First Horizon Corp
NYSE:FHN
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First Horizon Corp
Earnings Call Analysis
Q3-2023 Analysis
First Horizon Corp
The third quarter results have demonstrated the company's resilience and potential for delivering consistent shareholder returns. With 90% of their seasoned talent retained and a vast majority of their clients maintaining a long-term association with the company, they're showcasing strength in relationship-building. An adjusted earnings per share (EPS) of $0.27 and a return on tangible common equity of 9.2% mark a solid fiscal performance.
The company is forward-moving in its deposit accumulation, seeing a $1.6 billion surge which translates to a 2.4% increase from the previous quarter. The growth is spurred by successful deposit franchising campaigns, resulting in the opening of over 19,000 new accounts. Concurrently, the loan to deposit ratio has seen a favorable shift to 92%, indicating a healthier balance between the company's loan output and deposit intake.
With a flat CET1 ratio at 11.1% compared to the previous quarter, the company maintains a robust capital position. They are considering strategies to return capital to shareholders while aiming for a long-term CET1 ratio range of 9.5% to 10.5%. This balance of capital retention and shareholder return demonstrates their prudence in capital management with an eye on future growth and stability.
The Net Interest Income (NII) stands strong at $609 million with a net interest margin of 3.17%, despite increases in interest-bearing deposit costs. The company anticipates improvement in their NII and net interest margin in the subsequent quarter, banking on repricing strategies and the benefits from Federal interest rate hikes. The focus on growing customer deposits has also facilitated the payoff of all remaining Federal Home Loan Bank borrowings, further strengthening the interest margin outlook.
The company experienced a 1% loan growth totaling $483 million, hinting at market diversity and portfolio robustness. Commercial & Industrial (C&I) loans saw cross-industry growth, while Commercial Real Estate (CRE) loans increased primarily in multifamily fundings. Fee income showed stable patterns at $173 million, despite minor fluctuations. The company also emphasized on-balance sheet mortgage production as a strategic focus area.
Adjustments have been made to the annual outlook with the projection for loan growth increasing from a 3-5% range to 7-9%. This reflects the company’s ability to leverage deposit inflows for organic capital deployment and client loan fulfillment. While accounting for an idiosyncratic loss in net charge-offs, the expectation is for performance to align with prior guidance. In a display of confidence, the company reiterates its dedication to delivering returns for shareholders through various market conditions.
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Thank you all for joining. I would like to welcome you all to the First Horizon Corp. Third Quarter 2023 Earnings Conference Call. My name is Brika, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Natalie Flanders, Head of Investor Relations, to begin. So, Natalie, you may begin when you are ready.
Thank you, Brika. Good morning. Welcome to our third quarter 2023 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, and then we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, here to assist with questions as well.
Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release and on Page 3 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.
Thank you, Natalie. Good morning, everyone. Thank you for joining our call. Our third quarter results reflect the quality of our franchise, and we have highlighted some of our key strengths on Slide 5. Over the past 5 months, I've become increasingly confident in our ability to serve our customers and communities and deliver strong shareholder returns. Our team of associates are highly experienced. We've retained 90% of our talent over the past year who have been with us over 9 years on average. We have an extraordinary client base that's been with us a long time with a medium tenure of [ 16 ] years. Our team's dedication to serving clients is the key driver of our ability to retain 91% of our clients over this past year.
With our experienced bankers focused on excellent customer service and our ability to deploy capital through loan and deposit growth, we're seeing solid momentum in our businesses right now. I'm grateful for the hard work of our associates as they deliver value for our clients, communities and shareholders.
On Slide 6 are some of the financial highlights from this quarter, which Hope will cover with you in more detail. We delivered adjusted EPS of $0.27 per share on pretax -- pre-provision net revenue of $318 million, resulting in a return on tangible common equity of 9.2%. Our results were impacted by an idiosyncratic charge-off of $72 million that we communicated earlier this quarter. This credit loss was related to a company who unexpectedly converted from a Chapter 11 to Chapter 7 bankruptcy. Otherwise, the balance sheet continues to perform very well.
Period-end deposits were up $1.6 billion or 2.4% from last quarter as we continue to have success in acquiring customers throughout our deposit franchise and [ campaigns. ] We opened over 19,000 new deposit accounts this quarter, bringing in $1 billion in balances, with over 1/3 of the balances going into checking products.
Our loan-to-deposit ratio improved to 92% as deposit growth outpaced loan growth of just under 1%. Fees are relatively flat for the prior quarter as our countercyclical businesses have stabilized at cyclical lows. So we need to make some investments over the next year or two. We have a proven track record of managing our expense base, and we'll be disciplined in our reinvestment strategy.
Our capital position continues to be very strong, with our CET1 ratio flat for the prior quarter at 11.1%. As we look toward 2024, we will be evaluating our options to repatriate capital to our shareholders, with an eye towards longer-term CET1 ratio range of 9.5% to 10.5%.
Overall, sentiment of our bankers and clients remain cautious but positive. Inflation and labor supply continued to be a challenge. However, the economies in our footprint are performing well. Additionally, we recently released the results of our most recent stress test, which demonstrated our capacity to maintain capital levels well in excess of regulatory minimums even in the Fed's severely adverse scenario.
