On Wednesday, First Horizon (NYSE:FHN) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Full Transcript
OPERATOR
Hello everyone and thank you for joining the First Horizon first quarter 2026 earnings conference call. My name is Lucy and I’ll be coordinating the call today. During the presentation, you can register a question by pressing STAR followed by one on your telephone keypad. If you change your mind, please press STAR followed by two to remove yourself from the question queue. It is now my pleasure to hand over to your host, Tyler Craft, Head of Investor Relations to begin. Please go ahead.
Tyler Craft
Thank you. Lucy Good morning. Welcome to our first quarter 2026 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, after which we’ll be happy to take your questions. We’re also pleased to have our Chief Credit Officer Thomas Hahn 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 and to other non GAAP measures. Therefore, it’s important for you to review the GAAP information in our earnings release pages 2 and 3 of our presentation and the non GAAP reconciliation at the end 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 hand it over to Brian.
Brian Jordan
Thank you Tyler Good morning everyone. We started 2026 with strong momentum. In the first quarter we delivered our third straight quarter of 15% or greater adjusted ROTC in line with our expectations, fueled by strong C and I client growth and relationship focused client activity across our markets. Through our differentiated business model, we continue to successfully execute by providing tailored solutions to meet client needs and turning insights into profitable outcomes. We’re focused on building true client relationships, staying disciplined on price and structure, and supporting our clients with the full capabilities of our franchise. Our diversified business model with countercyclical businesses positions us well as the operating environment evolves. I’ll now turn the call over to HOPE to walk through our first quarter results. I’ll provide some closing comments at the end of the call.
Hope Domchowski
Hope thank you Brian Good morning everyone and thank you for joining us today. Over the last year we have talked a lot about our efforts to improve the profitability of the balance sheet and how we laid out our strategy for the entire organization. That work is evidenced in our results this quarter which includes a return on average assets of 1.30%, up 19 basis points from first quarter last year. Amidst rate decreases over the last year we have grown net interest income 6% year over year which outpaced our loan portfolio growth of 3% in that same time. Demonstrating our continued focus on profitable growth. We started 2026 with great momentum including earnings per share of 53 cents which is an increase of 11 cents over the first quarter. 2025 excluding loans to mortgage companies, our C and I portfolio grew 624 million in the quarter compared to having approximately flat growth in the first quarter of 2025. Our performance also includes 8% improvement in adjusted pre provision net revenue compared to the first quarter of 2025. Our adjusted ROTC of 15.1% increased over 200 basis points year over year. Starting on Slide 7, we walk through our net interest income and margin performance in the first quarter which saw NII consistent with the fourth quarter absent day count impacts. Our margin expanded by 1 basis point on continued strong performance in managing deposit costs following the Fed’s last rate cut in December 2025. While our variable loan portfolio experienced yield declines in the quarter, our deposit pricing discipline offset this impact. On slide 8, we cover details around our deposit performance in the quarter period. End balances decreased by 1 billion compared to prior quarter driven primarily by reductions in brokered deposits. The average rate paid on interest bearing deposits decreased to 2.28% coming down from the fourth quarter average of 2.53%. We maintain a cumulative deposit beta of 69% since rates started to fall in September 2024. Our interest bearing spot rate ended the quarter at 2.27%. On slide 9 we cover our quarterly loan growth period. End loans increased slightly by 221 million from the prior quarter. This quarter’s results, which include an impressive start to the year for our core C and I business which saw 624 million in loan balance growth. This builds on momentum we saw in the second half of 2025 and supported by continued strong pipelines in 2026. Loans to mortgage companies experienced typical seasonality in the first quarter and ended down $62 million versus year end. This business continues to have momentum as a source of strength for our company. Commercial real estate continues to be a headwind for loan balance growth as stabilized loans move to permanent markets and non past loan resolutions reduce balances Encouragingly, our CRE pipelines are strong and present notable opportunities to stabilize CRE balances in the future. I will also note that our consumer loan portfolio declined $198 million in the quarter which is in line with normal fluctuations. Our goal for consumer lending is to focus on relationship expansion and profitability. While competition in the market is strong, commercial loan spreads remain generally in the mid-100s to upper 200 base points. Turning to slide 10, we detail our fee income performance for the quarter which decreased 12 million from the prior quarter excluding deferred compensation and is up 13 million year over year. The largest decreases for fee income comes from our service charges and fee lines which was driven by the impact of day count and normal seasonality and other