First Horizon Corp
NYSE:FHN
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First Horizon Corp
Earnings Call Analysis
Q3-2024 Analysis
First Horizon Corp
In the third quarter of 2024, First Horizon reported a solid performance with an adjusted earnings per share (EPS) of $0.42, representing a $0.06 increase from the prior quarter. This demonstrates resilience as the company navigates challenges posed by external factors like Hurricanes Helene and Milton, and economic conditions. They reported a pre-provision net revenue increase of $11 million, underscoring the strength of their diversified business model.
The company maintained a disciplined credit culture, with net charge-offs amounting to just $24 million, or 15 basis points of average loans. This reflects the effective management of credit risk. The adjusted return on tangible common equity improved to 13.2%, while the common equity Tier 1 (CET1) ratio stood at 11.2%, above their near-term target of 11%. These figures affirm the company's solid financial foundation.
Net interest income remained stable at $631 million, although the net interest margin compressed by 7 basis points to 3.31%. This compression was attributed to higher deposit costs, driven by increased utilization of brokered deposits and efforts to support client growth. Moving into the fourth quarter, the company anticipates modest margin contraction due to the lag in the repricing of loans relative to deposits.
First Horizon reported a 3% growth in period-end deposits, equating to nearly $1 billion. The increase in noninterest-bearing deposits highlighted the effectiveness of their client retention strategies. The average rate on interest-bearing deposits increased to 3.44%, reflecting competitive pressures in the banking sector. The company is optimistic about further improvements in deposit costs with the repricing of approximately $18 billion of promotional deposits set to occur over the next year.
Looking forward, First Horizon's revenue guidance indicates a potential growth range of flat to 2% year-over-year. A key driver of this growth will be the actions taken by the Federal Reserve regarding interest rates. The management highlighted that overall revenues will be closely tied to the expected interest rate changes, further stating that their countercyclical businesses will act as a hedge against net interest income pressure.
As the company approaches 2025, management expressed optimism regarding the potential for positive pre-provision net revenue growth year-over-year. They plan to continue enhancing operational efficiencies while managing costs effectively. The firm’s diversified business model positions it well to navigate evolving economic conditions, as noted by management, who emphasized their readiness to adapt to interest rate volatility.
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Good morning, all, and thank you for joining us for the First Horizon Third Quarter 2024 Earnings Conference Call. My name is [indiscernible], I'll be the call coordinator for today. [Operator Instructions]. I'd now like to hand over to your host, Natalie Flanders, Head of IR, to begin. Floor is yours.
Thank you, [ Karli]. Good morning. Welcome to our third quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski will provide prepared remarks, after which, we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Tom Hung, here to assist with questions as well.
Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings.
Additionally, we feel aware that our comments will refer to adjusted results, which exclude the [ end of notable ] items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release on Page 3 of our presentation. And last but not least, our comments [indiscernible] our current views, and you should understand that we are not obligated to update them. And with that, I turn things over to Bryan.
Thank you, Natalie. Good morning, everyone. Thank you for joining our call. Before we get into the details of the quarter, I want to express our concern and support for those who were impacted by Hurricanes Helene and Milton. I'm incredibly proud of our team, how our team prepared for and responded to the needs of our associates, clients and communities.
We were on the ground immediately providing food, water fuel and other essential supplies. In North Carolina and Tennessee, all but one of our banking centers are back open, with mobile banking units on site there to provide continuous banking services to our clients. Florida is in the early stages of recovery, but our banking centers fared well, and all are open at this time. We've also announced financial commitments to the restoration of these communities, and we'll remain heavily engaged in the rebuilding process.
On Slide 5, we have shared some of the financial highlights for the quarter. First Horizon delivered another strong quarter for our shareholders as we grew revenue, maintained expense discipline, improved credit coverage and continue to generate capital. Our results this quarter reflect the strength of our diversified business model and our continued focus on growing and deepening client relationships.
We achieved an adjusted EPS of $0.42 per share, which was a $0.06 increase from the prior quarter. Pre-provision net revenue increased $11 million improving our adjusted return on tangible common equity to 13.2%. We continue to deploy capital through share repurchases, buying back $75 million of stock in the third quarter and over $440 million year-to-date. We ended the quarter with a common equity Tier 1 ratio of 11.2%.