In short, given our stable diversified business mix, attractive footprint, and strong credit culture, we feel confident in our ability to profitably navigate any economic scenario. Our experienced team has a proven track record of delivering high-quality service to meet our clients' and communities' needs. This yields long tenured, deep relationships that enable us to produce top quartile returns over the cycle. With that, I'll hand the call over to Hope to run through this quarter's financial results. Hope?
Thank you, Bryan. Good morning, everyone. Turning to Slide 7. We provide adjusted financials and key performance metrics for the quarter. We generated PPNR of $318 million, down modestly from second quarter. The main driver was a $26 million decline in net interest income driven by higher deposit costs. Fees and expenses are relatively stable to the prior quarter.
As Bryan already mentioned, we experienced an idiosyncratic credit loss of $72 million, which drove the $60 million increase in provision expense to $110 million in the quarter. This single credit impacted adjusted earnings per share by approximately $0.10. Other charge-offs of $23 million were in line with the prior quarters.
Tangible book value per share came in at $11.22, with adjusted earnings per share of $0.27, partially offsetting the $0.41 impact of higher marks on securities and hedges and $0.15 of dividends. On Slide 8, we outlined a couple of notable items in the quarter, which reduced our results by $0.04 per quarter. Third quarter notable items include a pretax restructuring expense of $10 million related to streamlining our market structure in addition to some reductions in force, primarily within mortgage as we continue to look at operational efficiencies within our businesses to offset increasing costs.
In addition to the tax impact of the restructuring, there are 2 notable tax items. A $24 million tax liability related to the book value surrender of approximately $214 million of separate account [ fully. ] This was triggered by the Fitch downgrade of the U.S. from AAA to AA+, which caused noncompliance with the underlying investment guidelines of the [ RAP ] provider. Lower corporate tax rate and higher interest rates made us surrender the policy, the most attractive option to exit this low-yielding asset and redeploy the cash into higher-yielding and more liquid alternatives. Partially offsetting this is an $11 million of tax benefit primarily related to amended returns on prior acquisitions.
On Slide 9, I will walk through net interest income and margin. NII of $609 million and net interest margin of 3.17% remained strong despite moderating from cyclical highs. Interest-bearing deposit costs increased 81 basis points, partially driven by a full quarter impact of the second quarter deposit campaign. Offsetting this increase was a partial quarter benefit of the July rate hike on floating rate assets as we remain asset-sensitive.
In fourth quarter, we will have the opportunity to reprice the promotional money market accounts acquired in the second quarter as well as the full benefit of July's rate hike, giving us the ability to improve our NII and margin from third quarter's level. The cumulative interest-bearing deposit beta reached 63% this quarter. We expect this to be the high watermark for us in this cycle. Our success in continuing to grow customer deposits enabled the payoff of all remaining FHLB borrowings this quarter. Over time, margin will also benefit from the continued repricing of fixed rate cash flows and widening credit spreads. As 2/3 of our loan portfolio is floating rate, we remain well positioned to benefit in a rising rate environment.
As you can see on Slide 10, we're still seeing strong inflows from our deposit campaign. Period-end deposits were up 2.4% from last quarter, demonstrating our ability to expand market share as the Fed's H8 data shows deposits essentially flat for the industry as a whole. Deposit growth was driven by new customer acquisition and deepening existing relationships. We opened over 19,000 new-to-bank deposit accounts, bringing over $1 billion, including approximately $400 million of checking account balances. The average rate on our new customer deposits was 4.2%, down over 100 basis points from our second quarter promotional rates.
Additionally, the customers we brought in during last quarter's promotion increased their balances by approximately $200 million. The full quarter impact of the successful deposit campaign and a higher Fed funds rate drove an increase in interest-bearing deposit costs from [ $2.55 ] in Q2 to [ $3.36 ] in Q3.
With our strong liquidity position, our focus is on primacy. We are launching a promotional cash offer for checking accounts that meet primacy benchmarks over time. For customers acquired in the second quarter, the rate guarantees on money markets will come up for repricing in the back half of the fourth quarter. We will have the opportunity to moderate funding costs as we focus on converting from [ promo ] to primacy.
On Slide 11, you'll see that period-end loans of $61.8 billion were up $483 million or 1% linked quarter. Loans to mortgage companies declined $454 million due to seasonality and the impact on volumes from higher mortgage rates. Loan growth was diversified across our markets and portfolios. C&I growth was diversified across multiple industries, geographies and lines of businesses. CRE growth was largely driven by fund ups from existing loans, primarily in multifamily, while commitments remain flat.
We have focused our on-balance sheet mortgage production on the medical doctor program, with over 60% of new balances coming through that channel this quarter. This has been an attractive vertical for us, as we can deepen these relationships with wealth management and other products. Our bankers are focused on expanding spreads and deepening relationships through increased cross-sell depository, treasury and wealth management products. Spreads on new fundings have increased almost 30 basis points since last quarter and approximately 60 basis points year-over-year.
I will cover fee income trends on Slide 12. Fee income is stable at $173 million versus $175 million in the prior quarter. However, excluding deferred compensation, fee income increased by $6 million. Other noninterest income was up $8 million, including an increase of $5 million in FHLB dividends from higher borrowing levels last quarter and a $1 million increase in swap fees. Again, I'll reiterate, we have paid off all of our FHLB borrowings in Q3 with [ our ] new-to-bank customer deposits.
