end loans declined 1% or $335 million from last quarter. This included an opportunistic sale of approximately $340 million as we exited the sponsored health care lending vertical. The portfolio consisted of approximately 20 relationships of higher leverage, low past graded healthcare loans. We do not have the intent to sell any other loan portfolios in the foreseeable future. After a period of fund ups in our commercial real estate portfolio, the balances in this portfolio have stabilized. As previously mentioned, loan yields were up 3 basis points from second quarter due to wider spreads and fixed cash flow repricing. As we move into the fourth quarter, loan yields are likely to decline as 56% of our loan portfolio is indexed to short-term rates. On slide 11, we highlight the increase in fee revenue we saw in the quarter. Fee income, excluding deferred compensation, increased $11 million from the prior quarter. Average daily revenue in our fixed income business improved 22% to $593,000, driving a $7 million increase in fee income. July was a relatively muted month. However, as the markets, confidence, and rate cuts increased, we saw increasing momentum in the business in both August and September. Lastly, other non-interest income increased $5 million due to some non-recurring items, including securities and other gains, higher federal home loan bank dividends, and BOLI benefits. On slide 12, we show that excluding deferred compensation, adjusted expenses decreased by $1 million. Personnel excluding deferred comp was down $1 million from prior quarter as a reduction in incentives and commissions offset the impact of a higher day count on salary expense and elevated medical expense. The $2 million reduction to incentives included the continued step-down and retention awards that took place at the end of the second quarter and outweighed the incremental incentives associated with the higher fixed income production. We are constantly evaluating options to improve operational efficiency. This quarter we implemented two items that impacted headcount. First, we optimized the retail staffing model across our footprint to more efficiently serve our clients. We also recently outsourced our property management functions, which lowered headcount and salary expense, but will be offset by some incremental occupancy costs. We expect this to make our building support more efficient, while providing a better experience for our clients and associates. Moving down to occupancy and equipment, there was a $2 million increase driven by our new property management engagement, as well as incremental software maintenance and appreciation from our strategic initiatives. Offsetting the increase is a $2 million reduction to outside services driven by lower advisory services as certain strategic initiatives enter the production phase. I'll cover credit on slide 13, which continues to perform very well. Net charge-off decreased by $10 million to $24 million or 15 basis points of average loans. Loan loss provision was $35 million this quarter, increasing ACL coverage to 1.44%. The $11 million of reserve build included $8 million of qualitative reserves related to Hurricane Helene, as well as the impact of continued grade migration, which was partially offset by improved economic scenarios. Non-performing loans increased $4 million with an increase in C&I slightly exceeding declines in consumer and commercial real estate. We remain optimistic that our clients can navigate to a soft landing, as 63% of commercial MPLs are still current on their payment. Overall, we are very pleased with the continued strength of our portfolio through a high rate environment and expect to see continual improvement if rates do continue to decline. On slide 15, we'll talk through our outlook for the remainder of the year. What we have laid out here is consistent with the guidance we gave last quarter, though we are now focusing more on total revenue versus the individual components. We believe total revenue will be flat to up 2% year-over-year with the composition driven by what the Fed chooses to do over the next couple of months. Our countercyclical businesses are a natural hedge against our asset sensitivity. If we see incremental declines in interest rates, those businesses' revenues will offset that incremental NII pressure. Turning to expenses, our guidance remains unchanged as we remain committed to continuing to identify efficiencies to help offset our investments. For net charge-offs, you can see that we are trending favorably to our guidance, but we have left the range unchanged until we have more information on the potential for losses that could arrive from the recent weather events in our footprint. Lastly, we continue to target an 11% CET1 ratio near-term. I'll wrap up as you turn to slide 16. I am proud of all the progress we have made as a company so far this year. We are focused on improving profitability while making the strategic enhancements needed to set us up for success as we continue to grow the franchise. As a leadership team, we remain extremely optimistic about the future of First Horizon and are excited to continue delivering value to our shareholders and a premier banking experience for our clients. Now I'll give it back to Bryan.