Our results continue to demonstrate the benefit of our disciplined credit culture as we saw just $24 million or 15 basis points of net charge-offs this quarter. I'm proud of the dedication of our -- that our bankers display in serving our clients and communities throughout the Southeast. I believe we are well positioned to capitalize on our attractive footprint and opportunities to grow along with these markets.
As we head into next year, I remain incredibly optimistic that our franchise is fully equipped to navigate any economic environment we encounter while continuing to enhance shareholder value. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?
Thank you, Bryan. Good morning, everyone.
On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated adjusted earnings per share of $0.42, a $0.06 increase from prior quarter. Pre-provision net revenue improved by $11 million from last quarter, largely due to strong performance from our fixed income business, while our net interest income and adjusted expenses remained essentially flat. We continue to see solid credit performance from our portfolio with net charge-offs of 15 basis points and $35 million of provision expense. ACL coverage increased modestly to 1.44% and including $8 million of qualitative reserves for potential losses related to Hurricane Helene.
The improved revenue and lower reserve build drove an increase in our adjusted return on tangible common equity to 13.2%. Our CET1 ratio increased to 11.2% modestly above our 11% near-term target, driven by lower-than-expected risk-weighted assets due to a late in the quarter portfolio sale.
On Slide 7, we outlined a couple of notable items in the quarter, which reduced results by $0.02 per share. Third quarter pretax notable items include a $2 million credit to expenses that was trued up to the FDI special assessment accrual, a $15 million of Visa derivative valuation expenses related to the escrow funding that occurred in September, and lastly, $2 million of restructuring expenses associated with the operational efficiencies we have continued to identify. All of this totals an $11 million reduction to net income.
On Slide 8, you will see that NII of $631 million was relatively stable to the prior quarter, benefiting slightly from a higher day count. The net interest margin compressed 7 basis points from last quarter to 3.31%, with better asset yields partially offsetting higher deposit costs. The increase in average deposit cost was driven by higher use of brokered deposits as well as acquisition costs on the $1 billion of new client growth.
Loan yields expanded 3 basis points from second quarter, benefiting from new and renewing floating rate spreads and repricing of fixed rate cash flows. As we move into the fourth quarter, we expect modest margin contraction due to the lag between the loan and deposit repricing.
On Slide 9, we take a closer look at our strong deposit growth. Period-end balances increased 3% with client position driving almost $1 billion of growth. We are also pleased to see that noninterest-bearing balances have continued to remain relatively stable over the last few quarters. The average rate paid on interest-bearing deposits increased to 3.44% from the 3.35% spot rate we saw at the end of June. This was driven in part by the higher use of broker deposits as seasonality and loan-to-mortgage companies drove a higher need for funding.
Deposit costs are already beginning to improve with the interest-bearing spot rate declining to approximately 3.33% by the end of September, partially due to the $9 billion of deposits, which are market indexed. Deposit rates have declined another 5 basis points in October with a spot rate today of 3.28%. We will continue to make [ progress ] on repricing the deposit portfolio as we have approximately $18 billion of promotional deposits that are set to reprice over the remaining of the year, in addition to the $1 billion of brokered CDs that are maturing.
On Slide 10, we have an overview of loans. Average loans were up 1% from the prior quarter, driven by seasonality in loans to mortgage companies. Period-end loans declined 1% or $335 million from last quarter. This included an opportunistic sale of approximately $340 million as we exited the sponsored health care lending vertical. The portfolio consisted of approximately 20 relationships of higher leverage, low pass graded health care loans. We do not have the intent to sell any other loan portfolios in the foreseeable future.
After a [ fund up] -- after a period of fund ups in our commercial real estate portfolio, the balances in this portfolio has stabilized. As previously mentioned, loan yields were up 3 basis points from second quarter due to wider spreads and fixed cash flow repricing. As we move into the fourth quarter, loan yields are likely to decline as 56% of our loan portfolio is indexed to short-term rates.
On Slide 11, we highlight the increase in fee revenue we saw in the quarter. Fee income, excluding deferred [ compensation ], increased $11 million from the prior quarter. Average daily revenue in our fixed income business improved 22% to $593,000 driving a $7 million increase in fee income. July was a relatively muted month. However, as the market's confidence in rate cuts increased, we saw increasing momentum in the business in both August and September. Lastly, other noninterest income increased $5 million due to some nonrecurring items, including securities and other gains, higher Federal Home Loan Bank dividends and [ BOLI ] benefits.