service charges like treasury management fees, interchange income and NSF fees and by quarter over quarter fluctuations in our equipment finance business. We saw a slight quarter over quarter decline in fixed income revenues due to the decrease in ADR to 742,000, though this is still a 27% increase year over year. We saw slightly lower ADRs at quarter end as market volatility increased. On slide 11 we cover our adjusted expenses that excluding deferred compensation decreased 32 million from prior quarter. Personnel expenses excluding deferred comp decreased by 10 million from last quarter driven by an 8 million decline in incentives and commissions which followed higher incentive accruals last quarter. Quarter outside services decreased by 26 million which includes reduced expenses related to technology initiatives from last quarter and decreased marketing expenses in the quarter. Turning to credit on slide 12, net charge offs decreased by 1 million to 29 million. Our net charge off ratio of 18 basis points remains in line with our expectations. We recorded a provision for credit losses of 15 million in the quarter and our ACL to loans ratio declined slightly to 1.28%. This was driven by mix change in the portfolio. On slide 13 we ended the quarter with a CET1 of 10.53% driven by buyback activity and loan growth in the quarter. During the quarter we bought back approximately $230 million of common shares. We have approximately 765 million in our current board authorization remaining. During the quarter we successfully issued 400 million of Series H preferred stock which drove the 44 basis point increase to our Tier 1 capital ratio of 11.95%. Our tangible book value per share is $14.34 which is up 9% year over year which includes buybacks of 766 million during that period and an increase to our dividend. I’LL wrap up on slide 15. I am proud of the momentum we have to start 2026. We continue to maintain our full year outlook and updated our near term CET1 target to 10.5% during the first quarter. For the third consecutive quarter we achieved 15% plus adjusted ROTC reflecting our focused execution on our business priorities. We continue focusing on deepening our client relationships, fully delivering our products and services across our excellent footprint, and enhancing our capabilities to create value for clients and shareholders. All of this moves us towards achieving the 100 million plus PPNR we noted last year as our opportunity in the next couple of years. We made initial progress on this objective last year and continue doing so in 2026. Our revenue expectations reflect continued capture of this profitability throughout the year. Expense discipline and underwriting consistency continue to be central to our company and disciplined capital deployment continues moving us towards our intermediate CET1 targets. And with that I’ll turn it back
Brian Jordan
over to Brian thank you Hope on the whole, we feel very good about how we started the year. We’re seeing strong client activity in our commercial pipelines as well as business owners. Planning for growth Relationship banking remains our priority, focusing on primary relationships, deepening treasury and wealth management, and making sure our solutions match client needs. In the first quarter we saw strong production, essentially evenly balanced between our regional banking and specialty verticals. C and I loan commitments reflected both deepening of existing relationships and new client acquisitions, and our CRE pipelines are as strong as they’ve been in years. We manage our business with three priorities, safety and soundness, profitability and growth, which is evident in our results. Again this quarter. We’re not playing solitaire. Competition is active, but our associates are protecting our base and winning with exceptional service and value. We expect that discipline, along with healthy CNI demand and the strength of our markets to drive revenue growth. As the year progresses. Our diversified model gives us a balance as the macro and geopolitical backdrop evolves. If the rate path is choppy or sentiment shifts, our countercyclical businesses are positioned to contribute. If confidence builds. Our core banking engine benefits from client growth, credit remains in line with our expectations and we continue to approach opportunities selectively. On price and structure, our footprint is a real advantage. The Southeast and Texas remain growth corridors. We deliver big bank capabilities with the personalized touch of a community bank across our entire footprint. That combination allows us to serve clients locally while bringing the resources of the entire bank when they need them. We remain focused on expense discipline while strategically investing in talent, technology and tools that make our associates more effective for their clients. We’ll stay thoughtful on capital management and we’ll be opportunistic with share repurchases. While the macroeconomic environment changes and creates new headwinds and uncertainties, I remain optimistic about our outlook for the year. Our job is to stack one good quarter on top of the next by effectively serving our clients and communities. Thank you to our associates for their hard work and to our clients and shareholders for their continued confidence and First Horizon. Lucy with that, we can now open it up for questions.
OPERATOR
Thank you, Brian. 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 to remove yourself from the question queue. When preparing to ask your question, please ensure your device is unmuted locally. The first question today is from John Astrom of RBC Capital Markets.
John Astrom
Your line is now open. Please go ahead.