Bryan Jordan, CEO
Thank you, Hope. Many of you have heard me say that our goal is to stack one good quarter on top of the next. This quarter added momentum to that track record and puts us one step closer to achieving our longer term return goals. As an organization, we are intently focused on execution. We aim to improve revenue through client growth and retention while maintaining expense discipline through operational excellence. We will continue to align capital and resources with the greatest business opportunities, while enhancing our technology capabilities to deliver exceptional client experience. I remain confident that our diversified business model, including our well-established countercyclical businesses, will allow us to continue to deliver strong shareholder value over the remainder of 2024 and into next year. Our associates' dedication combined with our attractive footprint and extraordinary client base positions us to build an unparalleled banking franchise in the Southeast. Thank you to our associates for all that you do for our clients, communities, and for each other. Carly, we can now open it up for questions.
Operator, Operator
Thank you, Bryan. Our first question comes from Ebrahim Poonawala at Bank of America. Ebrahim, your line is now open.
Ebrahim Poonawala, Analyst
Hey, good morning.
Bryan Jordan, CEO
Good morning.
Ebrahim Poonawala, Analyst
I guess maybe Bryan, Hope, but it makes sense in terms of talking about total revenues versus NII fees given the countercyclicality of your businesses. But just talk to us, I guess the question is, in case in the very near-term, NII I think, Hope you mentioned some margin compression over the next quarter or two will impact NII. When we look at the fixed income business, the $47 million in fees this quarter, is it as good as it gets in terms of the upper bound on this? Or what's like we've seen a fair amount of bond book restructuring that banks rates got cut or is there another leg higher to go on additional rate outlook certainty? Would love for you to address that.
Hope Dmuchowski, CFO
Good morning, Ebrahim. This is Hope, happy to answer that question. I mentioned in my comments that we saw a very muted July, so we absolutely think we see some upside if we continue to see rates decline as September and August were much stronger than July. And we've seen strong momentum ending the quarter. The one thing you mentioned was, you know, were people still buying? We had a conversation with our business the other day. If rates go down another 75 basis points this year, they've already talked to some clients that locked things in earlier this year, late last year, that are thinking about restructuring again. And so I do think there'll be continued momentum in a decreasing rate environment.
Ebrahim Poonawala, Analyst
Understood. And just the other question was around the loan to deposit ratio. I think you call out the decline from 97 to 94, partly driven by some of the actions you took during the quarter. I know we've talked about this in the past. Just remind us, when we look at the 94 loan to deposit ratio, is there a certain level to which you're managing to? And as a result, is that kind of making you a little bit more cautious in terms of how quickly you flex deposit pricing lower?
Hope Dmuchowski, CFO
We continue to monitor our loan to deposit ratio, but we also monitor our loans plus securities to deposit ratio. We run a much smaller securities portfolio than most of our peers. And you know, our belief is that as much as we can use deposits to help our clients, that's where we want to put it first. As we move forward, we continue to see loan and deposit ratios do tend to change as we have to fund up mortgage warehouse. You'll see we did put additional brokered on. We're comfortable generally with where it's at in the near-term, but of course, we want to continue to work it down over time. I would say it's not the biggest piece of our competitive pricing. What we're trying to do is defend our home front. We want to make sure that clients that are with us are staying with us. And so I would say, you know, the new to bank absolutely comes in at a higher rate, but it's really the back book and the current clients that are being made offers by other banks that are out there looking for the same deposit growth that we're looking for and to retain them in order to continue to have deposit growth quarter-over-quarter does come in a little bit higher of a premium.
Bryan Jordan, CEO
Ebrahim, I'll add we look at our deposit activity and deposit pricing largely through the customer acquisition lens. We don't think about it in a significant way around loan to deposit ratio. So while that is important over time, we look at growing customer relationships and you'll note that we grew customer deposits by 3% during the course of this quarter, about a $1 billion or so on the customer side. And we want to continue to grow in what are very attractive footprints with high quality customer relationships. We're pricing attractively versus wholesale funds and we're pricing attractively to gain market share. So while the two are somewhat related, we spent more time focusing on how do we grow our customer relationships, particularly in our retail, private client, high net worth businesses.
Ebrahim Poonawala, Analyst
That’s helpful. Thank you both.
Bryan Jordan, CEO
Thank you.
Operator, Operator
Thank you very much. Our next question comes from Michael Rose of Raymond James. Michael, your line is now open.