On Slide 12, we show that excluding the [ FER ] compensation, adjusted expenses decreased by $1 million. Personnel exclude deferred comp was down $1 million from prior quarter. As a reduction in incentives and commissions offset the impact of a higher day count on salary expense and elevated medical expense. The $2 million reduction to incentive included the continued step-down in retention awards that took place at the end of the second quarter and outweighed the incremental incentives associated with the higher fixed income production.
We are constantly evaluating options to improve operational efficiency. This quarter, we implemented 2 items that impacted headcount. First, we optimized the retail staffing model across our footprint to more efficiently serve our clients. We also recently outsourced our property management functions, which lowered head count and salary expense but will be offset by some incremental occupancy costs. We expect this to make our building support more efficient while providing a better experience for our clients and associates.
Moving down to occupancy and equipment. There was a $2 million increase driven by our new property management engagement as well as incremental software maintenance and depreciation from our strategic initiatives. Offsetting the increase is a $2 million reduction to outside services driven by lower advisory services as certain strategic initiatives enter the production phase.
I'll cover credit on Slide 13, which continues to perform very well. Net charge-offs decreased by $10 million to $24 million or 15 basis points of average loans. Loan loss provision was $35 million this quarter, increasing ACL coverage to 1.44%. The $11 million of reserve build included $8 million of qualitative reserves related to Hurricane Helene as well as the impact of continued grade migration, which was partially offset by improved economic scenarios.
Nonperforming loans increased $4 million with an increase in C&I slightly exceeding declines in consumer and commercial real estate. We remain optimistic that our clients can navigate to a soft landing as 63% of commercial NPLs are still current on their [indiscernible].
Overall, we are very pleased with the continued strength of our portfolio through a high rate environment and expect to see continual improvement if rates do continue to decline.
On Slide 15, we'll talk through our outlook for the remainder of the year. What we have laid out here is consistent with the guidance we gave last quarter, though we are now focusing more on total revenue versus the individual components. We believe total revenue will be flat to up 2% year-over-year, with the composition driven by what the Fed chooses to do over the next couple of months.
Our countercyclical businesses are a natural hedge against our asset sensitivity. If we see incremental declines in interest rates, those businesses revenues will offset that incremental NII pressure.
Turning to expenses. Our guidance remains unchanged as we remain committed to continuing to identify efficiencies to help offset our investments. For net charge-offs, you can see that we are trending favorably to our guidance but we have left the range unchanged until we have more information on the potential for losses that could arise from the recent weather events in our footprint. Lastly, we continue to target an 11% CET1 ratio near term.
I'll wrap up as you turn to Slide 16. I am proud of all the progress we have made as a company so far this year. We are focused on improving profitability while making the strategic enhancements needed to set us up for success as we continue to grow the franchise. As a leadership team, we remain extremely optimistic about the future of First Horizon and are excited to continue delivering value to our shareholders and a premier banking experience for our clients. Now I'll give it back to Bryan.
Thank you, Hope. Many of you have heard me say that our goal is to stack one good quarter on top of the next. This quarter added momentum to that track record and puts us one step closer to achieving our longer [indiscernible] goals.
As an organization, we are intently focused on execution. We aim to improve revenue through client growth and retention while maintaining expense discipline through operational excellence. We will continue to align capital and resources with the greatest business opportunities while enhancing our technology capabilities to deliver exceptional client experience.
I remain confident that our diversified business model, including our well-established countercyclical businesses, will allow us to continue to deliver strong shareholder value over the remainder of 2024 and into next year. Our associates' dedication combined with our attractive footprint and extraordinary client base positions us to build an unparalleled banking franchise in the Southeast. Thank you to our associates for all that you do. for our clients, communities and for each other. [ Carl], we can now open it up for questions.
[Operator Instructions]. Our first question comes from Ebrahim Poonawala, Bank of America.
