kbw winter financial services symposium
TRANSCRIPT
KBW Winter Financial Services Symposium
William Losch, Chief Financial Officer
February 11, 2021
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Disclaimer
Portions of this presentation use non-GAAP financial information. Each of those portions is so noted, and a reconciliation of that non-GAAP information to comparable GAAP information is provided in a footnote or in the appendix at the end of this presentation. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results. This presentation also includes certain non-GAAP financial measures related to “tangible common equity” and certain financial measures excluding notable items, including merger-related charges. Notable items include certain revenue or expense items that may occur in a reporting period which management does not consider indicative of ongoing financial performance. Management believes it is useful for the investment community to consider financial metrics with and without notable items in order to enable a better understanding of company results, facilitate comparability of period-to-period financial results, and to evaluate and forecast those results. Although FHN has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of results under GAAP. For more information on these calculations and to view the reconciliations to the most comparable GAAP measures, please refer to the appendix of this presentation.
Forward-Looking StatementsThis communication may contain forward-looking information, including guidance, involving significant risks and uncertainties. Forward-looking information is identified by words such as "believe," "expect," "anticipate," "intend," "estimate," "should," "is likely," "will," "going forward," and other expressions that indicate future events and trends and may be followed by or reference cautionary statements. A number of factors could cause actual results to differ materially from results stated in or suggested by forward-looking information. Those factors include: general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements including the slope of the yield curve; competition; ability to execute business plans; regional, national, and world-wide political developments; recent and future legislative and regulatory developments; inflation or deflation; market (particularly real estate market) and monetary fluctuations; pestilence; man-made or natural disasters; customer, investor and regulatory responses to any of those conditions or events; matters mentioned in this release; critical accounting estimates; FHN’s success in executing its business plans and strategies following its 2020 merger with IBERIABANK Corporation, and managing the risks involved; the potential impacts on FHN’s businesses of the coronavirus COVID-19 pandemic, including negative impacts from quarantines, market declines, and volatility, and changes in customer behavior related to COVID-19; and other factors described in FHN's annual report on Form 10-K, FHN’s other recent filings with the SEC, and FHN’s most recent earnings release and related materials. FHN disclaims any obligation to update any forward-looking statements to reflect future events or developments, or changes in expectations.
Throughout this presentation, numbers may not foot due to rounding and all references to loans are averages unless otherwise stated.
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• Integration activities ongoing, cost saves being realized, and early
success on revenue synergies evident
• Merger providing additional expense, investment and credit flexibility in
current environment
Resilient Business Model Well-Positioned to Deliver Top-Quartile Returns
• Countercyclical businesses providing profitable offsets
• Conservative risk profile, balance sheet strength and significant loss
absorption capacity
• Reallocating resources to higher growth markets
• Investing in higher-return specialty businesses
• Evolving technology and fintech capabilities
MOE
Progressing
Well
Proven
Defensive
Differentiation
Building
Offensive
Differentiation
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Well-diversified business model with attractive geographic footprint
Headquarters
• Diversified business mix with regional
and specialty banking focus
Highly attractive markets
Countercyclical businesses allow for
more resilient returns
• Top 15 Southern MSAs projected to
outpace national average population
growth by 34%
• History of successfully executing
M&A transactions
• Proven expense discipline commitment
• Strong risk and credit culture
Competitive Advantage
Top 5 deposit market share in 10 of the
Top 20 Southern MSAs
$810 Million
4Q20 Adjusted Revenue1
$59.8 Billion
4Q20 Loans
$69.6 Billion
4Q20 Deposits
64%
36%
Net Interest Income
Fee Income
78%
22%
Commercial
Consumer
68%
32%
Interest Bearing
Non Interest Bearing
Source,: MSA weighted average population data per S&P Global of 12/31/2020,; Map as of 11/30/20.. 1 Adjusted revenue excluding $.1m purchase accounting gain which is nontaxable.
