First Horizon Q1 2024 Earnings Report $18.06 +1.55 (+9.39%) Closing price 03:59 PM EasternExtended Trading$18.41 +0.35 (+1.94%) As of 06:39 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast First Horizon EPS ResultsActual EPS$0.35Consensus EPS $0.34Beat/MissBeat by +$0.01One Year Ago EPS$0.46First Horizon Revenue ResultsActual Revenue$819.00 millionExpected Revenue$809.51 millionBeat/MissBeat by +$9.49 millionYoY Revenue Growth-4.70%First Horizon Announcement DetailsQuarterQ1 2024Date4/17/2024TimeBefore Market OpensConference Call DateWednesday, April 17, 2024Conference Call Time9:30AM ETUpcoming EarningsFirst Horizon's Q1 2025 earnings is scheduled for Wednesday, April 16, 2025, with a conference call scheduled at 9:30 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryFHN ProfileSlide DeckFull Screen Slide DeckPowered by First Horizon Q1 2024 Earnings Call TranscriptProvided by QuartrApril 17, 2024 ShareLink copied to clipboard.There are 14 speakers on the call. Operator00:00:00Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla, and I will be coordinating your call today. I will now hand you over to your host, Natalie Flanders, Head of Investor Relations to begin. Natalie, please go ahead. Speaker 100:00:24Thank you, Carla. Good morning. Welcome to our Q1 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Brian Jordan and Chief Financial Officer, Hope Demchalski, will provide prepared remarks and then we'll be happy to take your questions. Speaker 100:00:42We'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, and 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. Speaker 100:01:18These 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 Brian. Speaker 200:01:34Thank you, Natalie. Good morning, everyone, and thank you for joining our call. The Q1 of 2024 was another strong quarter for First Horizon, demonstrating our ability to produce consistent returns for our shareholders. We grew revenue both through expanding our margin and improvement in our countercyclical businesses, while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate base. Speaker 200:02:16In honor of our 160th anniversary, we recently announced our Grants for Good campaign, which will award $1,600,000 in grants to non profit organizations within our 12 state footprint. We believe that the communities where we do business are the foundation of First Horizon's long record of success and we are proud to continue to support the clients and communities in our markets. On Slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of 0.35 dollars per share, up 9% from the prior quarter with pre provision net revenue up $25,000,000 Adjusted return on tangible common equity improved to 11.6% driven by positive operating leverage as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our countercyclical businesses. Speaker 200:03:26We grew the net interest margin 10 basis points from the 4th quarter from improved pricing on both loans and deposits, driving a $7,000,000 increase in net interest income. FHM Financial had a stronger quarter as well with a $15,000,000 increase in fixed income fees. In January, our Board approved a $650,000,000 share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150,000,000 of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near term target. Speaker 200:04:19As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter after quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint, a competitive product set and a strong credit culture that will allow us to profitably navigate the ever changing economic outlook of the upcoming year. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope? Speaker 100:04:55Thank you, Brian. Good morning. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre provision net revenue of $323,000,000 up $25,000,000 from the prior quarter. Net interest income increased $7,000,000 from 4th quarter driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Speaker 100:05:23Fees, excluding deferred comp, were up $13,000,000 from last quarter, driven by higher revenues from our fixed income business, which saw a 58% increase in ADR. Expenses, excluding deferred comp, were down $4,000,000 linked quarter, driven by a significant reduction to outside services, which as previously mentioned were elevated in the 4th quarter. That reduction was partially offset by personnel increases for annual merit, seasonal benefits and revenue driven incentives within our fixed income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Speaker 100:06:18Provision expense was $50,000,000 this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On slide 7, we outline a couple of notable items in the quarter, which reduced results by $0.02 per share. 1st quarter notable items include incremental expense of $10,000,000 for the FDIC special assessments, which stemmed from revised estimates the FDIC provided in February. We also had $5,000,000 of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies. Speaker 100:07:04We also noted an upcoming event in Q2. On April 1, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on May 1. The Series D shares were acquired during the Iberia merger of equals and do not qualify for capital treatment as the first call date was within a 5 year window. The interest rate was set to convert from a fixed coupon to a 3 month SOFR plus 4.12% in May. 2nd quarter will include an approximately $7,000,000 non cash charge associated with retirement of this instrument. Speaker 100:07:46On Slide 8, you will see that margin expanded 10 basis points from the prior quarter to 3.37 percent, improving MII by $7,000,000 1st quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023 with interest bearing deposit costs declining 9 basis points from prior quarter. Loan yields also expanded 9 basis points from the benefit of wider spreads on new and renewing loans as well as the ability to redeploy lower yielding fixed rate cash flows. The path for deposit costs over the rest of the year will depend on when the Fed decides to cut rates as well as the level of competition we see in our markets. Meanwhile, loan yields still have room to modestly expand as fixed cash flows continue to reprice. As you can see on Slide 9, we've successfully maintained deposit balances while reducing our deposit costs. Speaker 100:08:51Period end deposits are flat quarter to quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest bearing rate paid. We continue to see strong retention on the promotional deposits repriced last quarter with about 90% retention on both the number of clients and the balances. We had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately $800,000,000 of brokered CDs maturing in the 2nd quarter. Though we continue to see some rotation out of non interest bearing in January, balances were relatively flat since February. We have an overview of our diversified loan portfolio on Slide 10. Speaker 100:09:44Period end loans were up 1% from the prior quarter. Loans to mortgage companies are up 17% or $343,000,000 at period end, though average balances were down slightly due to typical seasonality in the business. CRE loans are up $210,000,000 driven by fund ups primarily in multifamily. We added some additional CRE detail in the appendix this quarter, including a geographical breakdown that illustrates the granularity and attractive footprint of the portfolio. Loan yields are up 9 basis points continuing to benefit from wider spreads on new and renewing loans as well as continued repricing of fixed rate cash flows. Speaker 100:10:29Spreads on new loans increased 46 basis points year over year. Fixed rate cash flow should continue to be a tailwind as we have $4,000,000,000 of cash flows coming back over the next year with a roll off yield of approximately 4.4%. On Slide 11, you can see that our countercyclical businesses had a relatively strong quarter. Average daily revenue in our fixed income business increased 200 and $68,000 from 4th quarter, contributing an additional $15,000,000 of fee income. The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market's expectation that short term rates have peaked and were likely headed lower. Speaker 100:11:16Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business will remain solid, though not as strong 1st quarter levels. Mortgage revenue also increased by $4,000,000 primarily due to higher volumes. Service charges and fees decreased $2,000,000 due to seasonality and overdraft fees. Card and digital banking fees rebounded $3,000,000 as 4th quarter included a nonrecurring impact from an accounting methodology adjustment on interchange rebates. Lastly, our non interest income declined $6,000,000 mostly due to lower FHLB dividends as well as a modest reduction in letter of credit and swap fees. Speaker 100:12:03Slide 12. We show that excluding deferred compensation, adjusted expenses are down $4,000,000 Personnel excluding deferred comp was up $17,000,000 from last quarter with a couple of drivers. 