I guess maybe, Bryan, Hope, it makes sense in terms of talking, about total revenues versus NII fees given the countercyclicality of your businesses. But just talk to us, I guess the question is, at least in the very near term, NII, I think Hope you mentioned some margin compression over the next quarter or 2 will impact NII. When we look at the fixed income business, the [ $47 million ] increase this quarter, is it as good as it gets in terms of the upper bound on this?
Or what's -- like we've seen a fair amount of bond book restructuring that banks, rates got cut or is there another leg higher to go on additional rate outlook? Certainly would love for you to address that.
Ebrahim. This is Hope to answer that question. I mentioned in my comments that we saw a very muted July. So we absolutely think we see some upside if we continue to see rates decline as September and August were much stronger than July. And we've seen strong momentum ending the quarter.
The one thing you mentioned was where people still buying -- we had a conversation with our business the other day. If rates go down another 75 basis points this year, they've already talked to some clients that locked things that earlier this year -- late last year that are thinking about restructuring again. And so I do think there'll be continued momentum in a decreasing rate environment.
Understood. And just the other question was around the loan-to-deposit ratio. I think you called out the decline from [ 97% to 94%], partly driven by the -- some of the actions you took during the quarter. I know we've talked about this in the past. Just remind us, when you look at the [ 94 ] loan-to-deposit ratio, is there a certain level to which you're managing to? And as a result, is that kind of making you a little bit more cautious in terms of how quickly you [indiscernible] deposit pricing lower?
We continue to monitor a loan-to-deposit ratio, but we also monitor our loans plus securities to deposit ratio. We run a much smaller securities portfolio than most of our peers. And our belief is that as much as we can use deposits to help our clients, that's where we want to put it first.
As we move forward, we continue to see loan-to-deposit ratio does tend to change as we have to fund up mortgage warehouse. And you'll see we did put additional [ broker ] on. We're comfortable generally with where it's at in the near term. But of course, we want to continue to work it down over time.
I would say it's not the biggest piece of our competitive pricing. What we're trying to do is defend our home front. We want to make sure that clients that are with us are staying with us. And so I would say the new to bank absolutely comes in at a higher rate but it's really the back book and the current clients that are being made offers by other banks that are out there looking for the same deposit growth that we're looking for. and to retain them in order to continue to have deposit growth quarter-over-quarter does come in a little bit higher [indiscernible] premium.
Ebrahim, I'll add. We look at our deposit activity and deposit pricing largely through the customer acquisition lens. We don't think about it in a significant way around loan-to-deposit ratio. So while that is important over time, we look at growing customer relationships. And you'll note that we grew customer deposits by 3% during the course of this quarter, about $1 billion or so on the customer side. And we want to continue to grow in what are very attractive footprint with high-quality customer relationships. We're pricing attractively versus wholesale funds, and we're pricing attractively to gain market share.
So while the 2 are somewhat related, we spend more time focusing on how do we grow our customer relationships, particularly in our retail private client [ and ] high net worth businesses.
Our next question comes from Michael Rose of Raymond James.
Hope, I just wanted to dig into your comments on the margin a little bit. Certainly I understand a little bit more pressure in the fourth quarter just given the mismatch of timing that you referenced. But as we think about the margin into next year with some of the tailwinds, as you mentioned on the deposit side, some additional repricing opportunities. I think the slide deck mentioned a chunk of deposits that was eligible for repricing $18 million of promotional client deposits that are eligible for pricing in the fourth quarter.
Are we at a point where the fourth quarter do you think is the inflection point for the NIM and we can move higher despite your rate sensitivity? Or is the expectation that it's going to be a push and pull each quarter, and we shouldn't expect the margin to really move at least over the next couple of quarters?
Michael, thank you for the question. I would say it's probably going to be more of a push and pull quarter-to-quarter. It really depends on how quickly we do the rate cuts. We see back-to-back rate cuts in November, December, and then we see some stabilization. Our margin can stabilize, but we continue to see month after month or quarter after quarter repricing down.
As I mentioned in my comments, our loans are going to -- 59% of our loans are going to reprice down their deposits. We're going to have to work through that as they come off promotions and new to bank. So I don't think it will necessarily be a steady trajectory one way or the other based on the current forward curve in 2025, but we are doing everything we can to put things in place to make sure that we can take somewhat asset sensitivity off of the table as we see a very uncertain rate cut environment.