Brian Jordan
Hey, thanks. Good morning. Good morning, John. Brian, question for you. You touched on some of this, but you seem a little more optimistic on the lending environment and wondering if you could touch a little bit more on the pipelines in CNI and whether or not you’ve seen any impact on pipelines from the macro uncertainty. Yes, happy to. John. The pipelines in CNI continue to be very, very good. And while the short term effects of the disturbance or the trouble in the Middle east has people asking questions, it really has not had a significant downward impact on CI pipelines at this point. And in fact, we still see what is a continuation of what we saw building in 25, which is business owners and leaders looking to grow, invest and build. And so that has been positive. In addition, I mentioned, and I think Hope did as well, that CRE pipelines have continued to build. And as you know, that’s a business for us, that loans originate and fund up over a 3, 4, 5 year period and then pay off all at once. And we haven’t seen pipelines this Strong since the 22, 21, 22 timeframe when rates were essentially zero. So those pipelines are building. So we’re very optimistic about the outlook for lending growth over the course of this year. You will see in our results and it’s somewhat evident in the way that we have transformed our balance sheet over the last 18 months. We have continued to focus on profitable growth. We’ve repositioned the business to align around our consolidated strategy and with that we’re seeing an improvement in the profitability of the lending that we’re doing. We’re focused on very much on relationship lending Things that are not relationship oriented we’re being very disciplined about. And so we look at the year and are very optimistic. I said in my closing comments that the market is still very competitive and without a doubt the markets are still very competitive. Very good loan transactions have a lot of competition for those. And our bankers are doing a very nice job of, of not only getting our fair share, but maybe a little bit more.
John Astrom
Okay, that’s helpful. And then maybe one more on lending, I think hope usually you handle this one. But on the loans to mortgage companies you’re, you know, despite the fact it’s been maybe a choppy environment, you’re still up like 35% year over year. Do you expect a typical seasonal bounce in warehouse balances and since it’s a bigger category for you, what, you know what, maybe you can size it for us and give us an idea of what we could see in Q2 and Q3.
Hope Domchowski
Thanks, John. I will say we do expect to see a seasonal increase in Q2. We’re already starting to see some of that fund up at the end of March and beginning to April now. Whether it’s typical, I can’t say what typical is anymore. Last two years, John, have been some of the lowest mortgage origination years in the last 20 years. And I think the way rates have been going the first part of the year, we’re probably going to see a low mortgage origination and a low refinance rate. But do expect that it will Trend consistently with Q1 to Q2 and Q3 of the last two years we have picked up market share and that has shown and continued to show in our strong loans to mortgage company balances even at the end of Q4 and Q1. You know, I’ve said before, I think one of the biggest upsides to our guidance is if we saw a refi wave. I think it gets less likely the further that 30 year rate goes up. But that is the back half of the year. I think that’s still a possibility for us, although that’s not built into our outlook today.
John Astrom
Yep. Okay. All right, fair enough. Thank you very much. Appreciate it.
OPERATOR
Thank you. Thank you. The next question comes from Michael Rose of Raymond James.
Michael Rose
Your line is now open. Please go ahead. Hey, good morning guys. Thanks for taking my questions. Maybe I’ll just take the other side of the balance sheet from John. Just on deposit competition, I noticed that the interest bearing spot rate was 227 versus the full quarter average of 228. Can you just talk to us about deposit competition? It seems like anecdotally over the past month, it’s definitely increased. So just wanted to get your kind of lay of the land and then what we can expect in terms of what you’ve modeled for race scenarios for the year and what is kind of a more optimal environment for deposit pricing at this point.
Hope Domchowski
Thanks for the question. I think this year is shaping up to look a lot like last year in the seasonality of deposit rates. As we expected more rate cuts, people brought in our competitors brought in their term and their rate guarantee. We’re starting to see that shift to longer guarantees and higher rates for longer in competition. And so we, as you saw, our spot rate is still below our average and we’re generally there. I do think that deposit costs will slightly Trend up in Q2 and Q3 if we don’t see a rate cut. Additionally, I mentioned in my expense comments that marketing was down in Q1. We tend to do a lot more new to bank acquisitions in Q2. Q2. It’s the time that consumers start thinking about moving their checking account, savings accounts, they’ve gotten tax refunds. And so I do think with that new to bank promotion out there, we’ll see a little bit of uptake and then we’ll walk it back just like we have the last two years. Okay, great. Thanks. Hope perfect. Really appreciate that. And then obviously there’s a lot of focus just separately on private credit and things like that. Appreciate some of the color that was in the deck. Looks like generally credit appears to be good. So maybe for Tom, anything you’re seeing on the credit front. And then I noticed that you guys didn’t put any commentary on criticizing classified this quarter. Just any sort of updates there. Thanks, guys.
Michael Rose
Hey Michael, good morning. Happy to address those. Overall, I remain pleased with our very consistent credit performance, headlined by the 18 basis points net charge off, which is slightly below the median of the range. You know, that said, there’s always things that we want to watch carefully. I would say for me in particular, I’m still carefully watching anything that is most closely tied to consumer discretionary spending, especially with recent increases in energy prices. That certainly hits discretionary spending. So sectors like trucking, auto restaurants, you know, those are things that I want to watch more closely. But to your comment on private credit, that is something that we’re certainly monitoring as well. But I would point out we have very minimal exposure to that segment in terms of direct exposure to private credit. It’s less than 1% of our loan book and substantially all of that is backed by the end collateral is either tangible assets like real estate inventory or equipment or accounts receivable. And there’s very, very little enterprise value lending exposure.