1st, salaries and benefits were up $9,000,000 due to our annual merit increase, which were effective January 1, and seasonality in certain benefits lines, such as 401 match and unemployment compensation. 2nd, incentives and commissions increased $7,000,000 driven by incentives on the fixed income revenue growth. Offsetting these personnel increases is a significant decrease to outside services. Speaker 100:12:45As a reminder, our 4th quarter marketing expense was elevated for deposit and brand campaigns as well as 3rd party services engaged on our strategic investments. As 2024 progresses, we expect technology investment expenses to moderately increase over the year, but those costs will be offset by lower retention expenses and continuing to identify and implement operational efficiencies. I'll cover asset quality reserves on Slide 13. Loan loss provision was $50,000,000 this quarter, flat to prior quarter. Net charge offs were $40,000,000 or 27 basis points. Speaker 100:13:28Our largest charge off this quarter was a 9,000,000 dollars C and I loan to a consumer goods company for which we were already fully reserved. We also had $12,000,000 of partial charge downs on 3 commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio. We have remained disciplined in underwriting and our approach to client selection. Speaker 100:14:06While we have seen some additional negative grade migration in the Q1, overall we continue to see stable credit performance across markets and industries. On Slide 14, you can see that we have maintained strong capital levels, while successfully deploying capital to shareholders through the repurchase of almost 11,000,000 shares, utilizing approximately $150,000,000 of our $650,000,000 of share repurchase authority. Share repurchases drew a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. Adjusting for the marks on our securities portfolio and loan book, our pro form a CET1 ratio would be 8.8%, which is well above the regulatory threshold. We will continue to opportunistically deploy capital above our 11% near term target. Speaker 100:15:071st quarter tangible book value per share increased to $12.16 benefiting by $0.35 of net income, offset by $0.15 of dividends, dollars 0.15 from higher mark to market impacts and $0.04 of share buybacks. On Slide 15, we update our 2024 outlook slightly to reflect better than expected performance in our countercyclical businesses. We continue to expect our full year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September November. Though the market's expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact to our outlook. Speaker 100:16:03We saw strong performance from our countercyclical businesses in the 1st quarter with fixed income fees up $15,000,000 and mortgages up $4,000,000 from prior quarter. We expect these businesses to continue to perform well, which has improved our outlook for non interest income growth from a range of 4.6% previously to an updated 6% to 10%. The expense outlook remains unchanged despite increases to revenue driven incentives in our countercyclical businesses due to the benefit of the operational efficiencies we have implemented. I will wrap up on Slide 1st quarter was a great start to 2024. Q1 was a great start to 2024 and I believe this is the beginning to a strong year for First Horizon. Speaker 100:17:00We expect to deliver better revenue performance than we laid out in our original guidance, while finding operational efficiencies to maintain our expense guidance. We are making tremendous progress on the strategic investments we have been talking about for almost a year now, and these initiatives will allow us to offer our clients and associates better products, better service and improved efficiencies. First Horizon has a diversified business model that can provide top quartile results throughout any cycle. We are well positioned to capitalize on our 160 year legacy with our passionate and dedicated bankers, clients and communities. We will continue to demonstrate our commitment, strength and resiliency while increasing shareholder returns. Speaker 100:17:46Now, I'll give it back to Brian. Speaker 200:17:48Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress over the last year on our strategic investments, which will allow our associates to serve our clients more quickly and efficiently. I continue to remain confident that this company has the people, the clients and the enthusiasm to build an unparalleled banking franchise in the South. My expectation is that the next few months for the economy will look similar to the Q1, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout the rest of the year. Speaker 200:18:35Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield has decided to retire later this year. We have named Tom Hung as our successor. Tom currently runs our franchise finance business and brings a wealth of credit and client experience to the role. We have already started the transition process with Tom serving as Deputy Chief Credit Officer as he prepares to officially step into the role on October 1. Susan will remain with the company until the end of the year to help ensure a seamless transition. Speaker 200:19:14Susan's decision to retire is bittersweet and she will be greatly missed. She has been with the company for nearly 30 years having served Chief Credit Officer for 11 of those years. She led us adeptly through a number of credit cycles, maintaining strong credit quality under her leadership. She has been a vital member of our Executive Management Committee as well as a mentor and role model to countless young professionals throughout her distinguished career. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Speaker 200:19:52Thank you, Susan. Carla, we can now open it up for questions. Operator00:20:00Thank you, Our first question comes from Ebrahim Poonawala from Bank of America. Speaker 300:20:24Your line is open. Speaker 400:20:27Good morning, Ebrahim. Speaker 300:20:29Hey, Brian. How are you? I guess maybe just first question for Hope around NII outlook. In the past, Hope, you provided spot rates on deposit costs. Just give us, if you don't mind, if you can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I'm assuming, if we don't get much in terms of rate cuts for the rest of the year? Speaker 100:20:57Thanks, Ebrahim. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest bearing and total deposits, but on average kind of flat. Some of it is mix, some of it is timing. So I really want to focus on what was our overall deposit cost for the quarter. Speaker 100:21:16Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. We're probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us get that first rate cut, the harder I think it's going to be to continue to drive deposit cost down meaningfully. We could be a couple of basis points here or there within a month or a spot rate within a quarter, but I think we're probably close to where the deposit cost will be for the rest of the year within 1% maybe on the beta on either side. Speaker 100:21:53It is really hard to predict. The market is just changing so quick and competition will slow 1 month and then pick up the next week. And so it's going to be kind of a month by month look for the industry, I think. Speaker 200:22:12Go ahead, Ebrahim. Speaker 300:22:14Yes. And I guess just taking a step back, when we look at that 1% to 4% NII guide, is it is the delta going to be around what gets you to 4%? Is it going to be just loan growth or whether or not we get any rate cuts? Like what's more impactful? Speaker 100:22:31Yes. Ebrahim, if you get to