Michael Rose, Analyst
Hey, good morning, everyone. Thanks for taking my questions. Hope, I just wanted to dig into your comments on the margin a little bit, certainly understand a little bit more pressure in the fourth quarter, just given the mismatch of timing that you referenced. But as we think about the margin into next year with some of the tailwinds, as you mentioned on the deposit side, some additional repricing opportunities. I think the slide deck mentioned a chunk of deposits that was eligible for repricing $18 billion of promotional client deposits that are eligible for repricing in the fourth quarter? Are we at a point where the fourth quarter, do you think, is the inflection point for the NIM and we can move higher despite your rate sensitivity or is the expectation that it's going to be a push and pull each quarter and we shouldn't expect the margin to really move, at least over the next couple quarters? Thanks.
Hope Dmuchowski, CFO
Thank you for your question, Michael. I believe we will experience a fluctuating situation quarter-to-quarter. The outcome heavily relies on the speed of our rate cuts. We anticipate consecutive rate cuts in November and December, followed by some stabilization. While our margins could stabilize, we will continue to face adjustments month after month or quarter after quarter as our loans reprice downward. As I noted earlier, about 59% of our loans will see a decline in their deposit rates, and we will need to navigate through this as we transition from promotions and new bank clients. Therefore, it's unlikely that we will see a consistent upward or downward trend based on the current forward curve into 2025. However, we are taking proactive measures to mitigate some of our asset sensitivity in the event of an uncertain rate cut environment. For instance, we have shortened our new to bank promotions from a 90-day guarantee to a 45-day guarantee, providing us with more flexibility. Currently, we are less asset sensitive due to that deposit repricing, but there may be delays quarter-to-quarter, particularly depending on how late we experience loan repricing before we can adjust our deposit size.
Bryan Jordan, CEO
One of the key variables, Michael, is as Hope said, the pacing of rate cuts. And as she properly noted, the more significant rate cuts are, the more impact you will see on net interest income, but the more offset you'll see in our fixed income business, et cetera. And that's why we focused on the total revenue where we think we're significantly more balanced and less sensitive to interest rate cycles than it might appear if you focus on one line item or the other. But we do believe that we've got the balance sheet positioned in such a way that we can manage through interest rate volatility and we will adapt to whatever pace the FOMC sets for moving rates in the rest of this year and into 2025.
Michael Rose, Analyst
Certainly understand that. Maybe just as a follow-up, and I know the rate backdrop is difficult to project, and I know it's early for next year, but is the plan or the expectation that you can grow kind of adjusted PPNR year-over-year, and are you planning at this point for positive operating leverage? And I ask that because I certainly understand you pulled some levers on the cost savings front, but we're hearing more and more banks looking to hire bankers. I assume that would be some of your expectations to drive some balance sheet growth. But just wanted to just initially, you know, if you had any comments on how we should kind of think about that? Thanks.
Bryan Jordan, CEO
Yes, we'll provide a little more guidance in the remainder of this quarter or outlook for next year. But I sit here today, I expect that we will drive positive PPNR next year. And we're still working through the various line items, but I do think you will see us growing our PPNR in 2025.
Michael Rose, Analyst
All right, I'll step back. Thanks for taking my questions.
Bryan Jordan, CEO
All right, thank you.
Operator, Operator
Thank you very much. Our next question comes from Jon Arfstrom with RBC Capital. Jon, your line is now open.
Jon Arfstrom, Analyst
Hey, thanks, good morning.
Bryan Jordan, CEO
Good morning, Jon.
Jon Arfstrom, Analyst
Bryan, one for you. Give us your thoughts on loan growth expectations. Looks like you guys referenced some CRE stability, but C&I was a bit weaker. But talk about what you're seeing, you know, how much of this is self-imposed and what kind of an outlook you have for growth?