Our countercyclical fee businesses are stabilizing near the cyclical lows. We saw a modest decrease of $2 million in fixed income with average daily revenues down due to the challenging market conditions. Mortgage banking income was up $1 million as we slightly modified our pricing strategy to drive volume into the secondary market.
Moving on to expenses on Slide 13. Excluding deferred compensation, adjusted expenses are up $12 million. This is largely driven by the $11 million of merger-related retention expenses moving into core results this quarter. Personnel expenses declined 2% or $4 million, and there are a couple of different moving parts. First, deferred compensation declined by $8 million, which is offset in the corresponding fee income line. Second, as I previously mentioned, the geography change of the $11 million of merger-related retention expense moving into core results. Lastly, we had an $8 million reduction in other variable compensation. Other expenses were up $7 million, as the prior quarter included a benefit of a few discrete nonrecurring items, which included lower franchise and realty taxes.
With a challenging economic environment, expense discipline remains a focus, and we continue to look for operational efficiencies within our business. This quarter, we restructured our regional bank by consolidating into 2 fewer regions and moderated our mortgage business. Our efficiency ratio was at 59% in Q3.
I will cover asset quality and reserves on Slide 14. Loan loss provision increased by $60 million from Q2 to $100 million in Q3. The increase was driven by a single C&I charge-off of $72 million. This loan was a shared national credit where we were the lead bank. We initially anticipated a recovery through a Chapter 11 bankruptcy sale. However, there was an unexpected conversion to Chapter 7 in August, at which point we charged off the full amount of the loan. We did not have a specific reserve for this credit as we had an updated third-party valuation that supported our carrying value, and we anticipate an imminent sale within the quarter. We are working with outside counsel to identify, evaluate and pursue potential recoveries. At this time, we have no estimate of the timing or ultimate amount of recoveries, if any.
Total charge-offs were $95 million in Q3. Excluding the idiosyncratic loss, charge-offs would have been $23 million, in line with the prior quarter. ACL coverage ratio increased 1 basis point to 1.36%, reflecting loan growth and continued caution around the macroeconomic outlook. The vacancy rate in our office CRE portfolio is 11%, which compares favorably to the industry, which is experiencing vacancy of 19% in the Southeast. Like others, we are seeing credit normalize from historically low loss levels during the pandemic. Though commercial credit can be variable, we do not expect significant broad-based deterioration in our portfolio.
On Slide 15, you can see that we continue to have exceptionally strong capital levels. Our CET1 ratio of 11.1% remained flat to the prior quarter, even as we organically deployed capital to loan growth. Even after adjusting for the marks on our security portfolio and loan book, our pro forma CET1 ratio would be 8.6%.
Tangible book value per share was $11.22 in Q3, a slight decrease from the prior quarter due to a $0.41 reduction from higher mark-to-market impacts that were partially offset by $0.29 of adjusted NIAC. Total capital also remained very strong at 13.6%.
On Slide 16, we have made a couple of tweaks to our outlook, though we continue to believe that PPNR will be within the guidance we gave at Investor Day in June. We updated our loan growth expectations from 3% to 5% to 7% to 9% as our success in raising deposits has enabled us to organically deploy excess capital into meeting our clients' borrowing needs and strategically acquiring new clients. The net charge-off outlook is updated to include this quarter's idiosyncratic loss, but we expect other charge-offs to be within prior guidance. The new capital range [indiscernible] RWA impact of the updated loan guidance. This assumes no share buybacks, but as Bryan mentioned, we intend to evaluate capital deployment as we head into 2024.
To wrap up on Slide 17. I am very proud of how this team navigated 2023 so far with passion and commitment to our clients despite the macroeconomic environment and the unique challenges we have faced. Our success in client retention and acquisition would not be possible without the consistent focus of our associates that they have on serving our clients through any cycle or challenge. We are well positioned to capitalize on the opportunities of our diversified business model, highly attractive franchise and asset-sensitive balance sheet. We are making strategic investments to support clients with products, services and technology upgrades that will result in improved efficiency. We will continue to look for operational efficiencies to offset our investments. We remain committed to delivering attractive returns for shareholders through the cycle. Now I will hand it back to Bryan.
Thank you, Hope. I'll roughly reiterate something Hope said a moment ago. Over the course of our history, we have demonstrated our ability to execute in changing and sometimes unusual economic environments. We know how to pull the necessary levers in order to operate profitably. Our footprint and our teams give me tremendous confidence in our ability to generate strong returns for our shareholders.
While 2024 economic conditions are likely to soften somewhat, I expect that we will grow revenue, control expenses and record positive operating leverage next year. I am confident that this company has the people, the resources and the determination to do what's necessary to support our communities and shareholders throughout the economic cycle. Brika, we can now open up the call for questions.
Thank you. [Operator Instructions] We have the first question from Ebrahim Poonawala from Bank of America.