the higher end of that guidance, we would definitely have to see less rate cuts. We even asset sensitive balance sheet, And so less rate cuts puts us at the higher end, more rate cuts puts us at the lower end. The thing that I can't handicap right now within 1% to 2% on the full year is what are the deposit costs going to do for the rest of the year. We had originally given guidance assuming we'd see a rate cut at some point early half of the year and we start to see competition for deposit costs be going down as an industry. Speaker 100:23:00And if we don't see any rate cuts, we don't see rate cuts till late in the year, that's where it gets a little harder for me to predict. But think about it as we'll be on the lower end with the current curve and less rate cuts is more positive for us to get to the higher end of that guidance. Speaker 200:23:15You'll remember when we laid out that guidance in the Q4, we laid it out based on 4 rate cuts in 2024 and the over and under bedding seems to be we're going to market has 2 today and there are questions about whether we get 2 or not. So that would dictate it. So deposit and loan pricing will both be affected by how many cuts we actually do get. As Hope pointed out, the most important aspect of managing the margin is we're not playing solitaire. We're doing this in a competitive marketplace and we've seen pricing competition increase fairly significantly. Speaker 200:23:55And I think you're seeing that show up in some of the earnings releases that are out there. And so we'll continue to protect our deposit base. We'll continue to protect our customer base and we'll continue to compete on a long term basis of growing the franchise. I would say we're every bit as focused on managing both sides of the balance sheet. You saw improvement on loan spreads and you've seen improvement on deposit pricing, and we think that will continue. Speaker 200:24:27We just think it's sort of stabilized at this point given what's going on competitively. Speaker 300:24:34Got it. Thanks for taking my questions. Speaker 200:24:37Thank you. Operator00:24:41Our next question comes from Michael Rose from Raymond James. Speaker 500:24:48Hey, good morning, everyone. Thanks for taking my questions. I think in the prepared remarks, you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you just give us a sense for what the magnitude of that could be? And Brian, if you can just generally comment on loan demand in some of your markets at this point. Speaker 500:25:14Obviously, I think some areas of commercial real estate a little bit weaker, but you are seeing some fund ups from existing commitments and just what you're seeing generally on the C and I side? Thanks. Speaker 100:25:26Thanks, Michael. As I mentioned in my prepared comments, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we're forecasting kind of flat to maybe slightly up. As we look at where to Speaker 400:25:42redeploy that mortgage warehouse is one of those that Speaker 100:25:42is a seasonal product for us. Warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3, and it's our highest yielding assets that we have. So when we look at kind of how will the year project, you do need to look at the seasonality of that business. We continue to see on renewing business and new business expanding margins anywhere from 150 basis points spread all the way up 300 and some above 300 in our top businesses. And so when you think about our specialty businesses, they have a higher spread. Speaker 100:26:14When you think about regional businesses, they are slightly on the lower end of that. But feel confident that we will be able to even with slowing loan demand that we'll be able to put this into our portfolio on the client side and be able to be there for our existing clients and bring new clients into the first horizon franchise with an expanding loan margin. Speaker 200:26:36Michael, I'll pick up on loan demand. Loan demand is okay. It's not great. It really is in pockets that you see real strength. You have some aspects of the Carolinas where loan demand has been very good and you see other pockets where it is probably a bit softer. Speaker 200:26:54As you mentioned, we do have the benefit of some fund up on some existing relationships And you started to see the tick up in seasonality in our mortgage warehouse lending business and that's usually stronger in the second and third quarters of the year as the moving season kicks in. But overall, we're still seeing good opportunities. We're still being very selective about how and where we participate, particularly on price and structure, but we're looking for long term growth and really those generational opportunities to move business. But I expect that the loan demand is likely to remain somewhat more modest, broadly speaking, in the economy simply because we're in that space between rates not going up anymore and rates not coming down. And I think people are still a little bit cautious and it's going to take a little bit more certainty about when the Fed is going to move and I think people will start to lean in. Speaker 200:27:57The economy is still very good in our view relative to all that's going on in the world and how much rates have been moving up. And as you know, we benefit from being in a sector of the U. S, the South that has a very strong general economic dynamic. So we think loan demand will be fairly soft, but improve over the course of the year. Speaker 500:28:26That's great color. And maybe just as my follow-up, maybe one for Susan and congratulations on your upcoming retirement, well deserved. Can you just describe or what drove kind of the increase in non performers? And then if you have an update to the criticized balances at quarter end, I think they were a little over $2,000,000,000 at the end of the 4th quarter. Thanks. Speaker 600:28:48Sure. Thanks. And thanks, Michael, for the nice comments. As it relates to new non performing, we saw non performing go up about $43,000,000 and that's a few new non performing loans. That increase was largely driven by 2 credits. Speaker 600:29:09One was a senior living facility, a senior living assisted living memory care facility and the other was a consumer finance company. Again, so when we're seeing some slight movement in NPLs, we're still seeing it kind of not any specific industry or sector. And as it relates to criticize, we have had a continued focus on conservative grading and as we somewhat seasonal getting in year end financials on borrowers, we did see criticized balances go up about 20%, but most much of that was in special mentions kind of a watch status. So those are not defined weaknesses at this point. They're more potential weaknesses where we're just taking a more frequent look working with borrowers. Speaker 600:30:04The other thing that I'm really pleased to see and this is in commercial real estate as well as C and I is borrowers really coming to the table, wanting to work with us, we're wanting to work with them. We've seen good opportunities to bring in additional equity reserves, etcetera, as we have loans that may be temporarily challenged due to interest rate environment. And then classified loans were up less than 10% quarter over quarter. Operator00:30:46Our next question comes from Jon Arfstrom from RBC. Speaker 700:30:53That's close. Jon Arfstrom. Good morning, everyone. Speaker 200:30:56Hey, Jon. How are you? Speaker 700:30:58It's like trying to pronounce Hope's last name. It's just as challenging. Just Susan for you, any just to follow-up on Michael's question, anything new or surprising that you're seeing on credit? And what do you think we should expect on nonperforming trends for 2024? Can you just set the expectation there? Speaker 600:31:19I'm not really seeing anything that surprises me. Again, we're still each one kind of has its stories. We're talking borrower by borrower. We've had a number of deep dives and portfolio reviews across lines of business in different regions, great conversations with our bankers about what's going on. Our bankers are having great conversations with clients. Speaker 600:31:47As I mentioned earlier to Michael's question, I'm still really pleased to see how we're able to be at the table, talk about rightsizing alone or what do we need to do? What do you think is