For example, we just shortened our new-to-bank promo that you see a 90-day guarantee to 45 days guarantee, and that allows us a little bit more flexibility quicker and we are less asset sensitive currently because of that deposit repricing. It's just maybe the lag quarter-to-quarter, especially depending on how late in a quarter we get the loan repricing before we can get the deposit side.
One of the key variables, Michael, is, as Hope said, the pacing of rate cuts in. And as you properly noted, the more significant rate cuts are the more impact you will see on net interest income. But the more offset you'll see in our fixed income business, et cetera, and that's why we focused on the total revenue where we think we're significantly more balanced and less sensitive to interest rate cycles, then it might appear if you focus on one line item or the other.
But we do believe that we've got the balance sheet positioned in such a way that we can manage through interest rate volatility and we will adapt to whatever pace the FOMC sets for moving rates in the rest of this year and into 2025.
Certainly understand that. Maybe just as a follow-up, and I know the rate backdrop is difficult to project, and I know it's early for next year, but is the plan the expectation that you can grow kind of adjusted PPNR year-over-year? And are you planning at this point for positive operating leverage?
And I ask that because I certainly understand you pulled some levers on the cost savings front, but we're hearing more and more banks looking higher bankers, I assume that would be some of your expectations to drive some balance sheet growth. But just wondering -- just initially, if you had any comments on how we should kind of think about that?
Yes, we'll provide a little more guidance in the remainder of this quarter or outlook for next year. But I sit here today, I expect that we will drive positive PPNR next year. And we're still working through the various line items, but I do think you will see us growing our PPNR in 2025.
Our next question comes from Jon Arfstrom of RBC Capital.
Bryan, one for you. Give us your thoughts on loan growth expectations. It looks like you guys referenced some CRE stability, but C&I was a bit weaker. But talk about what you're seeing, how much of this is self-imposed and what kind of an outlook you have for growth?
Yes. I would say very little of what we're seeing is self-imposed. We're not limiting the size of the balance sheet. There's one caveat to that, that I will come back to in a second. The loan growth in the marketplace is somewhat muted at this point. It has not picked up. I couldn't tell you how to weight the parts, but I suspect some part of it is what happens in the elections that are coming up in the next month.
It's partly weighted on what the Fed is going to do with interest rates. And in particular, when deals start to look better financially. And then just overall, are we going to have a [ soft ] landing or something else. And I'm somewhat optimistic that we get through the next 90 days we'll have greater clarity maybe on all 3 of those. And if we do, I think there's some pent-up loan demand, at least we hear that in our customer conversations.
The marketplace is still somewhat muted, and it's still very, very competitive at this point. I mentioned the one exception. There are a few places where we have taken some participations where we had been in participations for a period of time. We had not broadened or deepened the relationship as we thought we might, and we've used the opportunity to exit out of some of that. But other than that, we're looking to grow with our client base. We're looking to grow and lean in when customers are ready to make investments.
Okay. Fair enough on that. So maybe a little more optimism potentially. I know that's a lot of hedging there, but it feels like you're still somewhat optimistic on growth.
I didn't mean to hedge as much as I meant to convey uncertainty about what's going to happen.
Okay. Hope, a follow-up on fixed income. Are you willing to share what the ADRs look like in August and September? How big of a step-up that was? I think that would help us with maybe a run rate.
Jon, I actually don't have that in front of me. August and September were generally pretty equal, as I recall. But the end of September, following the rate cuts was a significant uptick. And right before the rate [ takes ] were kind of quiet. I would say that months were not materially different, but the weeks hold a much different story.
Nobody really wanted to buy anything right before the rate cut after the rate cut, we finished the quarter really strong. And I think we'll see that same type of momentum as there's uncertainty about rate cuts in the coming few months.
Jon, the 10-year the rate curve has moved around a good bit as people's expectations for the economy have changed. I'll give you the last 2 weeks. If you look at the first week of October, we were a little over $1.1 million. Last week, we were a little over $500,000. So 2 weeks does not make a trend, and it moves around based on what interest rates and sentiment in the market are doing.
On the whole, we were a little over -- I think we're [ 5.63 ] for this quarter. and just passed, and our outlook is to be slightly better for that than the remainder of the year. And you have to keep in mind as you well know, at some point, the markets tend to shut down as you get into the back part of the year. So we're optimistic on activity for the remainder of this year.