Brian Jordan
Very helpful. Thanks for taking my questions. I’ll step back. Thank you, Michael.
OPERATOR
Thank you. The next question comes from Jarrod Shaw of Barclays.
Jarrod Shaw
Your line is now open. Please go ahead. Hey, good morning. You know, I think if we could look at the hundred million of that sort of incremental ppnr, what are any of the assumptions behind that for cost savings and or potentially slower hiring driven by AI implementation? And if there’s nothing including there is that I would say. I was just gonna say if there’s not a thing in there, is AI a positive or a negative to that for that 100 million?
Hope Domchowski
Yes, Jared, There is nothing in there about expenses. That is all deepening relationships and about revenue. You know, in my prepared remarks we talked about 6% more NII year over year with 3% balance growth in a decreasing rate environment. So you can see the profitability of the existing relationships at renewal or new to bank getting, you know, additionally creating more value for us. So there are no expenses as far as AI. You know, we do have a flat expense outlook excluding countercyclical commissions. We’ve said that that is coming from the technology investments we’ve made over the years and we continue to make so that we can scale revenue without having to scale the back office. So less about cost saves right now in our outlook and more about able to scale with bankers, invest in new hires, grow our market share without having to add all of that support infrastructure.
Jarrod Shaw
Great, thank you. And then on the capital side, you know, I guess what would cause you to lower that 10.5% target? You know, you did some work on the capital stack this quarter. You know, I guess what, what could cause you to feel comfortable with with lower 10, lower than 10.5%.
Brian Jordan
Yeah, I’ll take that. I think right now we’re comfortable with the 10 and a half. As I’ve said in the past, this is something that we talk with our board continuously about and we will continue to do that. I think given that the near term uncertainty about what’s happening with respect to oil prices and what that means to inflation and the economy, it’s probably not a bad idea to see a few more cards here. Overall, we’re very optimistic that the economy is still in a pretty good place. That over the next several weeks to months we’ll start to see some of this uncertainty settle down. And I think at that point we’ll continue to evaluate whether we bring those ratios down. As we have said, we have a bias. We believe that we can operate the organization on a lower CET1 ratio. A lower CET1 ratio than the 10.5% and over time we will get there. Great. Thank you. Sure thing.
OPERATOR
Thank you. The next question comes from Casey Hare of Autonomous.
Casey Hare
Your line is now open. Please go ahead. Yeah, great. Thanks. Good morning guys. Wanted to revisit the NII outlook. Hope you mentioned that deposit costs were going to is going to feel some pressure going forward. I was wondering if you could shed some light on loan yields and bond yields given the fixed rate asset repricing benefits and just overall what does that
Hope Domchowski
do for n. Thanks for the question, Casey. On the deposit side, when I said it was a slight tick up, I don’t expect that to put a ton of pressure on NIM or nii. It’s really the mix that you bring new to bank in and so I see that in the low to mid single digits and that’s manageable for us in our current outlook. As far as bond prices and the outlook there, it’s really hard to predict what’s going to happen. As Brian mentioned earlier in his comments, we saw a lot of volatility that impacted FHN Financial at the end of March and April has started off slow. We have a slide in the back of our deck about where the market is for FHN Financial today. And we have it in red and green and all but one factor is in red for them as of today. That does not mean it couldn’t change going into the back half of the year. But we do see some risk there. But we don’t see any risk to our outlook of our guidance on all revenue. So if NII were to come with rate cuts, so we saw some stability, we’d see FHF financial pickup, maybe some additional refi. And so we feel that we are really balanced in the back half of the year to hit that revenue guide.
Brian Jordan
Gotcha. Okay. I’m trying to. Casey, I’m sorry, this is Brian. I’m trying to pull up. You asked about fixed asset repricing. I think we have something like billion dollars or so of investment securities. A little more than that. The reprices over the course of this year and on the fixed rate loan, whether it’s a long term ARM or et cetera, it’s a little over 5 billion that reprices in 2026. So in total we’ve got about 6 to 7 billion dollars of assets that will reprice principally at higher rates.
Casey Hare
Yeah, no, I see that on the slide deck on slide seven. I was just wondering if the asset yields could offset some of the modest deposit pressure that you guys are feeling to keep the NIM stable.
Brian Jordan
Well, I think clearly the fixed asset repricing will have fixed rate asset repricing will have some impact. But Hoax alluded to it a couple of different ways. We’re working very profitable to improve the profitability of the balance sheet. And so there is some offset there as well. And we talked in the past, for example our market investor cree we’ve improved the yield significantly in that business on a year over year basis. So we think we have lots of levers that allow us to continue to navigate through the sort of deposit trends that are occurring in the market in the near term. And as Hope has said, we feel very good about the balance in the balance sheet over the long term that we can navigate changing interest rate environments with as much or more stability than most. Great.