going to happen getting updated projections from clients? So we still feel good about the ultimate performance of the portfolio. I think depending on what happens with interest rates, John, that's probably going to affect if obviously if we start seeing rates start to go down, I think you'll see non performing loans start to slow in terms of any increases. The good news about not having any increased rates right now though, you're seeing a lot of borrowers who have adapted to this new interest rate environment. Speaker 600:32:38Whether they're able to pass along costs in their businesses or just learning how to do things differently, being more efficient, learning how to operate in a higher interest rate environment. So at this, we're still being cautious. Brian mentioned we're always selective with discipline in how we underwrite, discipline in client selection. And so that's serving us well, but we're keeping an eye on the portfolio. Speaker 200:33:07John, I would add to that. I'm not really surprised at all by anything I see in terms of credit performance. You're getting what you would expect with higher inflation and higher interest rates and a lot of movement in a fairly short period of time. And across the entire economy, you're going to have borrowers who are a little more stressed by that and it's going to show up in terms of their performance. I would say Susan and her credit teams as well as our relationship teams, our RMs and PMs have been very proactive and doing deep dives through our portfolio, understanding at a transaction level borrowers financial position. Speaker 200:33:53As Susan said, being very proactive in working with borrowers. And as Susan also said, we've had tremendous success with borrowers who want to work with us and stepped up with rightsizing loans, etcetera. So I'm not surprised and in fact, I'm very pleased with the performance that I see given the nature of what's going on in the underlying economy and the way we structured this loan portfolio. I'm very comfortable that we're in a pretty good position. Speaker 700:34:26Okay, good. Fair enough. And then Hope for you on slide 8, the bottom of slide 8, you're highlighting $5,000,000,000 in loans and securities that are rolling off. Can you talk about what the repricing uplift is from that? And I think the message here is that you expect the margin to grind higher because of some of this repricing, the deposit repricing opportunities are probably done. Speaker 700:34:54So it's more about this asset repricing that's going to drive the margin higher over time. Is that the right message? Speaker 100:35:02That's the right message, John. I think deposit unless they could go a couple of basis points lower, a couple of basis points higher and quarter to quarter that may change until we see that first rate cut. But we have $4,000,000,000 rolling off at 2.25 percent yield. And you're seeing 6% and 7% yields pretty steadily in the market and some 8% in our specialty businesses. And so absolutely putting that to work on the client side of the balance sheet versus parking in securities or something else is our intention with that money to be able to increase our spread. Speaker 700:35:34Okay. All right. Thank you very much. Speaker 200:35:37Thank you. Operator00:35:41Our next question comes from Casey Haire from Jefferies. Speaker 800:35:48Great. Thanks. Good morning, everyone. Hope, question for you on the NII outlook. The DDA attrition a little bit lower as you guys kind of highlighted in January. Speaker 800:36:02Just wondering what does this guide presume for DDA mix going forward? Speaker 100:36:09Yes. The guide is a range a 4 basis point range there. So it is assuming today, we're assuming kind of flat balances with non interest bearing. If we were to see a larger pickup in that, again, that could help us get to the higher end of the range. But I don't see any risk to that taking us below the range if we saw immaterial runoff. Speaker 100:36:31We think we're at the bottom, right? We saw some January outflows, February March are really stabilized. Q1 does tend to be a little bit more seasonally low and then come back through the year. Speaker 800:36:43Okay, very good. And then just big picture question on getting ready for the $100,000,000,000 and CAT IV. When I compare you guys versus the CAT IV group, you guys are in pretty good shape. If there is a weak link, it's on the liquidity side. And I'm just wondering when do you guys start to I know you have time, but when do you start to address that and build out the securities book and or drive down that loan to deposit ratio? Speaker 200:37:17Yes. There's a lot of work going on all around the industry to understand the impact on potential Category 4 banks. As you know, Casey, we've done a lot of work around it. And I think we are in pretty good shape. We have continued to run stress testing. Speaker 200:37:36We have some of the infrastructure in place, not all, and we will build that infrastructure out on the compliance side. The balance sheet structure issues really fall into 2 major categories. 1 you highlighted, which is liquidity. The other is the potential for TLAC. And we don't have a lot of total loss absorbing capital or long term debt on our balance sheet either. Speaker 200:38:03And in some sense, those 2 can be mutually solving in the sense that if we raise debt, we can use that to fund high quality liquid assets. So, as you said, we have time. We don't feel any particular balance sheet hurdles that we would have to get balance sheet hurdles that we would have to get over. And as we get greater clarity from the Basel III in game, the FDIC's proposals around TLAC, we'll have a better sense of the steps that we need to take over the next 2 or 3 years to get prepared for crossing that threshold. Speaker 800:38:48Great. Thank you. Just last question for Susan. You mentioned or Hope mentioned a handful of losses within the CRE bucket on updated appraisals. Just wondering if you could provide some color as to what the price decline was on those underlying properties? Speaker 800:39:06Yes. Speaker 600:39:07I mean on the specific ones, I'd say on average, we saw probably about a 20% decline. I did talk to getting close contact with our Chief Appraiser just on a larger perspective, Casey, just on what we're seeing in terms of reappraisal, both non performing properties, but also just office in general. And it really varies a good bit by market. Strong markets like Florida, you're seeing small declines of 3% to 5%, 3% to 5%, not 3%. And then some markets or certain office properties that may have had a major tenant that they haven't yet replaced, you can see it in the 25% range. Speaker 600:39:56So it is kind of on an individual basis. As it relates to the credits where we took a partial charge related to new updated appraisals this quarter, it was in 3 different markets and one was actually more of a mixed use facility, just that office had the most space and so we classify that as office. All three were in our footprint. Speaker 800:40:26Okay. And so there it sounds like most were office, one was a mixed use or was are these varied by underlying property type? Speaker 600:40:37Of the $12,000,000 that we took in charge offs in commercial real estate, 2 were pure office and then one was a mixed use that had some office space, which was the predominant space, but it also had some retail and multifamily. Speaker 800:40:55Got you. Thank you. Speaker 200:40:58Thanks, Casey. Operator00:41:02Our next question comes from Jared Shaw from Barclays. Speaker 900:41:08Hey, good morning. Speaker 200:41:10Good morning, Speaker 900:41:12Jerry. Maybe sticking with Casey's question on the CRE, what drove the revaluation? Is that because you saw individual credit migration or is this part of a broader revaluation of all CRE? I guess if it's not broader, what happens to drive a revaluation? Speaker 600:41:35Yes. There are a number of things, Jerry, that first of all, whenever we downgrade loans to non pass, we have a policy where we do updated appraisal on commercial real estate loans that get downgraded to non pass within several months of a downgrade. And then if we start to see further deterioration and in this case these were non performing loans, then we'll in these three cases, these were we