Bryan Jordan, CEO
Yes, I would say very little of what we're seeing is self-imposed. We're not limiting the size of the balance sheet. There's one caveat to that, that I will come back to in a second. The loan growth in the marketplace is somewhat muted at this point. It is not picked up. I couldn't tell you how to weight the parts, but I suspect some part of it is what happens in the elections that are coming up in the next month. It's partly weighted on what the Fed is going to do with interest rates and in particular when deals start to look better financially. And then just overall, are we going to have a soft landing or something else? And I'm somewhat optimistic that we get through the next 90-days. We'll have greater clarity maybe on all three of those. And if we do, I think there's some pent-up loan demand. At least we hear that in our customer conversations. The marketplace is still somewhat muted and it's still very, very competitive at this point. I mentioned the one exception, there are a few places where we have taken some participations where we had been in participations for a period of time. We had not broadened or deepened the relationship as we thought we might and we've used the opportunity to exit out of some of that. But other than that, we're looking to grow with our client base, we're looking to grow and lean in when customers are ready to make investment.
Jon Arfstrom, Analyst
Okay, that’s fair enough on that. So maybe a little more optimism potentially. I know that's a lot of hedging there, but it feels like you're still somewhat optimistic on growth.
Bryan Jordan, CEO
I didn't mean to hedge as much as I meant to convey uncertainty about what's going to happen.
Hope Dmuchowski, CFO
Okay, Jon, I actually don't have that in front of me. August and September were generally pretty equal, as I recall, but the end of September following the rate cuts was a significant uptick and right before the rate ticks were kind of quiet. I would say the months were not particularly different, but the weeks told a much different story. Nobody really wanted to buy anything right before the rate cut and after the rate cut, we finished the quarter really strong. And I think we'll see that same type of momentum as there's uncertainty about rate cuts in the coming two months.
Bryan Jordan, CEO
Jon, the 10-year, the rate curve has moved around a good bit as people's expectations for the economy have changed. I'll give you the last two weeks. If you look at the first week of October, we were a little over $1.1 million. Last week, we were a little over $500,000. So two weeks does not make a trend and it moves around based on what interest rates and sentiment in the market are doing. On the whole, we were a little over $5 million, I think we were $5.63 million for this quarter and just passed and our outlook is to be slightly better for that than the remainder of the year. And you have to keep in mind, as you well know, that at some point the markets tend to shut down as you get into the back part of the year. So we're optimistic on activity for the remainder of this year.
Jon Arfstrom, Analyst
Yes. Okay, that's helpful. Thank you very much.
Bryan Jordan, CEO
Yes.
Operator, Operator
Thank you very much. Our next question comes from Jared Shaw of Barclays Capital. Jared, your line is now open.
Jared Shaw, Analyst
Hey good morning everybody.
Bryan Jordan, CEO
Good morning, Jared.
Jared Shaw, Analyst
Maybe just going back on the deposit side, the $18 billion that you referenced that's coming to you in fourth quarter, could you give us an update on the pricing of those deposits now and where you expect to see that moving to? And also is there a term change in that promotion?
Hope Dmuchowski, CFO
Jared, yes, starting at the end of your question, we have changed the term as recently as last week. As we continue to look at how to bring down rates, it is really a sensitivity analysis of how sensitive our clients to, how quickly the rates are falling. And so we did just roll out at the end of last week, new rates that as I mentioned earlier, only guaranteed for 45-days versus a prior 90. Our money market is currently at $4.25 million, that compares to $5.05 million last quarter when you asked me on the earnings call. Our retention offer is now 3.5% and so we've been walking it back ahead of the rate cut and after. And we have quite a few scenarios for how that might walk back, depending on the rate cuts we see in Q4. A December rate cut is really hard for us to make much headway with deposits. And so November rate cut will have the most meaningful impact on how much we can walk it back.
Jared Shaw, Analyst
Okay, okay thanks and then you know as we look at the deposit composition what's the appetite for additional brokered from here? I heard your commentary that you built that up in anticipation of the mortgage business. Should we expect to see brokered be a bigger part of the overall deposit mix or are we near the top?
Hope Dmuchowski, CFO
Jared, our goal is to always use client money first and brokered second. So let's start with that being our goal. The more we can bring and retain client money, the less brokered we need. Brokered for us is always kind of a match funding for mortgage warehouse. We saw mortgage warehouse on average up about $400 million last quarter, which I'll note is against past years, typically Q3 comes down and we actually saw it come up with some of the rate cuts and we saw our refi activity actually increase 5% quarter-over-quarter. So as we think about that, it's really going to be more about mortgage warehouse and how much we continue to have balances there in the short run. But yes, our goal is to always try to get out of it quarter-over-quarter when we can, whether we see decreasing mortgage warehouse balances or increasing client money. But I am comfortable where it's at. We're well below our peer group the last couple quarters when I compared our brokered versus theirs.