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Well-diversified, balanced business mix
Regional Banking Specialty Banking
$59 billion
loan mix2
$272 million
fee income2
• Market-centric business model to
adapt to local market needs
• Experienced, trusted RMs
• Targeting higher-value
Commercial and Private Client
relationships
• Strong retail bank that provides
efficient source of funding
• Opportunity for cross-sell and
referrals across lines of business
Asset Driven:
• ABL
• Loans to mortgage companies
• Equipment Finance
• Corporate Banking/Syndications
• CRE
• Franchise Finance
• Correspondent
Fee Driven:
• Fixed Income
• Mortgage Banking/Title
• Treasury Mgmt/International
Positioned to drive relative outperformance with strong collaboration across
regional footprint and specialty businesses
ROA
1.7%
Efficiency Ratio
55%
ROE1
18%
ROA
2.7%
ROE1
36%
Efficiency Ratio
39%
69%31%
39% 61%
1Segment equity is allocated based on an internal allocation methodology 2Data as of 4Q20, balances exclude amounts in Corporate
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Merger integration update
Systems
Integration
Talent
• Associate retention remains strong, including in
leadership/critical positions (95%)
• New sales team structures and credit partnerships for
combined organization successfully implemented
• Completed SunTrust Branch conversion post IBERIABANK
merger announcement. Customer retention at 94%
• Early system conversions completed include:
HR (Payroll, Benefits etc)
Retail Brokerage
Mortgage division operating on single platform
Consolidated procurement and expense
management systems
Converted and upgraded to a consolidated project
management system
Converted training systems and migrated associates to a
new digital training platform
• Wealth and Trust conversions scheduled for early summer
• Core systems (Loan and Deposit) conversion planned for fall
of 2021
Financial Highlights
Increased targeted
annualized cost saves to
~$200 million by 1H22
• Achieved ~$32 million
YTD with ~$14 million
in 4Q20
Seeing strong early
success on revenue
synergies not included in
deal economics
Annualized Savings$s in millions
Actual Estimated3Q20 4Q20 2021 2022~$32 ~$56 ~$115 ~$200
Aligning cultures and making good progress;
focused on optimizing customer experience
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Countercyclical and specialty businesses enhance revenue profile
$ 278 million
$ 423 million
2019 2020
$4.4 billion
$6.4 billion
2019 2020
• Fixed income, loans to mortgage companies and
mortgage banking provide attractive ballast in low-
rate environments
Core customer revenue levels provide
attractive returns during periods of rising rates
• Niche specialty businesses drive improved
differentiation for commercial customers and strong
cross-sell opportunities
Emphasis on high-return businesses where we have deep knowledge and expertise
2019 – 2020 Revenue Growth1,2
Average LMC Balances2,3Fixed Income Fees2 Mortgage Banking Fees2
4.5%
2.6%
FHN + IBKC
Adj. Combined
Peers
$99 million
$206 million
2019 2020
1Peer group includes BPOP, CFG, CIT, CMA, EWBC, FITB, FRC, HBAN, KEY, MTB, PBCT, RF, SBNY, SIVB, SNV, TCF, and ZION 2Illustrative of combined FHN and IBKC results from public disclosures. Fixed Income and LMC reflects FHN only; Mortgage Banking reflects legacy FHN and legacy IBKC
combined with no adjustments. 3Represents average balances from 4Q19 and 4Q20
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Lower-risk profile with solid capital positioning
2.8%3.5%
0.9%
6.9%
2.0%
-1.1%FHN Peers
4.91%
1.76%
0.75 % 0.70%
FHN Peers
1Peer group includes BPOP, CFG, CIT, CMA, EWBC, FITB, FRC, HBAN, KEY, MTB, PBCT, RF, SBNY, SIVB, SNV, TCF, and ZION . 2 Based on Fed Comprehensive Capital Analysis and Review (CCAR) Severely Adverse scenario released September 17, 2020 using a flat (static) balance sheet over 9 quarter planning horizon from 3Q20
to 3Q22 Current Expected Credit Loss. Fed methodology sets allowance equal to the next four quarters of forecasted losses. References to peer stress testing data represents the median 2H20 CCAR results of 33 participating firms. Also assumes maintenance of all preferred dividends. Median change in peer results may not
equal difference from median starting point to median minimum. PPNR = Pre-Provision Net Revenue Source: Federal Reserve
• PPNR/Assets outperformed CCAR-bank median ~150 bps
• Loss rates >400 bps below CCAR-bank median
• Significant loss absorption capacity of ~2.2% of loans
~45% of portfolio marked
• Transformed loan portfolio since Global Financial Crisis from
higher-risk, real estate concentration to commercially
diversified portfolio
Stress test results illustrate PPNR resilience and lower-risk characteristics of
commercially-oriented portfolio
Loan Loss
Rate
PPNR %
Assets
Pre-tax
Net Income %
Assets
Stress test results outperform CCAR median2Substantial loss absorption capacity
Significant improvement
in NPL levels1
2008 3Q203Q20 2008
1.80%2.14% 2.22%
4Q20
ACL/Total
Loans
4Q20
ACL/Total
Loans ex.