reappraised 6 months later, just having to look at what may be going on. The other thing that can trigger it is if there's something in an individual loan, it could be the loss of the tenant that was maybe it was being renegotiated, thought it was going to come up or maybe renegotiated at a lower rate, that could cause the need for an appraisal. So we believe in being conservative. Speaker 600:42:30And if we need to reappraise, like in this case within 6 months of the last one, then we'll do that to make sure we've got the valuations correct. Speaker 900:42:40Okay. So those three loans you talked about, they were previously non performers and they hit the 6 month. So you did an additional reappraisal. I guess what happened with that first reappraisal? So if these are down, call it 20%, what was that first reappraisal step down from maybe peak to current? Speaker 300:43:01On one of them? Speaker 900:43:05Well, I guess on those three loans that were previously non performer, I guess what you talked about a 20% markdown now from what I'm assuming is the 6 month prior reappraisal. What's the magnitude of sort of origination to current markdown? Speaker 600:43:24Right. So in terms of I have to look back at that, but again, on average, what we're seeing and I hate to do averages because it really does vary by property. So in one case, it was down 20%, 25% from an original appraisal. But then our charge was not nearly that much because we've got significant equity that we've gotten these properties when we underwrite them. In other cases, we're seeing appraisal changes of 10%. Speaker 600:44:00So there's a different number for each building. Speaker 900:44:04Okay. All right. That's good color. Thanks. And then maybe shifting to the fixed income business, really good trends in ADRs this quarter. Speaker 900:44:14I guess in a stable rate environment, what's driving the expectation for lower ADRs going forward? Was that just you saw some maybe a spurt of activity early on and then it tapered off? Or how should we be thinking about the pace of that for the rest of the year? Speaker 100:44:33Yes. Jared, I'll start that. The first is there was a pent up demand, right? There had not been a lot of balance repositioning. There had not been a lot of liquidity put to use. Speaker 100:44:43So we started to see it happen in December. We had a really good December, which we talked about in our last earnings call and that just carried through to Q1. And so we think some of that is behind us and it was more of just kind of a catch up. Additionally, the current week has given us a little bit of pause in that we are talking about not if we'll see rate cuts, but could we see a rate increase this year, what will it look like and that has stalled will stall that business for a period of time. And if you do run the current guidance, I know you all do after this call, it assumes kind of a 500 ks ish ADR for the rest of the year, which is still significantly stronger than we saw last year in every quarter except for Q4. Speaker 900:45:27Okay. Okay, thanks. And then finally just for me on the buyback, strong activity this quarter. Should we be thinking that you continue being pretty aggressive on that $650,000,000 authorization? Or was there anything unique in Q1 that may have accelerated some of that? Speaker 200:45:50No, we'll continue to be very opportunistic, manage our excess capital relative to that 11% manage our excess capital relative to that 11% near term target and the buyback is a great vehicle for doing that in the absence of a significant pickup in balance sheet growth, I. E. Loan growth. Speaker 900:46:18Great. Thanks a lot. Speaker 200:46:20Sure. Thanks. Thank you, Jared. Operator00:46:24Our next question comes from Chris McGratty from KBW. Speaker 400:46:31Great. Thanks. Good morning. Just wanted to follow-up on Jared's question on the buyback. Brian, you mentioned 11% as the near term. Speaker 400:46:40I guess, what would lead you to change that directionally either up or down? And maybe is there something you could consider this year? Speaker 200:46:51Well, right now, I don't think about changing the 11% near term. I think there's still enough uncertainty in the economy and the interest rate environment that we want to see a few more cards. If anything changed, it would it'd have to be a significant pickup in the economic environment and inflation abating significantly. And I don't anticipate either one of those at this point. So, we'll manage to the 11% near term. Speaker 200:47:23We'll have greater clarity probably by the end of this year about what Basel III is likely to Basel III Endgame is likely to look like and we can manage from there. So, we're comfortable with that target. And as we pointed out earlier, we start with 11.3% ratio in CET1 and so we have a little bit of gap there and we're going to have some earnings. So, we think we've got the capacity with the authorization that we can make a significant dent in that authorization over the next three quarters. Speaker 1000:48:00Okay, great. Speaker 400:48:02And just maybe one more on the fee income business, a lot of talk about the fixed income. The mortgage banking is a smaller line item, but directionally had a decent jump linked quarter. Maybe what's in your assumptions and your guide hope for the mortgage just to gain on sale business? Speaker 100:48:19It's not materially up from here. Q1 was coming off a pretty record low last year for mortgage originations and Q4 was somewhat anemic in that space. And so we're not expecting a big upturn, but just a continued originations coming in. Speaker 1000:48:40Okay. Thank you. Operator00:48:46Our next question comes from Steven Alexopoulos from JPMorgan. Speaker 200:48:53Hey, good morning. Good morning, everyone. Speaker 1100:48:56Brian, I wanted to go back to your answer to Casey's question across the $100,000,000,000 And I'm curious, given how this New York community situation played out, how has that impacted how you think about crossing the threshold? Previously, you said that you thought a transaction was a preferred method. Curious if you still feel that way. Speaker 200:49:19Say the last part again, you broke up a little bit. I still feel what way about what? Speaker 1100:49:25Well, in the past yes, in the past you indicated that you didn't want to fall over $100,000,000,000 you wanted to more or less leap over it via transaction. I'm just curious if you still feel that way just seeing how your community played out? Speaker 200:49:40Well, yes, that's a yes, I guess you have to couple of thoughts. 1, if you put M and A in a separate bucket, I still have significant reservations about 1, what can get approved and 2, how long it takes to get it approved. And so that's not something without greater clarity that looks like a good idea independently. And then you couple it with crossing the $100,000,000,000 threshold. And in particular, how much readiness do you have to have? Speaker 200:50:13Is there really a 3 year phase in if you cross in the context of an M and A transaction? I would tell you, while I don't have any inside information, my gut would tell me that what happened recently is likely to make it more difficult to cross. And I think you'll have to show a significant significantly greater degree of preparedness to be a Category 4 bank or a very near term path for achieving that. So I think it makes it and said another way, it makes it more likely that if you cross the $100,000,000,000 threshold in the near term, it's likely to be in an organic fashion and then you sort of deal with is M and A the right strategy and does it make sense from a shareholder and a capital deployment perspective independent of trying to cross that threshold. Speaker 1100:51:12Okay. That's helpful. That makes sense. Speaker 400:51:16If I could shift Speaker 1100:51:17gears and talk about C and I loan growth, when I look at balances, they're pretty flat versus the prior quarter, up a bit versus last year. And it's funny, when I look at your markets, whether it's what's going on in Nashville or Texas or Florida, they're on fire. GDP is probably 4% in your markets. Why are you not seeing stronger commercial loan growth here? Speaker 600:51:41I'll take care of that, Stephen. In terms of C and I loan growth, first of all, we have been