I guess maybe first question, just -- Hope, thanks for running through kind of the promotion rates, where they were this quarter versus last. As we think about the NII guide, I guess, full year or we can back into 4Q, 6% to 9%, give us a sense of how fourth quarter shakes out, higher end versus lower end of that guidance range. And then as we think about moving forward, you still have promotional CDs or promotional deposits rolling off. Just if this -- should this be the trough in NII and that growth continues through at least the first half of '24? Is that the right way to think about it? And again, the 6% to 9%, could it -- what makes it 9% versus 6%?
Thank you, Ebrahim, for many questions in one. I'll try to get all of them covered. Apologies if I missed one, you can hold me accountable.
First, we have not updated our ranges to a very specific percentage, but we expect next quarter to look similar to current quarter trends with the exception of NII that we do expect to increase noninterest margin -- net interest margin that we do expect to increase next quarter as we're able to take advantage of the expanding yields and lower deposit costs. our Investor Day guidance that we reiterated here, we believe we'll end up on a PPNR basis, right in the middle of that, with revenue being a little bit towards the lower side as well as expenses coming in on the lower side. On how we think about -- sorry, go ahead.
No, go ahead.
As to how we think about going into next quarter and next year, as we said in our prepared remarks, we continue to be focused on disciplined lending and bringing down our core deposit rates that we did. As we've talked about multiple times in Q2, we went out with a very large promotion in order to reenergize our franchise, our bankers and our clients, and we plan to walk those rates back. And I believe that the billion [ ticks ] that we were able to bring in the quarter at 420 shows that we're able to acquire new clients and walk back existing client rates.
Got it. And just a separate question. So I completely get the credit that you had this quarter was very idiosyncratic. But Bryan, you've done a ton of heavy lifting post-GFC in cleaning up this balance sheet. As you went through this credit, does this -- did that cause you to revisit the loan book to look at some of the larger credits, kind of do another deep dive on the portfolio review to make sure there are no other kind of big chunky surprises? Just talk to us about that.
Ebrahim this is Susan Springfield. I'll take that and then Hope and Bryan can add any comments.
During really any economic downturn, we take an opportunity to do portfolio reviews across sectors as well as markets. So we are doing that. We -- for all of our lines of business, specialty lines as well as regional banks. The other thing is any time we have any kind of pause, we do a, I call it, a spilled milk analysis to look at were there things that we could have done differently, whether it was the original underwriting, the servicing, timing, communication, et cetera. So we obviously do take that very seriously. Our -- and are in the process of evaluating anything that could be improved related to the outcome of that credit. That being said, I do feel that both Bryan and Hope indicated very good about the portfolio. We have a history of strong client selection, being consistent and conservative in our underwriting and staying on top of our services.
I would add to Susan's comments. The economy has started to tighten financial conditions and slow down to some extent, higher interest cost is going to have impact. And so when you see those things happening as Susan said, we not only continue what we typically do in terms of credit monitoring, we do some focus reviews. And we expect this credit will soften some, but we think we start at an extraordinarily good place with strong borrower selection, strong underwriting and credit structure and ultimately strong collateral value. So we have, as Susan said, an effort that we undertook to understand what happened with this 1 individual idiosyncratic credit. And we will learn from that, but we believe the fundamentals of our credit selection, underwriting and delivery process will position us very well for our economy that's likely to soften some over the course of the next year or so.
Thanks for taking my questions.
Thank you. Your next question comes from Casey Haire of Jefferies.
Wanted to touch on expenses. So if I'm looking at the guide, I mean, year-to-date, they're up 3%. And versus last year, and you guys are still holding to that 6% to 8%, which would imply a pretty big step-up in the fourth quarter. Is -- is that accurate? Or is that guide conservative? And then I'll start there.
Casey, thank you for the question. I would say, reiterating my response to Ebrahim on expenses, we're probably going to be on the low side. We are trying to deploy a lot of new projects and technology that have not yet come into a run rate. Some of those will start in Q4. And then the bigger unknown is really where our cyclical businesses have Q4, they have such a variable revenue base. And so even though we're at 3%, we have set at pretty low levels for FHN, and we are expecting a little bit of an uptick in Q4 to drive that expense up.
Okay. It feels like you would have to come in below that unless -- anyway. Okay. And then, Bryan, just following up on your comments about positive operating leverage next year. I believe at your Investor Day, you were talking about expenses being up another [ 6% to 8% ] next year. Does that -- your hope for positive operating leverage in '24, does that -- does that still contemplate that [ 6% to 8% ] expense guide? Or is there a possibility to flex that lower?
Well, I do think expenses will be up somewhat next year. Part of it is what Hope just talked about in terms of the reinvestment in the franchise and making some investments in technology and really doing some of the remedial work that we have talked about in the past. That said, I do still believe that we can drive positive operating leverage. I'm very optimistic in our ability to continue to drive loan growth and particularly wider spreads on our lending portfolios. And as Hope mentioned a couple of different times and ways, we think we have the ability to bring the cost of deposits down over the course of the next year. So all that said, I think expenses can be up. We're not going to spend $1 if we don't need to spend. And so we're going to control expenses. At the end of the day, though, I think we can still generate with even slightly higher expenses, positive operating leverage.
Okay. Very good. And just lastly, on the capital return. You guys obviously warming up to the buyback is what it sounds like to me. Just wondering, what is -- you guys have been fairly consistent on this front and saying like it's just not the time macro-wise, just given all the uncertainty. It's not as if that uncertainty is going to improve in '24. Just wondering what is driving that decision to more increased appetite for share buyback.