Casey Hare
Just one more on the credit side of things. So the ACL ratio has come down nicely. You got some mix shift and some credit resolution. I know it’s difficult with the CECL modeling but all else equal, like what is a good landing spot for the ACL ratio versus that 128 level?
Tom
Yeah, it’s hard to say because obviously things evolve on a quarter to quarter basis and depending on what happens with loan growth, depending on what happens with grade migration and and classified resolutions, all of that can change the result quarter to quarter. But we feel like we’re very adequately reserved at this current time. At our current acl that’s approximately seven times our average net charge off over the last two years. And so I believe where we’re currently at is a very well reserved position relative to our very steady net charge off performance.
Hope Domchowski
What I’ll add to that, and I’ve said this in prior quarters, two or three basis points in the CECL model is not material. I mean we’ve gone up, if you look at the last six quarters, we’ve gone, you know, down three, one quarter, up two. I mean that’s really essentially flat in a coverage with a portfolio that moves as much as ours does.
OPERATOR
Thank you. The next question comes from Bernard von Gazicki of Deutsche Bank.
Bernard von Gazicki
Your line is now open. Please go ahead.
Brian Jordan
Hi guys. Good morning. On the 100 million plus PPNR opportunity, you know, you highlighted some progress made since mid 2025 on slide 15 of the deck. Could you just walk us through these examples on the CRE pricing? You know the Deeper relationships between regional and specialty, the treasury management and wealth management initiatives.
Hope Domchowski
Absolutely. I’ll start with that is in no way a holistic list of all the things. But as we keep getting asked what are some proof points that you can show us? What can you point to? We put a couple on slide 15, but CRE pricing is one that Brian has talked a lot about as we’ve been speaking with investors at conferences. Which is the benefit of having a specialty model and a market centric model. We have a strong pro CREE business that is long tenured bankers and are continuing focusing on exactly what’s happening in the CREE industry across the country, by sector, by subsector. And about a year and a half ago we brought that specialty to every deal with a market in market banker who is doing a CREE deal. And we’ve been able to see additional fee income come out of that partnership where they were able to get origination fees or unused line fees as well as increased margins as the appetite for CREE in our industry really shrunk over the last three years. So those spreads increased. It’s really the benefit of a market centric model with a specialty partnership. You’re bringing the best of both to the client and we’ve gotten in addition to the financial benefits. We continue to hear from our clients how much they appreciate that having somebody who can talk to exactly what’s happening in the industry alongside a banker that knows exactly what’s happening in the market. It’s been a great enhancement for us and we have that in a lot of places. We’ve highlighted cree, but we have it in franchise finance, abl, equipment finance. Just that partnership is really paying additional dividends for us and is a big part of our 100 million pp and r opportunity that we’re already realizing.
Brian Jordan
This is something that we have built into our expectations for 2026. And it’s really hard to highlight how much work goes into this. We have hundreds, thousands of bankers that are working on aspects of this every day. And it really comes from the ability that our teams have created for the organization to see with a lot of granularity, relationships and understanding the nature of relationships, interconnectedness of deposit or fee based services and lending relationships. And those tools have helped us navigate opportunities for bringing new products and capabilities to customer relationships, making sure where we’ve underpriced a spread here or there that we’re asking for appropriate spread on the credit or the treasury service or the wealth management or whatever it happens to be. It’s something that is a work in progress. It’s not completed in 25 or 26. It will continue, but it’s part of the discipline that we believe that the organization is oriented around, which is building long, deep, broad, long term relationships and creating win win solutions for our customers that essentially create partnerships that are, as I said, win win for both sides.
Tom
Thanks for that. Color. Just to follow up on loan growth, you know, obviously you reiterated the expectations for the mid single digit growth, but just wondering, are contributors changing? You know, maybe, you know, stronger CNI than originally expected, maybe a bit less cre. You know, you noted the headwinds but pipelines remain strong. Just thoughts on if CRE will still be a positive contributor for loan growth this year.
Brian Jordan
Yeah, I’m happy to tackle that one. I’ll start on the CNI side where you saw very strong continued momentum in Q1. I think what I’m saying most pleased about in those results is how evenly spread that is between both our regional bank regions as well as our specialty lines of businesses. We saw momentum on both sides. On the CRE side. We’ve talked about the headwinds in terms of project starts over the last several years going into the perm market. We started to really see that pace of payoffs decelerate and we believe with a very, very strong pipeline, especially now compared to a year ago, we should start to see some very good net growth on the CRE side later this year as well. So overall there’s very good momentum up and down the balance sheet.
OPERATOR
Great. Thank you. Thank you.