focused on making sure that we're taking care of existing clients first. We're also very focused on sole relationship businesses. And as Brian said earlier, we continue to remain selective in terms of new underwriting and bringing on new clients. That being said, we are open for business and we are seeing some good opportunities and have brought in both new to bank as well as some increased opportunities with existing clients. Speaker 600:52:21And we are hearing when we have pipeline calls, we are hearing some additional opportunities for us to again lend existing customers, but also bring in some generational opportunities in our communities as well as in our specialty lines of business. So I think that you will continue to see some opportunities for loan growth across our markets and our business. Speaker 200:52:48As I pointed out earlier, Steve, there are pockets that are stronger than others and some that are a little softer. And Susan is exactly right. If you step back, we are looking to build relationships and do relationship banking and we really want to move and bank relationships. Doing the transaction, lending money, getting it out the door is the easy part of the business. It's really how you build relationships and long term nature of the banking business. Speaker 200:53:21And I think our teams are doing an outstanding job of working for a relationship. And we've taken some opportunities where there is not the opportunity for a long term relationship to step away from some transactions. So we're trying to manage our balance sheet in a way that manages the balance between profitability and growth. Speaker 1100:53:46Okay. That's fair. And maybe Susan, if I could squeeze one more in for you on commercial real estate. I see the maturity schedule here on the slide. Can you tell us what was the balance of commercial real estate loans that came due here in the Q1? Speaker 1100:54:02And how did those work out in terms of refinance extensions, things like that? Thanks. Speaker 600:54:08Well, in terms of things that came up through, we've had in terms of things that come up, we have been again, as I said earlier, we've had good really good outcomes in terms of working with borrowers on the appropriate way to refinance when there is a maturity. It could be things are clicking along like they should and we look at just kind of a traditional renewal, looking at rates and structure. Sometimes we do talk with borrowers about bringing money to the table either in terms of a pay down or some reserves. So we're again, we're having, I think, really good success. One of the things that I do want to emphasize is that we can I mentioned this earlier, we've been very disciplined in our underwriting really through all the cycles? Speaker 600:55:01And if you look at things like our office portfolio, and this is with updated appraisals in them, our stabilized loan to value on office is about 60%. So there's a lot of cushion that we have in our commercial real estate book of business. And that allows us, 1, to continue to have good outcomes, but also the ability to work with borrowers. And when borrowers have that kind of equity in front of our debt, there's even more of an incentive to work with us. The last thing I would add is that we've also seen in certain cases where we have been able to and Brian talked about exiting things that aren't relationships, but I would tell you I've also still will occasionally see us get refinanced out of something that might not hurt our feelings that we're being refinanced out of either because of a credit grade or potentially a borrower that didn't come to table Speaker 100:56:01was quite the right approach network for us. Speaker 600:56:04So it's good to see that there are still some opportunities out there too when it doesn't set our risk profile going forward that there are opportunities for them to refinance. So all in all, I feel good about things that have come up for maturity, our ability to work with them and the options that we have. Speaker 1100:56:28Thanks for the color. And Susan, congratulations on the upcoming retirement. Speaker 600:56:33Thank you. I really appreciate it. Operator00:56:40Our next question comes from Timo Braziler from Wells Fargo. Speaker 1200:56:47Hi, good morning. Speaker 200:56:49Good Speaker 1200:56:51morning. One more for you, Susan, on commercial real estate. Just looking at the allowance build over the last couple of quarters compared to the coverage ratio on the CRE book. The coverage ratio looks like it's 115% today. That's been tracking lower. Speaker 1200:57:09I guess, how should we be thinking about coverage ratio here? And if we don't get any kind of improvement in rates and we see some broader kind of degradation in that space, Are you modeling it to a coverage ratio? Are you modeling it to an allowance ratio? Maybe just give us the puts and takes of those 2. Speaker 600:57:28As it relates to the allowance process, I would tell you, we don't really we don't shoot for a specific number. We go through a disciplined process each and every quarter and look at various scenarios such as different economic outlooks, things that are base case, things that are ultra stressed cases. We don't put a lot of emphasis on upside cases, but there are those out there as well. And then we have qualitative overlays related to certain segments that we may decide needs either that may need more than what just an economic outlook would look like. As you know, with CECL, CECL is considered a lifetime loss approach. Speaker 600:58:18So based on what we know today and what we're what external autonomous and our own internal experts are saying, we believe this is the right reserve coverage based on several different outcomes that could emerge. But as I mentioned earlier, each quarter we're reevaluating that. And as you know, as we all know, things like interest rate outlooks can change pretty dramatically quarter to quarter. All that being said, I do think the economy, Brian talked about this, I think the economy remains strong. We're still seeing borrowers being able to adapt to higher inflation, higher interest rates, but this is something that we take a look at each and every quarter. Speaker 1200:59:08Great. Thanks. And then my follow-up, looking at Slide 22 on the C and I loan buckets. The 12% of C and I that's to finance and insurance companies. Can you just give us a reminder what that composition is? Speaker 1200:59:24And maybe more specifically, what component of that balance is to borrowers that are then using those funds as leverage for commercial loans? Speaker 600:59:35Yes. So the finance and insurance bucket has a number of different things in it. Probably one of the things our asset based lending business, we lend to companies that lend to others. A good part of that is consumer finance company. And we've had we've been in that business for many, many years. Speaker 600:59:59We've got very sophisticated borrowers. I would tell you just as a sidebar, we've also seen them adapt nicely to our interest rate environment as it relates to how they deploy. I don't have the exact number with me on how much of it is to then further commercial funds. It's not a big number for us. We do have some of that kind of a business to business type lending arrangements, but it's not a significant portion of that finance and insurance bucket. Speaker 601:00:34So those are the ones I would highlight in that bucket. Speaker 1001:00:40Okay, thanks. Thank you for the questions. Speaker 401:00:44Thank you. Operator01:00:47Our question comes from Ben Gurlinger from Citi. Speaker 401:00:54Good morning, everyone. Good morning, Vince. Speaker 101:00:57Good morning. Speaker 401:00:59I was curious, I know you belabor it quite a bit here on guidance change. It seems like the uptick in fees, one that's a big positive. So I think from going from 4 to 6 now 6 to 10. Speaker 801:01:14Should we Speaker 401:01:14kind of assume the expenses are closer to that 6 range given you've cited being fixed income and mortgage which are typically higher percentage ratio businesses or can you also see fees at the high end and expenses on the lower end? Just kind of think about the cadence of the 2 throughout the year. Speaker 101:01:36Ben, thanks for the question. I would not say that the expenses will be