[Operator Instructions] Next question comes from Jared Shaw of Barclays Capital.
Maybe just going back on the deposit side, the $18 billion that you referenced that's coming due in fourth quarter. Could you give us an update on the pricing of those deposits now and where you expect to see that moving to? And also, is there a term change in that promotion?
Jared, yes, starting at the end of your question, we have changed the term as recently as last week. As we continue to look at how to bring down rates, it is really a sensitivity analysis of how sensitive our clients see how quickly the rates are falling. And so we did just roll out the end of last week new rates that, as I mentioned earlier, only guaranteed 45 days versus our prior 90.
Our money market is currently at [ 4.25 ]. That compares to [ 5. 05 ] last quarter when you asked me on the earnings call. Our retention offer is now 3.5%. And so when we've been walking it back ahead of the rate cut and after, and we have quite a few scenarios for how that might look back depending on the rate cuts we see December rate cut is really hard for us to make much headway with deposits. And so the November rate cut will have the most meaningful impact on how much we can walk it back.
Okay. Okay. And then as we look at the deposit composition, what's the appetite for additional brokered from here? I heard your commentary that you built that up in anticipation of the mortgage business. Should we expect to see broker be a bigger part of the overall deposit mix? Or are we near the top?
Jared, our goal is always used client money first and brokerage seconds. So let's start with that being our goal, the more we can bring and retain client money, the less brokerage we need broker for us is always kind of a match funding for mortgage warehouse. We saw mortgage warehouse on average of about $400 million last quarter, which I'll note is against past years, typically, Q3 comes down, and we actually saw it come up with some of the rate cuts. And we saw our refi activity actually increased 5% quarter-over-quarter.
So as we think about that is really going to be more about mortgage warehouse and how much we continue to have balances there in the [indiscernible] but yes, our goal is to always try to get out of it quarter-over-quarter when we can whether we see decreasing mortgage warehouse balances or increasing client money. But I am comfortable [ where ] that we're well below our peer group the last couple of quarters compared to our brokerage versus theirs.
Okay. And then just finally for me, I know you're guiding more towards total revenue versus NII versus fees, but with the expectation. How should we think about the dynamic between continued margin pressure, but potentially some balance sheet growth, are we at a trough for NII here or trying to try and gauge or what the -- how we're ending the year, what the exit of NII is for '24?
Jared, for 2024, I don't see much of a change from our prior guidance and you look at the new revenue guidance we gave, it is in line of both revenue and NII [indiscernible] we going to come in the low end of one and the high end on the other.
For us, not just for Q4 going into next year, as we think about NII, the big unknown for us is how much mortgage are we going to see. It's our highest yielding asset and so we did see a large refi movement. It moved from a 22% to historical 30% or 40% or 50% we've been seeing, that would help NII significantly.
So as we talk about countercyclical, FHN Financial is in the income line with the majority of mortgage warehouse and mortgage is in the NII line. So that also is as we talk about embedded hedges, we do have an embedded hedge with hopefully, loan growth going into 2025 in both of those businesses.
Our next question comes from Samuel Varga of UBS.
I just wanted to switch over to deposits a little bit. I wanted to see if you could give some color on any initiatives you might have going on to attract some noninterest-bearing deposits, whether it's through retail or commercial.
Yes. This is Bryan. We're looking to really grow across the entire deposit base. We have had very been very active in growing our noninterest-bearing deposits. They've been stable, which it was -- it sort of follows along with what we articulated earlier in the year, which is you get to a core level as a percentage, it drops a little bit, but that's because we grew noninterest bearing.
But we're looking to grow customer relationships and growing core checking accounts, noninterest-bearing low-cost deposits is an important part of that. So we have had a number of efforts across our entire franchise to grow those deposits. And we will continue to lean in and look to grow client customer relationships on the commercial and the consumer side.
Understood. And then, Hope, the 12% of loans that [indiscernible]. Can you give us a sense for what sort of weighted average yield that part of the book currently has? And I understand that over the next year, there's not much of a reset on any of those. But I guess as you think about late '25 and '26, are there sort of bigger chunks that we should be aware of as a main model NII?