Yes. I think it's fair to sort of break it into 2 pieces. One, we said longer term in the prepared comments, it would probably be in that 9.5% to 10.5% range. And -- and I think that's probably a fair way to think about our business through varying economic cycles as we sit here today. We're a little north of 11%. And I think as we look at '24, we may not bring it down much below 11% or into that range, but we don't believe that we need to let that capital continue to accumulate. So depending on what happens with the balance sheet in terms of any growth, we think there's still excess capital to repatriate the shareholders and hold those ratios in this current [ 11%, 11.1% ] area that they're in today. So we think we can do both, maintain strong capital levels which are important in an economic situation that's probably less certain than any of us might like. And at the same time, we don't need to let that capital base continue to grow from here in our view.
Your next question comes from the line of Michael Rose of Raymond James.
Just following up on the last 2 on Ebrahim's and Casey's questions. I guess what I'm trying to -- I'm struggling with here is the ability to actually drive positive operating leverage, especially if countercyclical businesses, specifically in mortgage and fixed income are going to be under pressure. And it does look like well, fixed income will be under continued pressure on a higher-for-longer scenario. So Hope, maybe if you can just help us kind of understand the drivers of how you actually drive positive operating leverage? Because I think that's something that we're all struggling with, I'm certainly getting some e-mails.
Michael, good to hear from you. And I appreciate the third question, and I'll try to answer it as well as I can in a little bit more detail. I think Casey said it that it's going to be hard for us to hit the 6% to 8% expenses. Bryan followed up what we are looking for ways to drive down expenses. We're only 4.5 months post the deal termination, and we're looking at our franchise and trying to figure out how we make investments and how we've offset that this quarter. We reorganized 2 of our regions. We've downsized our mortgage business. We are continuing to look at how can we bring back deposit costs. So we're going to -- this will be -- we're going to be able to increase margin in future quarters. We believe that this is our high watermark for the cost side of margin. We're going to see -- we do expect that our on business will have a better year in 2024 and 2023 as we see stabilization in rates next year. And we are going to continue to keep a disciplined focus on expenses. We're just in the cycle now as looking at what 2024 will be from a budget perspective, and we're looking at every opportunity to bring down expenses and drive revenue.
I would love to give you 2024 guidance. We just need a little bit more time to finalize everything. But I think you should see the regional bank restructure that we did as well as the mortgage of us getting out pretty quickly, the first full quarter after our deal was terminated in looking at how we can run our businesses more efficiently and redeploy that to investments to improve the client experience.
Okay. And then just stepping back...
And Michael, one other note I'll mention -- sorry, go ahead, Michael. You go.
No, go ahead.
When we look at the retention expenses coming back to core, I know we mentioned this on our prior quarter, we came up with Barclays as well. The year-over-year increase in that is only $5 million. So even though we only have a half year this year in core and a full year next year, because the first portion pays out in May, it is not as big of a year-over-year increase as I think some of you have in your model. I think you guys are taking the $11 million, assuming that was almost double next year. And so when you look at the expense that I see in your models, I think you guys were overweighting that piece.
Okay. Helpful. And then, again, I know it's too hard for 2024 at this point. But I mean, is there an expectation just broadly that you can actually grow NII? I certainly understand all the tailwinds as it relates to the margin. But is that actually baked into at least preliminary expectations?
In the current rate scenario, yes, we believe flat to up is strong for us. We do have a rate curve that has continuing increases for the 2024 year and no decreases and being asset-sensitive that is positive to our NII.
The next question comes from Brody Preston of UBS.
Good morning, everyone. Hope, sorry to beat a dead horse, but I just wanted to put a finer point on the expenses. To get to the low end of your guidance range, I need to step expenses up to $520 million for the fourth quarter. It's a $55 million linked quarter increase, which seems peak, if not kind of like numerically impossible to kind of flex the model that high. So can you tell me why, like specifically what is going to drive the $55 million increase to get to the low end of the guidance?
I think the low end of the guidance, 5.6% also rounds up to 6%, right, or 5.51%. And so -- as we look at it, we're sitting here at about 4%, and we still haven't seen a lot of our technology projects start. And again, we have a variable compensation model at FHN. We're sitting at a quarter that was a kind of a low watermark for them. And we are expecting increased revenue there, which comes with increased compensation. We also have additional marketing campaigns tied to our new checking account program that we just launched as well as acquiring new deposits.
Is there anything left from the deferred compensation from the TD deal that still needs to work its way into the run rate? And if so, can you tell me what the dollar amount is there?
Not in the fourth quarter. It's in the same -- the same ZIP code that you had in the third quarter, about $11 million incremental in the third quarter expense base, and it should be about the same in the fourth quarter.
Got it. Do you guys happen to have with the spot interest-bearing deposit rate was at [ 9/30. ] And then you've talked about kind of moderating deposit costs from here. Do you have a view on where you expect that spot rate to move to by [ 12/31 ]?