on the high end, but that's a foregone conclusion. As we mentioned, we are continuing to look at operational efficiencies. We are looking at what is the right way to run the organization in a lower loan growth environment. We have spent a significant amount of technology that's going to go into place this year that creates additional efficiency. Speaker 101:01:58We're looking at every contract that's coming up and looking at what we're doing for it. And so our goal would not to be on the high end of that, but things can change. But no, I would not make that assumption. If I thought we were in the high end of that, honestly, I probably would have just increased guidance. At the same time, I told you to be increased revenue and derisk it. Speaker 401:02:18Got you. Okay, that's great. It kind of leads to my next question actually because I know you're after sensitive, you took out a cut in your guidance. To me, it kind of implies that you're close to a higher end. Like if we get to the middle of the year, would it even be worth going from plus 1 to 4 to something like 2 to 5? Speaker 401:02:37Or is that too nuanced to think about? Speaker 101:02:42Ben, I wish I could. If you saw the number of models we run every single month and as soon as we get to ALCO every month, somebody has said something, Powell released something, there's new CPI data, which puts it out there. So I just don't think we're in an environment where we could be that specific. And we thought it was going to be kind of like our fee income, we knew that the high end of the guidance was probably the low side, but we immediately let you guys know that we don't expect to we don't expect to come because we expect to be on the high side. Instead, we said previous high side and our low side. Speaker 101:03:12Forecasting NII in this environment is very, very hard even within a 3% range with as much moving parts as we have. Speaker 401:03:22Got you. Okay, I appreciate it. For what it's worth, I want I remember one model and we're calling it with similar numbers. So appreciate Speaker 1001:03:29the heavy lifting you guys Speaker 401:03:30are doing on your end. Speaker 201:03:33Thanks, Ben. Operator01:03:39Our next question comes from Christopher Marinac from Janney Montgomery Speaker 1301:03:46Scott. Thanks. Good morning. Susan, I wanted to ask about loan modifications. How often are you seeing now? Speaker 601:03:56Chris, you broke up the last part of that question. Can you repeat it? Speaker 101:04:05Chris, are you there? Speaker 401:04:16And Speaker 101:04:32Yes, Carlos, move on to the next question and Chris can hop back in Operator01:04:34the queue if he needs to. All right. Our next question comes from Brennan Crowley from Baird. Speaker 301:04:44Hey, good Speaker 1001:04:45morning guys. Thanks for taking my question. Given to me's guide and I know one point last year kind of 2024 positive operating leverage was discussed and kind of walk back a bit. And I know it's difficult with the investment initiative underway here, but given what you've seen through 3 months and the lifting guide today, is that something that's a possibility for this year? Speaker 101:05:07Thanks for the question, Brandon. I think if you look at where the guide is, it is neutral on operating leverage or slightly positive depending on which side of the range we come in. Speaker 201:05:20So in short, Andrew, yes, it's possible. Speaker 1001:05:26Great. Thank you, guys. And then just as a quick follow-up, and maybe I missed this in the prepared remarks, but saw that the investment portfolio yield actually fell sequentially. So just kind of wondering if you could talk about the driver there and then maybe how you guys plan to manage portfolio and roll off over the next couple of quarters? Speaker 101:05:43Yes. First, I'll mention we're currently not reinvesting in our securities portfolio. So we're letting it run off and redeploying that into the loan side of our balance sheet. But a lot of the volatility that you saw this quarter is just the mark to market with where the market is at the end of the quarter. There was nothing material change in our balance sheet. Speaker 1001:06:05Okay, great. Thanks guys. Operator01:06:11Our next question comes from Samuel Largo from UBS. Speaker 1001:06:18Good morning. Good morning. I just Speaker 401:06:23wanted to ask one last follow-up on NII. I appreciate you touched on the $4,000,000,000 of the fixed rate loan repricing. Could you give some color on how even that is through 2024? Is it similar to securities where it's pretty much the same every quarter? Or is it a bit more front or back loaded? Speaker 101:06:41Yes, it's pretty consistent through the quarter. There is not a bulge quarter or it's being back loaded. Speaker 401:06:49Okay, great. I appreciate it. Speaker 901:06:50Thanks for taking my question. Operator01:06:56And our next question comes from Christopher Marinac from Janney Montgomery Scott. Speaker 1301:07:02Thanks. Sorry for my issue there earlier. Susan, I want to ask you about loan modifications and how often they are a tactic for resolving any type of loan this year or next? Speaker 601:07:17Well, I mean anytime we have either one if there's a true maturity, we're always looking at what do we need to do that's really not a true modification. In terms of modifications, when we have loans that are non cash or handled in our special assets groups, There are situations where it might be in our best interest if we're the lead bank or the sole bank to work with them on modifications. And then obviously, on some of the deals where we're part of a bank group and the bank group has to work together on what could be an appropriate loan modification. I would tell you, Chris, that we have a history of wanting to work with borrowers and figure out the best outcomes that obviously for us are the best outcomes for our shareholders. But we've also are complemented frequently by our borrowers about our ability to work with them and in some cases keep them in business. Speaker 601:08:20And as I mentioned earlier, in many cases, they've got a lot of equity ahead of us. And so they have a vested interest in working with us for to come up with something that makes sense and is economically viable for both the bank and the client. Speaker 201:08:37Yes, loan modifications used to be an accounting term of art and I'll echo what Susan said. I often say this and I don't say it lightly to our clients, but we look at it as a partnership. And so we use that long term relationship and we work through the ups and downs and I don't consider that modification. I just consider that supporting the long term relationships that really drive the profitability of our organization our balance sheet and at the same time makes our customers and our community stronger. Speaker 1301:09:18No, that's great. Thank you both for your color on that. And Susan, just a quick follow-up on debt service coverage ratios. How is the stress process going for customers? Are you seeing instances where you have to criticize a loan due to just higher interest rates and the DSCR is falling? Speaker 1301:09:34Yes. Speaker 601:09:35Chris, I would say that's actually the predominant reason that we're taking loans to special mention in the initial criticized status would be that debt service coverage while still over still able to service the loan, it might be it's less than either a covenant or where the borrower expected to be at a certain point in time. We do expect and I mentioned earlier that the downgrades mostly had been into that special mention category. That's a very dynamic category and we do see borrowers come back out of it as they adjust either their operating expenses or if interest rates do start coming down, I expect you'll see a good bit of a lot of upgrades at that point. Speaker 1301:10:23Great. Thank you again and best wishes for your success, Susan. Operator01:10:32We currently have no further questions. I will hand back over to Brian Jordan to conclude. Speaker 201:10:38Thank you, Carla. Thank you, everyone, for joining the call this morning. We appreciate your time and appreciate your interest in our company. Please reach out if you have any further questions or if you need any additional information. We'll be happy to try to help. Speaker 201:10:51Hope everyone