I don't have the weighted average of where they're at currently from the [ rate]. But we don't have a large wall of them at any time in the next 3 years. They've kind of been steadily added to our balance sheet over the last 2, 2.5 years. What I'll say though is we expect a lot of them to get prepaid.
Being fixed for 5, 6, 7 years, whomever, they have less at a 6%, 7%, if we really see rates get cut 100% to 200%. That is one of the items that I think -- that I mentioned earlier that we could see a large amount of refi in the [ ARM ] space or what we have on our balance sheet today.
If I remember correctly, and I'll look to Natalie because she remember these numbers better than I do. But you can use as a proxy. I think our consumer loan portfolio yielded in the 5.8% or so range, maybe a little higher in the third quarter, and that's largely driven by [ ARM]. So that's a proxy for that number.
[Operator Instructions]. Next question comes from Chris McGratty of KBW.
Hope maybe a question or Bryan, on the PPNR [ 25 ] being above [ 24%]. Just I guess a couple of questions. Maybe a comment between is that more of a revenue comment or an expense control given your steps? And secondarily, does that currently factor in the forward curve right now?
Yes, yes. So if I break that [ yes ] down, we -- we can prognosticate about rates, but it's probably most efficient to always use the [ cord ] curve. So that's sort of our point of reference. And it's been in flux and we're always focused on growing revenue. We're always focused on controlling expenses.
I think we have a number of catalysts that we are working to leverage that are really, really important in terms of our ability not only of driving PPNR in 2025, but creating long-term shareholder value, essentially taking our returns a little over 13% on tangible common equity back north of 15-plus percent. And those initiatives that we're focused on are really the logical follow-on of the work associated with the merger of equals that didn't get done during the integration period.
And so we see a number of opportunities once we get the systems investments made at a very tactical level to grow revenue, to deepen relationships to drive additional loan growth and to control our costs, centralize -- further centralizing processes things of that nature. So I'll circle back around to, yes, we think it's going to be across all of the levers that you mentioned.
Okay. That's really helpful. And then maybe on regulation, your target of 11% on CET1, you're slightly above it. I would expect you're saying you're going to continue with the buyback. But just any changes over the medium term that you might be contemplating now that Basel have been a little bit watered down? And also maybe a comment, Bryan, about where you are on the investment for $100 billion?
Yes. Yes. We look at capital and clearly, our Board is involved in any discussions about buyback and authorization. We feel like we have sufficient authorization to get us through.
The fourth quarter, we will talk to the Board in the early part of 2025 about further authorization. We don't see any short-term catalyst to bring the CET1 ratio below 11%. What we've said is we're looking at the economy and how things play out. And I would circle back in some ways to what I said earlier that customers have uncertainty about soft landing and interest rates and the election process.
That clarity they get will also be clarifying to us. And the more certain we get about continued strength and improvement in credit performance and things like that, the more comfortable we get as we approach a soft landing to bring that ratio down. We do think that the CET1 ratio is above where we need it through the cycle. So we will look at that. Probably it will be sometime in the early part of 2025 before we really start to assess -- reassess it in a meaningful way.
The second part of that is regulatory hurdles, particularly around becoming an [ LFI ] at $100 billion. We are doing a fair amount of work in making investments in the near term to prepare for crossing that threshold as we look at it. We think we've got a number of years to do that work, and we will feather those costs in and over time and build those capabilities that infrastructure.
But given the markets that we're in, given the strong client relationships that we have, we do believe that leaning forward and growing the balance sheet is an important part of it. And it's not a matter of if we hit the $100 billion threshold is really a matter of when and that we are going to build the preparatory infrastructure to get it in place so that it won't be an obstacle to our ability to continue to grow on the other side of that.
I also think that in the event that you have a more difficult landing, building that infrastructure gives us the opportunity to be opportunistic if they're a strong deposit base that we have the opportunity to pick up in a more difficult financial set of circumstance you have more trouble institutions.
Our next question comes from Timur Braziler of Wells Fargo.
Maybe one for Hope, just following up on some of your comments relating to mortgage outlook for next year. I guess what's the rate environment need to look like for mortgage to get back to some of the type of performance that maybe you were implying on the upside?
Our overall belief is that we have to be at a sub-6% mortgage rate. How that will play out is a little bit uncertain. This last 50 basis point cut fairly touched mortgage rates as the Board -- as the curve became less inverted and actually had a steepened curve for a little while there.