We do have the current spot rate, that [ 339, ] and we are looking to walk that down. I don't want to put it right out there every time I put a beta out there or rate out there. We seem to miss it. So far, we've missed our beta guidance, and our rate guidance, we've been able to raise deposits quicker. We do have almost $6 billion repricing in Q4 related to the money we brought on in Q2 for the deposit campaign. And so I think it really tied to how quickly -- what our ability is to walk that back as well as bring new deposits in if we can continue to bring them in at a [ 420 ] average rate, we'll be able to walk it back a lot more. But most of that reprices in the second half of November and December. So we've really got to see what our ability is. But we're seeing some steep competition on deposit pricing. And so how that changes, how our competitors change their deposit pricing from now until November and December when ours reprice will really kind of generate how much I think we can walk it back.
The other big factor to Hope's comment is the shift in mix as money moves from noninterest-bearing to interest-bearing that naturally moves that cost [ up ] as well. So it's a -- there are a lot of levers to play. We think in the aggregate, as Hope highlighted in her prepared comments, the new money that we brought in in the third quarter was, on a mix basis, significantly lower than it was in the second quarter in terms of lending costs. And -- and we think as this deposit promo we start to reprice, we have the opportunity to bring those costs down more in line with where we've been bringing new balances all over time.
Got it. And do you -- maybe switching gears in the loan portfolio, do you happen to have what your exposure is to shared national credits? And of that, what portion are you the lead lender on?
Yes. We've got that information. In terms of shared national credits as a percent of the portfolio, it represents about less than 14% of our balances, and we're the lead on about around 3% -- 3% to 3.5% of that.
Okay. Great. And then the last 1 for me before I hop was just a 2-parter on the office exposure, specifically on the nonmedical office. Do you happen to have what the allowances that you have set aside against the nonmedical office currently? And then do you have a sense for what the average LTV on those properties are?
I don't have it broken out in that detail in terms of the allowance. But in terms of our loan-to-values on office -- you're talking about nonmedical office, correct?
Yes, that's correct.
Just the traditional office. So our portfolio today on traditional office, the average upfront equity we have is about 35%. And on the stabilized loan-to-value basis, we're at about 60%.
Got it. Thank you very much, everyone. I appreciate you taking my questions.
Thanks, Brody.
Thank you. We now have Brady Gailey of KBW.
We've had 2 big quarters of deposit growth, which has been good to see it's helped lower your loan-to-deposit ratio. How should we think about that going forward in 4Q and as we head to next year? Are you still targeting to have deposit growth outpace loan growth? And is there a target you have in mind as far as where you want to get your loan-to-deposit ratio?
Well, it's an interesting discussion. Hope and I talked about the loan-to-deposit ratio. We clearly want to grow deposits. And I would say it's less about the balances than it is the relationship. It's customer acquisition to us, and we want to be in a position to continue to broaden and deepen and grow customer relationships. Our loan-to-deposit ratio ended the quarter at about 0.92. And if you blend that, that's probably a little bit higher than peers. But if you grow on securities, which we tend to have a relative -- much smaller relative portfolio, we're sort of right in line.
We think to the extent that we can grow relationships that we grow deposits, it gives us the fuel to continue to support customer needs on the credit side as well. And so we are not proactively as much managing the loan-to-deposit ratio as we are trying to proactively manage our ability to serve our customers and our communities in a profitable fashion. So I'd say at the end of the day, if we have the opportunity to grow attractively priced deposits and relationships, absolutely, we're going to continue to do that.
Brady, what I'll add to that is we are -- we feel like we're in a great place because we have now 2 quarters of deposit growth, we've shown that we can do it. And we also have a capital position that allows us to deploy that, we don't have to build our capital base. So our ability to continue to grow deposits and deploy that into higher yielding loans is what we're looking at. 92 -- loan-to-deposit ratio, as Bryan said, when we add securities and they're right at the peer median, we feel really good about the trajectory we're on, which we believe that we will improve our margin in the coming quarters.
One final point is, look, we're fortunate in the fact that we get to do business in great markets, great economies. And on a relative basis, we think that they will outperform the U.S. economy. So we're -- I think we're in a good spot to see positive momentum in our deposit base.
It's good to be in the South. I agree. And then just my last question is to follow up on your comments about buyback into '24. If I heard you correctly, it sounds like you instead of getting common equity Tier 1 down to that 9.5% to 10.5%, you kind of just want to hold it relatively flat at 11%. Did I understand that correct? And then what would it take for you to consider a more elevated level of buybacks that could potentially get that common equity Tier 1 number down into your range? Is it more economic uncertainty? Or what would you like to see to take that lower?
Yes. That's what you said is a rough approximation of what I said, which is that as we look at it today, we're likely to keep that CET1 ratio, given the Board's support, at a constant level around that 11% area, 11.1% area. To bring it down further, I think we and the Board would have to be confident that we had greater certainty about the direction of the economy and how things were more likely to play out. So just not to say that that's completely off the table. But as we sit here today, it still feels like 2024, in terms of rate and economic outlook, is still a little more uncertain than we would like. We don't see it as extremely negative. We just see it as more uncertain than we think maintaining a strong capital base tends to be more in our favor than bringing it down prematurely.
We now have Steven Alexopoulos from JPMorgan.
This is Anthony Elian on for Steve. In the second quarter, you added about $6 billion in deposits from the new campaigns. And then you added another $1 billion in 3Q. As the rates on these campaigns move lower in 4Q, how confident are you that you can retain both these deposit balances as well as more importantly, the overall client relationships that you've added?