Andrew Leishner
The next question comes from Chris McGrathy of KBW. Your line is now open. Please go ahead. Hey, how’s it going? This is Andrew Leishner on for Chris McGrathy. I know you touched on it a little bit earlier on. Hey, how’s it going? I know you touched on it a little bit on Casey’s question earlier, but just on the 3 to 7% revenue guide. Can you maybe walk us through the scenarios or assumptions that would get us to the higher end or lower end of that range?
Hope Domchowski
Thanks. As I said, I think we’re pretty balanced. The question is not how do we get to the higher or lower end of the range, it’s does it come from fee income and countercyclicals or does it come from NI and higher loan growth? What I have mentioned is to get to the high end or exceed. Not to say it’s our only, but it’s really we have no pickup in mortgage three. Five built into this outlook. As I said earlier, I don’t expect it in the near term as 30 year rates keep moving up and there’s uncertainty of the consumer. But that’s the one item not built in here. But you know, we’re 3, we’re starting the year with 3% loan growth year over year and you know, 6.5% revenue growth year over year. So we have a strong start to that momentum.
Brian Jordan
Yeah, I think the other driver is likely to be an acceleration of economic growth and. Excuse me, to the extent that we look at the economy today, we feel like we’re in a pretty good place. The economy is growing pretty steadily, but it’s probably in that 2.5 to 3% area. And I would say given what we know today, there’s probably greater downside risk than there is upside opportunity. If that gets resolved and the pace of growth in the economy picks up, loan growth will naturally pick up and we could get to the higher end of that range. So it’s really going to be a combination of how the interest rates play out in connection with some of our businesses. Then more importantly, what does that mean in terms of economic growth in the economy overall?
Hope Domchowski
Great, thank you. And on the expense outlook, analyzing this quarter gets you a little lower than flat expenses. So outside of the lower marketing in the quarter, is this a good run rate from here or were there some other items that were lower than usual? I know you completed that technology project reference in the release, but any color here would be great. Thanks. Yeah, there’ll be some movement throughout the quarters as it relates to marketing spend. You know, we always have a issue with the way we do our income statement where marketing spend hits first and then the cash offers hits and other. And so you’ll see some volatility there. But you know, the other one is technology projects. They can vary quarter to quarter. At the end of the year we had a lot of projects complete and they went from the expense part of their project to capitalization, which is more stable. But I do think, you know, to your point, it’s a good glide path. And on average we do expect to be flat year over year with some variability quarter to quarter.
Brian Jordan
One of the things that I’m excited about on the expense side is we’ve had very good success hiring new revenue producers. And if you look at just the stream of press releases over the last several weeks, you’ll see that we’re having very good success recruiting bankers all across our franchise. And I think the point I’m really trying to make is not only are we bringing good people into the organization, we’re controlling costs while still continuing to invest in growth and driving the business forward. So I think that combination is very positive for the long term.
Andrew Leishner
Great. Thank you so much for the color.
OPERATOR
Thank you.
Ben Gerlinger
Thank you. And the next question comes from Ben Gerlinger of Citi. Your line is now open. Please go ahead. Hi, good morning.
Brian Jordan
I know you talked through CET1 and the appetite we could potentially go lower, but as of now it’s ten and a half and then kind of with the outlook for loan pipelines and sounds pretty robust with that respect. When we look at the seasonality component, like your, your balance sheet balloons a little bit with mortgage. I get that mortgage is a little bit soft, but like how should we think about buybacks over the next couple quarters? Given you’re fairly close to the ten and a half, is it more opportunistic or. Because the capital needs to go to growth. But how do we just think about the next couple quarters here? Yeah, we will be opportunistic as we always are. And we have said that to the extent that mortgage warehouse lending pushes down on a temporary basis our CET1 ratio, we are not uncomfortable with that. Our mortgage warehouse lending business has exceptionally low credit losses. Historically. We see it as more of an operational risk and our team does, I think a very good job of controlling risk in that business. So to the extent that that pushes us down a little bit here and there, that does not cause us concern in the near term. So against that backdrop, we will continue to be opportunistic to take the excess capital that we believe we have and that we generate and use that in share repurchases or repatriation of capital to our shareholders. Yeah.
Tom
And just to add on to Brian’s comments, it’s noted in our presentation, over the last 10 years our mortgage warehouse business has averaged about 1 basis points annual net charge offs.
Ben Gerlinger
Yeah, no, that’s great. I wasn’t worried about the credit components more so just the, the usage of capital over next. But that is a great answer. Appreciate the time, guys. That’s all I had. Thanks, Pam.
OPERATOR
Thank you.
Timo Bravilla
The next question comes from Timo Bravilla of ubs. Your line is now open. Please go ahead. Hi, good morning.