What I think is it will be the telling thing and the thing that we continue to see is new home purchases, so not refi this first-time home purchases, second homes has been historically low for the last 2 years. So a lot of the data we're seeing from the mortgage industry says we have the highest supply we've seen. And if [ they ] think buyers will start getting back in.
So I think it's going to be a combination of new purchases when we get under 6% as well as a refi for the people that are in the mixed rate part of their [ arm].
Okay. And then maybe just on the revenue guide, it implies a pretty wide range of outcomes in the fourth quarter. I'm just wondering where the greater variability is? Is it on the NII side? Is it on the fee side? And then maybe more specifically on fees, you called out some of the other fees this quarter being onetime in nature. Can you maybe give us a starting run rate for 4Q kind of ex some of those onetime fees?
Sure. What I would say is start with -- we did not intend to change our range. It really comes then to rounding as we would have had to say like -- instead of flat would have been 0.33%. The intent is not at all to change our revenue range for Q1 or for the year.
It is -- there's probably more upside on fee income and more downside on NII. If the forward curve plays out, we really see 75 basis points of cuts in 2 successive months. NII will be on the lower side and fee income will pick up. If we don't see any cuts, NII is going to come in better, and I think the income would look similar to this quarter.
It's really hard to handicap whether -- when the current [ board curves ] is 75 basis points, but most of the money doesn't believe a little bit more than [ 25 ].
Okay. And then just the one-timers this quarter for fees? Is that the full increase in the other line?
[ Up ] at the other items, it always bounces around. BOLI is something that just comes when it comes, and you don't know. So we often have to comment on BOLI is we do run a portfolio of that moving quarter-to-quarter. I can't really predict what's going to happen next quarter.
Obviously, you can figure out [indiscernible] that those dividends paying quarter arrears and the more that we're borrowing, the more we get those dividends. I don't expect it to be materially up or down on us. It tends to go about in a $5 million range quarter-to-quarter.
Great. And if I could sneak one more question in. So the comment on commercial real estate, that the funding schedule has kind of stabilized out. I'm just wondering, as we do get rate cuts as paydowns start to accelerate, is there any way you can quantify maybe what historical paydowns have looked like? What they've looked like more recently? And what type of headwind that might be to broader loan growth?
You're talking about pay downs on NPLs?
Just commercial real estate.
Yes, just paydown on commercial real estate.
Okay. Sorry, I thought you're talking about the ones that we mentioned that were in nonperforming that we're still paying.
Yes. I think -- this is Thomas Hung here. I think that's going to be a little hard to predict right now because for us, a lot of our commercial real estate is went heavier on the construction side than probably a lot of our peers. And so in terms of paydowns, it will really come down to the [indiscernible] financing market, how much appetite there is for that firm takeout financing. That's what will really drive the level of paydown that we see.
Our next question comes from Christopher Marinac of [ J Montgomery Scott ].
I had a follow-up credit question as it relates to the Shared National Credit exam this year. Is there anything that could fall out on that in terms of either inflows of NPAs or more importantly, [ net ] charge-offs as we move into Q4 and Q1?
Yes. This is Thomas Hung again. I don't expect so. Overall, shared national credits has run a little under $8 billion for us overall. And if you look at kind of the relative performance of our SNC book through our C&I book, the metrics are all generally about the same in line.
There's not really a material difference in terms of classified assets, NPLs or year-to-date net charge-offs and that [indiscernible]. So my expectation is that SNC should continue to perform about the same as the overall book. We haven't really seen a variance.
Great. And then just a quick one for you. I know you broke out a lot of information on the other expense numbers this morning. Is there anything in there for operational losses or customer fraud, things of that nature that would stand out?
There's nothing that stands out now. As I said, it would seem as a bunch of small items that added up to $5 million. We did not have significant fraud change quarter-over-quarter or any large onetime gains on any sales of property or things like that.
We currently have no further questions. I'd like to hand back to Bryan Jordan, CEO, for any closing remarks.
Thank you, [ Karl]. Thank you all for joining our call this morning. We appreciate your time and your interest. Please follow up with any additional questions that you may have. Hope everyone has a great day.
As we conclude today's call, we thank everyone for joining. You may now disconnect your lines.