Jared Shaw, Analyst
Thank you. Lastly, regarding your guidance on total revenue compared to net interest income and fees, how should we view the dynamics of ongoing margin pressure alongside potential balance sheet growth? Are we at a low point for net interest income right now, and how should we assess where we will end the year and project net interest income for 2024?
Hope Dmuchowski, CFO
Jared, for 2024, I don't see much of a change from our prior guidance. And you look at the new revenue guidance we gave, it is in line of both revenue and NII. It's just already coming on the low end of one and the high end on the other. For us, you know, not just for Q4, but going into next year as we think about NII, the big unknown for us is how much mortgage are we going to see. It's our highest yielding asset. And so we did see a large refi movement move from the 22% to the historical 30% or 40% or 50% we've been seeing. That would help NII significantly. So if we talk about counter-cyclical, FHN Financial is in the income line, but the majority of mortgage warehouse and mortgage is in NII line. So that also is, if we talk about embedded hedges, we do have an embedded hedge with hopefully loan growth going into 2025 in both of those businesses.
Jared Shaw, Analyst
Okay great, thanks very much.
Operator, Operator
Thank you very much. Our next question comes from Samuel Varga of UBS. Samuel, your line is now open.
Samuel Varga, Analyst
Good morning. I just wanted to switch over to deposits a little bit. I wanted to see if you could give some color any initiatives you might have going on to effect some non-interest bearing deposits, whether it's through retail or commercial?
Bryan Jordan, CEO
Yes, this is Bryan. We're looking to really grow across the entire deposit base. We have had been very active in growing our non-interest bearing deposits. They've been stable, which sort of follows along with what we articulated earlier in the year, which is you get to a core level as a percentage it drops a little bit, but that's because we grew non-interest bearing. But we're looking to grow customer relationships and growing core checking accounts, non-interest bearing low-cost deposits is an important part of that. So we have had a number of efforts across our entire franchise to grow those deposits. And we will continue to lean in and look to grow client-customer relationships on the commercial and the consumer side.
Samuel Varga, Analyst
Understood. And then, Hope, the 12% of loans that are ARMs, can you give us a sense for what sort of weighted average yield that part of the book currently has? And I understand that over the next year, there's not much of a reset on any of those, but I guess as we think about late ‘25 and ‘26, are there sort of bigger chunks that we should be aware of as we model NII?
Hope Dmuchowski, CFO
I don't have the current weighted average of the rates, but we don't have a significant volume of them maturing in the next three years. They have gradually been added to our balance sheet over the past two to two and a half years. However, we anticipate a considerable number of them will be prepaid. With fixed rates lasting five to seven years, if we see rates decrease by 100 to 200 basis points, that could lead to a substantial amount of refinancing in the ARM segment of our current balance sheet.
Bryan Jordan, CEO
If I remember correctly, and I'll look to Natalie because she remembers these numbers better than I do, but you can use as a proxy, I think our consumer loan portfolio yielded in the 5.8% or so range, maybe a little higher in the third quarter, and that's largely driven by ARMs. So that's a proxy for that number.
Natalie Flanders, Head of IR
Agreed.
Samuel Varga, Analyst
Awesome. Thank you very much. I appreciate it.
Operator, Operator
Thank you very much. Our next question comes from Chris McGratty of KBW. Chris, your line is now open.
Chris McGratty, Analyst
Good morning. Hope maybe a question or Bryan on the PPNR ‘25 being above ‘24. Just I guess a couple of questions, maybe a comment between is that more of a revenue comment or an expense control given your steps? And secondarily, does that currently factor in the forward curve right now? Thanks.