Hope Domchowski
Looking at the expense guide relative to revenue. The revenue the guide is still pretty wide in range versus a pretty tight expectation on expenses. I’m just wondering how agnostic the expense base is towards the different ranges of the revenue guide and kind of what’s embedded as the baseline now for the flat year on year expense.
Timo Bravilla
Yeah, it is agnostic to the revenue guide with the exception of the counter cyclical businesses. If we hit the higher end of the range and more of it comes year over year from the countercyclical businesses, you can assume a 60% commission on that, that amount. But what’s built in is flat counter cyclical revenue year over year to that flat guidance. But I don’t see. You know, Brian talked about new hires. New hires were built into our expense guide. Branches were built into our new expense guide. A consolidation into a new hub in Charlotte’s. In our expense Guide guide, all of the investments are already in there and we believe it’s flat. You talked about the range of the guide. Every CFO will tell you it’s easier to control expenses than it is revenue. And so the range for the guide is really the uncertainty of the economy that we’re looking at right now. Brian mentioned, you know, earlier, could we see the economy start to rebound with consumer confidence and more spending and loan growth. That is what’s driving our large range, not our internal understanding of where we think our businesses are going. It’s just really hard right now, Tim, or as you know, to figure out what type of economy we’re going to be lending into and you know, what’s going to happen in the wealth business over the next three quarters. Great, thanks. And then as a follow up, there’s some increased conjecture maybe this week surrounding M and A, all the volatility that’s going on in the market market right now. Could you just give us a reminder on both sides of M and A kind of your updated standard?
Brian Jordan
Yeah, nothing’s changed with respect to M and A. As we said, our number one priority is continuing to focus on the profitability of our business and driving the benefits that we can realize by investing in our core franchise. And we have said that opportunistically we had the opportunity, we felt better about our ability to do fill in in our existing footprint. We have as always taken an approach that we’re going to maximize return on capital for our shareholders and we’re going to evaluate any opportunity that presents itself. But nothing has changed in terms of our thinking around M and A.
Timo Bravilla
Great, thank you.
OPERATOR
Thank you. The next question comes from Anthony Elian of JP Morgan.
Anthony Elian
Your line is now open. Please go ahead. Hi everyone. Hope to put a finer point on Nim. Last quarter you pointed to a range in the mid three fours, but you’ve clearly outperformed that for a couple quarters. Now, just given the earlier comments on loan yields, deposit costs ticking up slightly. How Are you thinking about NIM here?
Hope Domchowski
Thank you. Yep. The MIP4 comment was about stabilization. When we saw, you know, a flat interest rate environment, more consistent spreads near term, we do expect to be in the high 3 4s, you know, within a few basis points of where we’re at right now. Thank you. And then on capital, given the recent proposals, have you quantified any of the estimated impact or benefits you’d see from the recent proposals? Thank you.
Anthony Elian
Thanks, Anthony. We have calculated and every consultant out there has sent us a deck and wants to meet with us on how to optimize it. It’s really clear that it is positive for everybody. It will definitely be a pickup for us, especially in some of the proposals for mortgage, some of the proposals for our fixed income business inventory. But we have not put a fine pen to say that this is exactly what it is. There’s still a lot of uncertainties out there in the model as well as how do we react to some of those. How do you change, you know, term of a loan, for example, gives you different, different capital treatment, but net positive for sure.
OPERATOR
Thank you.
Christopher Marinac
Thank you. The next question comes from Christopher Marinac of Breen Capital Research.
Tom
Your line is now open. Please go ahead. Thanks. Good morning, Tom.
Hope Domchowski
Just wanted to ask about the reserve as it pertains to both Mortgage Warehouse and any other ndfi. Should we see that grow over time or how do you think about that?
Tom
Yeah, Mortgage Warehouse and NDFI is all part of our Ann ACL reserves for the CNI business. I don’t have it broken in front of me in terms of bispecific lines of business, but overall, as you saw, we did add a little bit to our C and I reserves this quarter. That’s more a reflection of some overall economic uncertainty around the conflict in the Middle east as well as what how that is impacting discretionary consumer spend. Overall, I would say we’re, as I mentioned earlier, I believe we’re well reserved from both the CNI basis as well as a overall ACL basis specific to ndfi. I think what I would point out is it may be helpful to break down the components a bit. From the Coal Report, you’ll see we have a total of $8.6 billion of total NDFI. However, from there about 55% of the mortgage warehouse business that we talked about with very low charge offs and very short tenure with an average dwell of under 20 days. And so of the remaining 3.9 billion of non mortgage warehouse NDFI, about a third of that is categories that are NDFI in the CALL report that are really more akin to traditional CNI structuring and risk. And so therefore what’s left, the remaining 2/3 is really only about 4, 4% of our overall loan book and the performance in that business, you know, there’s certainly some pockets with some elevated CNCs we have to watch, as you would expect. But the overall performance of that remaining book is actually not too dissimilar from our overall CNI book. In terms of the NPLs are actually slightly lower relative overall book net charge off is slightly higher that it’s all very close to being in line. And so from my position, I don’t think there’s any specific reason to have outsized results tied to our NDFI book.