Yes. So we recognize that when you attract new customer relationships, I think the number was something like 32,000 in the second quarter, about 25,000 of those being retail. I think it was about 19,000 new -- the bank accounts in the third quarter. That not only is it important that you attract the new relationship that you broaden and deepen it. And -- and our bankers all across our markets are working every single day to broaden and deepen the relationships with those new customer relationships, new bank customers.
So we have a high degree of confidence that we will retain a significant portion of those. I don't sit around and think we're going to retain every 1 of them, but we have a high degree of confidence that we can broaden, deepen with a significant number of those relationships.
Okay. And then total deposit growth was really strong in the quarter, supported by the campaigns, but the noninterest-bearing deposits continued to decline. On the guidance slide, you point to DDA balances returning to pre-pandemic levels, but it looks like you're very close to that level of 27%. So I guess, how much more do you see to get there and by what time?
On a pre-pandemic percentage, you're right, we're at about 27%, which is where we were. But on an absolute value, we're about $2 billion higher. We've done the analysis of operating accounts. And we think on the downside, we look at how much is in the accounts versus how much they're using, there's only about $2 billion to $3 billion of additional credit versus debit each quarter. So we don't feel -- we're not losing clients. It's balances that have moved to interest-bearing. And as clients are holding less cash in their operating accounts, the inflationary environment that they have, the macroeconomic environment that they're working in, they are holding less cash in operating accounts. And so we think if you look at absolute value, they really got to a point that we had the exact same amount of debits and credits. In every client account, we'd be exactly, kind of dollar-wise, where we are.
We are working very hard to attract new DDA clients as well. As we mentioned, we just launched a new program, this new marketing campaign in this current quarter and a program to go after that. It is a factor of 2 things there, which is the 1 with the mix we saw earlier in the year; and two, just our clients have less cash on hand than their operating accounts these days.
Okay. And then my last question. At Investor Day, you provided an ROTCE range of 15% to 18% through the cycle, but your adjusted ROTCE this quarter was just over 9%. I know the elevated charge-offs this quarter weighed on that. But how are you thinking about the previous range of 15% to 18% for ROTCE that you provided at Investor Day?
Yes. That's a through-the-cycle number, and we still believe that will be the number. If you look at this quarter and we take out the 1 charge-off, we add about 3.2% back to ROTCE. So we get closer to our range. As Bryan and I have talked about earlier, we are looking to create positive operating leverage. We're looking to return capital to shareholders. And so we still do run our company and look at through the cycle, that being our target rate. We have no reason to believe that we can't hit that or that we should bring that down.
As we've talked about a number of different times, we're running at higher capital levels today, and we believe is sort of the root of cycle range as well that has an impact on that. So we still have a high degree of confidence through the cycle. We can drive those sort of mid- to higher-teens ROTCEs.
Thank you. We now have Christopher Marinac of Janney Montgomery Scott.
Thanks. I want to ask Susan about criticized loan trends and kind of what she is seeing this quarter and also maybe what she would expect the next few quarters, looking into early '24?
Thanks, Chris. We are seeing some increase in criticized assets, but it's slight at this point. We are up, I guess, about $100 million in terms of criticized assets quarter-over-quarter. And it's -- we also -- we continue to have some upgrades. We're seeing a little bit more in commercial real estate than we are in C&I. But again, it's a handful of credits. I'm not seeing anything systemic, just kind of credit normalization at this point.
Does that change, or is there levels? Okay.
Yes. Obviously, we've got a slight increase in terms of reserve coverage. We were at about [indiscernible].
Very well. And then based on the [ SNC ] information that you gave us a few minutes ago, are there any other sort of like club-type deals that wouldn't define as SNCs that would be above and beyond that 14% number?
[ Not ] 1% more.
We now have David Chiaverini of Wedbush Securities. You may begin.
You've previously mentioned about how you're open to doing a potential MOE for scale benefits and crossing the $100 billion in assets. I was wondering what factors could accelerate a potential deal? And what factors could push out a potential deal? Any updated thoughts there would be helpful.
Yes. I'd say there are more factors pushing it out than there are bringing it in. I think they're opposite sides of the same point in some sense. I think the M&A environment is likely to be very, very minimal over the next couple of years. Part of that is economic. Part of that is interest rate marks. And I still think, as demonstrated over the last few quarters, uncertainty about regulatory approval processes in addition to the proposed rules around Basel III make anything unlikely in the near term. And I would guess our view is it's probably 2, 3 years -- anywhere from 1.5 years to 3 years before you really start to see a pickup in M&A activity. So that's not something that's on our radar strain today.
Makes sense. And shifting over to loan growth and the increased guidance to 7% to 9%. I was curious, what areas are you leaning into with the increased loan growth guidance?
So we do see some opportunities where other banks have pulled out completely. So we've got some opportunities in mortgage warehouse lending. We've got some opportunities in what I would just call for commercial in our markets. We can talk about generational opportunities to bring over family of companies in the markets that we continue to serve. There's also some opportunities in asset-based lending. One of the reasons that we think this could be attractive too is we are seeing some ability to have widening spreads and even more conservative underwriting. So things like more upfront equity, better covenants, more opportunities to have [ Gartour and part tour ], resource, that kind of thing.