Bryan Jordan, CEO
Yes. So if I break that yes down, we can prognosticate about rates. It's probably most efficient to always use a forward curve. So that's sort of our point of reference and it's been in flux. And we're always focused on growing revenue. We're always focused on controlling expenses. I think we have a number of catalysts that we're working to leverage that are really, really important in terms of our ability not only of driving PPNR in 2025, but creating long-term shareholder value, essentially taking our returns a little over 13% on tangible common equity back north of 15%-plus. And those initiatives that we're focused on are really the logical follow-on of the work that associated with the merger of equals that didn't get done during the integration period. And so we see a number of opportunities once we get the systems investments made at a very tactical level to grow revenue, to deepen relationships, to drive additional loan growth and to control our costs, further centralizing processes, things of that nature. So I've circled back around to yes, we think it's going to be across all of the levers that you mentioned.
Chris McGratty, Analyst
Okay, that's really helpful. Thanks, Bryan. And then maybe on regulation, your target of 11% on CET1, you're slightly above it. I would expect you're saying you're going to continue with the buyback, but just any changes for the medium term that you might be contemplating now that Basel has been a little bit watered down? And also maybe a comment, Bryan, about where you are on the investment for $100 billion. Thanks.
Bryan Jordan, CEO
Yes, yes. We look at capital and clearly our board is involved in any discussions about buyback and authorization. We feel like we have sufficient authorization to get us through the fourth quarter. We will talk to the board in the early part of 2025 about further authorization. We don't see any short-term catalysts to bring the CET1 ratio below 11. What we've said is we're looking at the economy and how things play out. And I would get circled back in some ways to what I said earlier, that customers have uncertainty about soft landing and interest rates and the election process. That clarity they get will also be clarifying to us. And the more certain we get about continued strength and improvement in credit performance and things like that, the more comfortable we get as we approach a soft landing to bring that ratio down. We do think that the CET1 ratio is above where we need it through the cycle. So we will look at that probably it'll be, sometime in the early part of 2025 before we really start to reassess it in a meaningful way. The second part of that is regulatory hurdles, particularly around becoming an LFI of $100 billion. We are doing a fair amount of work in making investments in the near-term to prepare for crossing that threshold is we look at it, we think we've got a number of years to do that work and we will feather those costs in overtime and build those capabilities, that infrastructure. But given the markets that we're in, given the strong client relationships that we have, we do believe that leaning forward and growing the balance sheet is an important part of it. And it's not a matter of if we hit the $100 billion threshold, it's really a matter of when. And that we are going to build the preparatory infrastructure to get it in place, so that it won't be an obstacle to our ability to continue to grow on the other side of that. I also think that in the event that you have a more difficult landing, building that infrastructure gives us the opportunity to be opportunistic, if they're strong deposit base that we have the opportunity to pick up in a more difficult financial set of circumstances that you have more trouble with institutions.
Chris McGratty, Analyst
Great. Thank you very much.
Bryan Jordan, CEO
Sure thing.
Operator, Operator
Thank you very much. Our next question comes from Timur Braziler of Wells Fargo. Timur, your line is now open.
Timur Braziler, Analyst
Hi, good morning. Maybe one for Hope, just following up on some of your comments relating to mortgage outlook for next year. I guess what's the rate environment need to look like for mortgage to get back to some of the type of performance that maybe you were implying on the upside?
Hope Dmuchowski, CFO
Our overall belief is that we have to be at a sub-6% mortgage rate. How that will play out is a little bit uncertain. This last 50 basis point cut barely touched mortgage rates as the board, as the curve became less inverted and actually, you know, had a steepened curve for a little while there. What I think it will be the telling thing and the thing that we continue to see is new home purchases, so not refi, the first-time home purchases, second homes has been historically low for the last two years. So a lot of the data we're seeing from the mortgage industry says we have the highest supply we've seen and that they think buyers will start getting back in. So I think it's going to be a combination of new purchases when we get under a 6%, as well as a refi for the people that are in their fixed rate part of their ARM.
Timur Braziler, Analyst
Okay. And then maybe just on the revenue guide, it implies a pretty wide range of outcomes in the fourth quarter. I'm just wondering where the greater variability is. Is it on the NII side? Is it on the fee side? And then maybe more specifically on fees, you called out some of the other fees this quarter as being one-time in nature. Can you maybe give us a starting run rate for 4Q kind of ex, some of those one-time fees?