Hope Domchowski
On your comment about Mortgage Warehouse and ndfi, I want to point out for us, the way we do Mortgage Warehouse, we don’t really consider it ndfi, although the call report does. We hold the underlying collateral. We take each note. At closing, we talk. Tom talked early in his prepared remark that we had one basis point of charge off in the last 10 plus years. That comes down to the operational risk should the company that we’re lending to have an issue and can no longer be in business. We have the notes, we’ve worked through that and we then pledge them and sell them or put them on our balance sheet. And so for us, NDFI is an operational risk. For the fraud piece of it, we’ve seen collateral double pledged. We don’t have that situation. We actually maintain the notes until they’re sold. And that’s something that is different than how some others do mortgage warehouse in the industry.
Tom
And just to make sure we’re clear, the one basis point is the average annual charge offs in that business.
OPERATOR
Great. Thanks, Hope. And thank you Tom for that additional detail. That’s very helpful. Tom, just to clarify, so you mentioned that there are some charge offs in the other 90 fi that smaller component. Are these kind of normal charge offs or have these changed at all in recent quarters? I would say it’s relatively normal. You know, I mentioned it’s slightly higher than our overall net charge off rate, but it’s not, it’s not anything alarming. I would also point out, you know, I mentioned. The next question comes from David Chiaverini of Jefferies.
Max Astaris
The line is now open. Please go ahead. Hi, good morning. Max Astaris on for David Shiverini.
Brian Jordan
Just a quick question around capital markets. Given recent yield curve volatility, I wanted your thoughts Specifically around fixed income. And how sensitive is the fixed income
Max Astaris
trading desk to the current shifting expectations around Fed easing? Yeah, this is Brian. The business has had its ups and downs and volatility and interest rates over the longer term is good for the business and short term it can be difficult. And the uncertainty in the way rates have been moving have created some volatility from week to week. On the whole though, we’re pretty encouraged by the positioning of the business. Our ADR for the quarter was down slightly from the fourth quarter, but up significantly from a year ago. So all in all, we look at the business as a very strong contributor. And our optimistic, our outlook is optimistic for the foreseeable future, recognizing that there are going to be potential events that can push rates up or bring rates down rapidly. But we think we’re well positioned and in a good place to benefit from that volatility over time. Time. Great.
OPERATOR
Thank you.
John Pankari
Thank you. The next question comes from John Pankari of Evercore.
Gerard Sweeney
Your line is now open. Please go ahead. Hi, this is Gerard Sweeney on for John. So you highlighted that this is the third straight quarter, 15% plus ROTC consuming, 15% target. How should we think about ROTC trajectory going forward? Do you see a path closer to high teens or is maintaining the current level more your priority? And if you were to get more to a high teens level, maybe what are the three, you know, or a few steps that would get you there. Thank you.
Brian Jordan
Yeah, this is Brian. We’re making progress and hope pointed out our rotce is up a couple hundred basis points from a year ago. Then we set 15 plus as as a target. We did not set it as a destination. So we work to continue to build rotc. We think we will continue to make progress. And to the extent that you combine three or four things, two or three things depending on how you count them. One, the improved profitability that we’re driving with our existing balance sheet. Two, the ability to leverage our balance sheet either through capital return or growth in the balance sheet and the combination thereof of the regulatory guidance and bringing CET1 ratios down. We think we have the ability to push those ROTCs up over time. I’m not going to try to put a fine point on it today. We’re confident with the progress that we’re making. We’re focused on driving those returns higher. And I feel good about the work the organization is achieving every single day in that regard.
Gerard Sweeney
Great, thank you. That makes a lot of sense. And maybe going back to the prior question on the fixed income business, is there an ADR range you’d say embedded in your revenue guidance. I know there’s a countercyclical side of it but just how to size up from a modeling standpoint the rest of
Hope Domchowski
the year there are multiple ranges embedded in our guidance because as I’ve said before, we trade NII for fee income or mortgage warehouse balances in a decreasing rate environment. And so we do not have a single outlook to hit our guidance regardless of whether rates increase, stay flat or decrease. You’ll just see the revenue come from different places.
Gerard Sweeney
All right, understood.
OPERATOR
Thank you.
Brian Jordan
Thank you. Thank you. We have no further questions at this time so I’d like to hand back to Brian for closing remarks.
OPERATOR
Thank you, Lucy. Thank you all for joining our call this morning. Please reach out if you have any further questions. We appreciate your interest. I hope everyone has a wonderful day.
B
This concludes today’s call. Thank you all for joining. You may now disconnect your line sa.
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