LMC & PPP
4Q20
total loss
absorbtion
capacity
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Redeploying capital to higher growth, higher return products and markets
28%
22%13%
10%
9%
9%
5%4%
36%
31%
10%
6%
6%
5%4%2%
Focus on profitable, sustainable relationship-driven growth
• Expanded footprint has significant scale and
client reach in attractive markets
Reallocating resources and investments in
talent and capabilities toward higher-
opportunity geographies
• Ability to leverage relationships and specialty
expertise across markets
Simplifying banker ecosystem with
migration to digital channels
• Specialty areas drive enhanced risk-adjusted
returns and economic profit
ABL/equipment more resilient during
downturns as clients provide essential
goods and services
$40.6 billion
4Q20 Regional Loan Portfolio
TN
FL LA
TX
NC & VA
Other
ALGA
Corporate
Correspondent
$18.2 billion
4Q20 Specialty Loan Portfolio
Loans to Mortgage
Companies
Commercial Real Estate
Asset Based Lending
Equipment Finance
Franchise Finance
Other
Corporate Banking
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Investing to enhance client experience and improve efficiency
New
Technology
&
Operational
Merger expense saves drive incremental investment in people and technology
• nCino platform deployment for loan origination and Treasury Management
• New wire system
• Pipeline management capability
• Customer relationship management system
• Imaging system
• Cloud-based core (Finxact) with API enabled apps for VirtualBank
• Advanced data governance tool set
• Cloud-based enterprise data hub
• Investment in Canapi
• Cloud-based consumer /small business mobile app
Targeted cost saves are net of technology investments
Expense
Saves
• Net targeted ~$200 million in cost saves
Gross ~$250 million
Allows for reinvestment of ~$50 million through mid-2022
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Targeting top-quartile returns
Medium-Term Targets
Near-Zero Interest Rate
Environment
Pre-Pandemic Interest Rate
Environment
Adjusted ROTCE ~12% - 14% ~15% - 17%
Fed funds effective rate
10-year treasury yield
~10 bps
~1.20%
~2.10%
~3.20%
Strength from countercyclical
businesses, combined with
enhanced scale and merger
efficiencies result in stable to
improving returns on capital
Assumes gradual improvement in
macroeconomic conditions with
moderate inflation and a return to
more normalized countercyclical
business activity
Assumes CET1 ratio of ~9.5%, provision expense equals net charge-offs and stable tax rates
Well positioned to deliver top-quartile returns from a diversified business model
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Well-positioned to deliver strong execution
• MOE enhances efficiency with cost saves and technology investments
Uniquely positioned to deliver significant cost savings in a challenging environment
• Defensive, balanced business model to navigate challenging environment
Countercyclical businesses producing above average revenue growth
45% of loan book marked with ~$1.3 billion of total loss absorption capacity
• Building strong offense with focus on differentiation
Expanded franchise in attractive Southern markets
Diversified balance sheet across multiple geographies and products
• Flexibility to deploy capital through organic growth, dividends, and share buybacks
Significant opportunities to drive relative outperformance and
build shareholder value
Appendix
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Countercyclical businesses and favorable portfolio mix help First Horizon outperform peers in latest stress test
Based on Fed Comprehensive Capital Analysis and Review (CCAR) Severely Adverse scenario released September 17, 2020 using a flat (static) balance sheet over 9 quarter planning horizon from 3Q20 to 3Q22 $ in thousands
• Severe global recession with heightened stress in commercial
real estate and corporate debt markets
Real GDP grows 8.5%
Unemployment up to 12.5%
Short-term rates near zero
• Asset prices drop sharply
House prices down 25.7%
CRE prices down 28.5%
Equity prices fall 43%, surge in market volatility
Fixed Income Countercyclical Contribution
• 9 quarter cumulative losses of $1.5B; additional pre-tax
loss capacity of ~$3.1B to 4.5% CET1 Capital regulatory
requirement
• FHN’s portfolio mix contributes to lower losses
Loans to mortgage companies have relatively low
loss rates and represent ~7% of average loans
Loss rates excluding PPP and LTMC are 3.0%
Credit card portfolio is <0.5% of average loans
First Horizon Stressed Loan Loss Rate
0%
5%
10%
15%
20%
25%
$-
$50
$100
$150
$200
$250
$300
$350
Total PPNR Fixed Income PPNR Fixed Income PPNR %
Note: 3Q '20 Total PPNR = 713
6.9%2.8%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Total Loan Losses
Other Loans
Other Consumer
Credit Cards
Commercial and Industrial
Commercial real estate
Junior liens and HELOCs
First-lien mortgages2020 First Horizon Stress Test Results
Median 2020 Peer Results
Stress testing