Hope Dmuchowski, CFO
Sure. I want to clarify that we did not plan to alter our forecast. The adjustments we considered were minor; for instance, instead of a flat range, we might have mentioned a figure like 0.33. The goal is certainly not to revise our revenue expectations for the fourth quarter or the entire year. We anticipate there could be more growth in fee income and potential declines in net interest income. This is related to the forward interest rate projections, which suggest 75 basis points of cuts over two consecutive months. Consequently, we expect net interest income to decrease while fee income should increase. If cuts do not occur, net interest income may perform better, and fee income would likely resemble this quarter's results. It is challenging to predict outcomes given that the current market is forecasting 75 basis points, yet most in the market expect no more than 25 basis points.
Timur Braziler, Analyst
Okay. And then just the one-timers this quarter for fees. Is that the full increase in the other line?
Hope Dmuchowski, CFO
Also, the other items, it always bounces around. BOLI is something that, you know, it just comes when it comes and you don't know. So we often have to comment on BOLI since we do run a portfolio of that moving quarter-to-quarter. You know, I can't really predict what's going to happen next quarter. Obviously, you can figure out that those dividends pay in a quarter or years or the more that we're borrowing the more we get those dividends. I don't expect it to be materially up or down, if I'm honest. It tends to go about in a $5 million range quarter-to-quarter.
Timur Braziler, Analyst
Great. And if I can sneak one more question in. So the comment on commercial real estate that the funding schedule has kind of stabilized out, I'm just wondering, as we do get rate cuts as paydowns start to accelerate, is there any way you can quantify maybe what historical paydowns have looked like, what they've looked like more recently, and what type of headwind that might be to broader loan growth?
Hope Dmuchowski, CFO
You're talking about paydowns on MPLs?
Bryan Jordan, CEO
Yes, just commercial real estate.
Hope Dmuchowski, CFO
Okay, so I thought you were talking about the ones that we mentioned that were in non-performing that we're still paying. Thomas Hung: Yes, I think this is Thomas Hung here. I think that's going to be a little hot to predict right now because for us, a lot of our commercial real estate is way heavier on the construction side than probably a lot of our peers. And so in terms of paydowns, it'll really come down to the financing market, how much appetite there is for that pump takeout financing. That’s what will really drive the level of pay down that we see.
Timur Braziler, Analyst
Okay. Thank you.
Operator, Operator
Thank you very much. Our next question comes from Christopher Marinac of J. Montgomery Scott. Christopher, your line is now open.
Christopher Marinac, Analyst
Thanks. Good morning. I had a follow-up credit question as it relates to the shared national credit exam this year. Is there anything that could fall out on that in terms of either inflows of MPAs or more importantly, charge-offs as we move into Q4 and Q1?
Thomas Hung, Chief Credit Officer
Yes, hi, this is Thomas Hung again. I don't expect so. Overall, shared national credits, it's run a little under $8 billion for us overall. And if you look at kind of the relative performance of our SNCC books through our CNI books, the metrics are all generally about the same. In line, there's not really a material difference in terms of classified assets, NPLs, or year-to-date net charge-offs and that’s my expectation is that SNCCs should continue to perform about the same as the overall book. We haven't really seen a variance.
Christopher Marinac, Analyst
Great. Thank you for that. And Hope, just a quick one for you. I know you broke out a lot of information on the other expense numbers this morning. Is there anything in there for operational losses or customer fraud, things of that nature that would stand out?
Hope Dmuchowski, CFO
There's nothing that stands out now. As I said, it was a bunch of small items that added up to $5 million. We did not have significant fraud change quarter-over-quarter or any large one-time gains on any sales of property or things like that.
Christopher Marinac, Analyst
Okay, great. Thank you very much.
Bryan Jordan, CEO
Thanks, Chris.
Operator, Operator
Thank you very much. We currently have no further questions, so I'd like to hand back to Bryan Jordan, CEO, for any closing remarks.
Bryan Jordan, CEO
Thank you, Carly. Thank you all for joining our call this morning. We appreciate your time and your interest. Please follow-up with any additional questions that you may have. Hope everyone has a great day.
Operator, Operator
As we conclude today's call, we thank everyone for joining. You may now disconnect your lines.