We're always -- I'm sorry to interrupt. We're always opportunistic as we think about how we grow high-value relationships. And that's through all economic cycles. And so we're always thinking about how we grow the business. The other thing that's driving the growth, if you look at a substantial portion of the growth in the third quarter of this year, continues to be what I've described in the past, the spring loaded nature of our balance sheet and that we have some continued fund ups of construction assets which is driving the growth.
Organic growth has slowed. It does feel like lending activity more broadly in the economy, and what we see from customers has slowed and it's likely to continue to slow, but we will be opportunistic and look at -- to grow our business and to grow our customer base by using our balance sheet in appropriate ways to support customers and communities.
Thank you. We now have Jon Arfstrom of RBC Capital.
Just on a question on loan growth, too. David kind of stole my question, but that's okay. I guess the question for you, Bryan, is this -- do you feel like this is a sustainable pace of growth, this kind of 1% to 2% sequential growth as you look out into '24?
Well, right now, I think as I tried to mention or say, articulate -- some of the growth is just going to be natural in the fund up of some of these construction loans as projects get completed. And -- and these are projects that, as Susan has described, continue to be on track and continue to look good. So that will drive some of it.
In the middle of this quarter, it started to feel a little more like -- really in the back half of this quarter, it started to feel like starting the slowdown in customer demand, customer activity. So it does feel like things will be a bit slower. But I do think there's opportunities to continue to selectively add relationships and credits and -- a lot of euphemisms are out there about the RWA [ dies ] and things like that. We're not in that mode. We do think that we can use our balance sheet to support customers and communities, and it's 1 of the benefits of having a strong capital base and being in a position to compete effectively for new relationships when we see, as Susan described, generational opportunities or otherwise that the strength in our customer pool across the entire franchise we serve.
Okay. And just somewhat related, I know you're asked this at Investor Day, but the balance sheet growth expectations at your size, it feels like you have a couple year runway. And maybe you think about $100 billion in asset threshold later, but any limits on your balance sheet growth in the near term?
No real short-term limits. I think we've got a few years of runway. And if necessary, we can tread water. So we understand where that bright line is, and we're going to be very intentional about not inadvertently stumbling over that threshold. So until we get greater clarity about what that regulatory landscape looks like, we will do all we can to grow the balance sheet and at the same time, not inadvertently stumble over. But we think we've got a few years. It's not an immediate concern in the near term.
Okay. Good. Just a small one, too. One of the numbers that you flagged was the 19,000 new checking accounts as part of the deposit campaign. Is that a material number to you? I know it's just a quarterly number. And what drove that? And is that repeatable?
Well, it's an important number because it's 19,000 new relationships. It probably compares to a base of around, call it, 900,000 customer relationships. So it's not an insignificant number. We, in any given quarter, will lose a few as well. But it is important to note that our bankers are out there front footed, they're acquiring customer relationships in the marketplace across the entire footprint. And as I said earlier in this call, clearly, it's not just about that first account. It is we want to build a relationship. I mentioned the tenure of our customer relationships. We want to broaden and deepen those relationships.
So I guess it's -- what's the old proverb about every journey starts with the first step? I mean, it's that first account, and then we've broadened and deepened from there is our goal.
Jon, this is Hope. The other reason that we've called that out is it shows that we're growing our deposits 1 client at a time. We're not out there buying big municipal funding. It's not forward deposits. We're truly acquiring clients, and that's why our deposits are growing. I know others have flat deposit -- deposit growth, but they're talking about CDs, talking about big chunks of money. We are doing it 1 client at a time. And because we believe the way that our franchise will excel and succeed is to bring these clients in with their first product and then sell them to make them long, deep relationships that are with us for 5, 10, 15, 20 years.
Yes. Yes, makes sense. Okay. Thank you very much.
Thank you. We now have a question from Timur Braziler of Wells Fargo Securities.
This is [ John Rowan ] on for Timur. Just kind of a longer-term question about your CET1, your long-term CET1 target in the 9.5% to 10.5% range. I guess, has there any been -- has there been any preliminary work done on what that could move to, if at all, as if you were to cross that $100 billion mark? Or does that already factor into the range provided? And just how that would maybe impact your long-term capital return plans?
Yes. We have done some very preliminary work. But given the sort of state of flux of the Basel III proposals and how it impacts the various tiers above the $100 billion ratio, we haven't really factored that into our long-term goals at this point. And if, in fact, we do something that puts us above that $100 billion threshold, whether it's group through organic growth or otherwise, we'll update it at that point.
Okay. And then just 1 clarification question on the expense guidance. So the guidance for the full year assume that the FDIC special assessment hits in 4Q. Or has that not been included yet?
No. We don't have that in expenses. We have that as an adjusted item. It is in our capital forecast. But for the expense guidance, we're excluding that as an adjusted item.
Okay. Great. That's helpful.
Thank you. As we have no further questions, I'd like to hand it back to Bryan for any final remarks.
Thank you, Brika. Thank you all for taking time to join us this morning. We appreciate your time, attention and questions. Please reach out if there's any additional information that you need from us. I hope everyone has a great day.
Thank you all for joining. I can confirm that does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your lines.