has a great day. Operator01:10:55This concludes today's call. Thank you for joining. You may now disconnect your lines.Read moreRemove AdsPowered by Conference Call Audio Live Call not available Earnings Conference CallFirst Horizon Q1 202400:00 / 00:00Speed:1x1.25x1.5x2xRemove Ads Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) First Horizon Earnings HeadlinesFirst Horizon Corporation (FHN): Among the High Growth Dividend Paying Stocks to Invest inApril 9 at 4:29 PM | msn.comFirst Horizon: Q1 Earnings Present An Opportunity (Upgrade)April 9 at 10:01 AM | seekingalpha.comTrump’s betrayal exposed Trump’s Final Reset Inside the shocking plot to re-engineer America’s financial system…and why you need to move your money now.April 9, 2025 | Porter & Company (Ad)First Horizon (NYSE:FHN) Upgraded to "Hold" at StockNews.comApril 9 at 3:33 AM | americanbankingnews.comRobert W. Baird Upgrades First Horizon (NYSE:FHN) to "Outperform"April 9 at 2:46 AM | americanbankingnews.comBaird Upgrades First Horizon Corporation - Preferred Stock (FHN.PRF)April 9 at 2:38 AM | msn.comSee More First Horizon Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like First Horizon? Sign up for Earnings360's daily newsletter to receive timely earnings updates on First Horizon and other key companies, straight to your email. Email Address About First HorizonFirst Horizon (NYSE:FHN) operates as the bank holding company for First Horizon Bank that provides various financial services. The company operates through Regional Banking and Specialty Banking segments. It offers general banking services for consumers, businesses, financial institutions, and governments. The company also accepts deposits; provides underwriting services for bank-eligible securities and other fixed-income securities by financial subsidiaries; sells loans and derivatives; financial planning; and offers investment and financial advisory services. In addition, it offers mortgage banking; loan syndications; brokerage services; commercial and business banking for business enterprises, consumer banking, and private client and wealth management services; capital markets, professional commercial real estate, mortgage warehouse and asset-based lending, franchise and equipment finance, tax credit finance, energy and healthcare finance, asset management, and corporate and correspondent banking services. Further, the company provides transaction processing services including check clearing services and remittance processing, credit cards, investment, and sale of mutual fund and retail insurances, as well as trust, fiduciary, and agency services. 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There are 14 speakers on the call. Operator00:00:00Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla, and I will be coordinating your call today. I will now hand you over to your host, Natalie Flanders, Head of Investor Relations to begin. Natalie, please go ahead. Speaker 100:00:24Thank you, Carla. Good morning. Welcome to our Q1 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Brian Jordan and Chief Financial Officer, Hope Demchalski, will provide prepared remarks and then we'll be happy to take your questions. Speaker 100:00:42We'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, and 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. Speaker 100:01:18These 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 Brian. Speaker 200:01:34Thank you, Natalie. Good morning, everyone, and thank you for joining our call. The Q1 of 2024 was another strong quarter for First Horizon, demonstrating our ability to produce consistent returns for our shareholders. We grew revenue both through expanding our margin and improvement in our countercyclical businesses, while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate base. Speaker 200:02:16In honor of our 160th anniversary, we recently announced our Grants for Good campaign, which will award $1,600,000 in grants to non profit organizations within our 12 state footprint. We believe that the communities where we do business are the foundation of First Horizon's long record of success and we are proud to continue to support the clients and communities in our markets. On Slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of 0.35 dollars per share, up 9% from the prior quarter with pre provision net revenue up $25,000,000 Adjusted return on tangible common equity improved to 11.6% driven by positive operating leverage as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our countercyclical businesses. Speaker 200:03:26We grew the net interest margin 10 basis points from the 4th quarter from improved pricing on both loans and deposits, driving a $7,000,000 increase in net interest income. FHM Financial had a stronger quarter as well with a $15,000,000 increase in fixed income fees. In January, our Board approved a $650,000,000 share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150,000,000 of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near term target. Speaker 200:04:19As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter after quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint, a competitive product set and a strong credit culture that will allow us to profitably navigate the ever changing economic outlook of the upcoming year. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope? Speaker 100:04:55Thank you, Brian. Good morning. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre provision net revenue of $323,000,000 up $25,000,000 from the prior quarter. Net interest income increased $7,000,000 from 4th quarter driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Speaker 100:05:23Fees, excluding deferred comp, were up $13,000,000 from last quarter, driven by higher revenues from our fixed income business, which saw a 58% increase in ADR. Expenses, excluding deferred comp, were down $4,000,000 linked quarter, driven by a significant reduction to outside services, which as previously mentioned were elevated in the 4th quarter. That reduction was partially offset by personnel increases for annual merit, seasonal benefits and revenue driven incentives within our fixed income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Speaker 100:06:18Provision expense was $50,000,000 this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On slide 7, we outline a couple of notable items in the quarter, which reduced results by $0.02 per share. 1st quarter notable items include incremental expense of $10,000,000 for the FDIC special assessments, which stemmed from revised estimates the FDIC provided in February. We also had $5,000,000 of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies. Speaker 100:07:04We also noted an upcoming event in Q2. On April 1, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on May 1. The Series D shares were acquired during the Iberia merger of equals and do not qualify for capital treatment as the first call date was within a 5 year window. The interest rate was set to convert from a fixed coupon to a 3 month SOFR plus 4.12% in May. 2nd quarter will include an approximately $7,000,000 non cash charge associated with retirement of this instrument. Speaker 100:07:46On Slide 8, you will see that margin expanded 10 basis points from the prior quarter to 3.37 percent, improving MII by $7,000,000 1st quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023 with interest bearing deposit costs declining 9 basis points from prior quarter. Loan yields also expanded 9 basis points from the benefit of wider spreads on new and renewing loans as well as the ability to redeploy lower yielding fixed rate cash flows. The path for deposit costs over the rest of the year will depend on when the Fed decides to cut rates as well as the level of competition we see in our markets. Meanwhile, loan yields still have room to modestly expand as fixed cash flows continue to reprice. As you can see on Slide 9, we've successfully maintained deposit balances while reducing our deposit costs. Speaker 100:08:51Period end deposits are flat quarter to quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest bearing rate paid. We continue to see strong retention on the promotional deposits repriced last quarter with about 90% retention on both the number of clients and the balances. We had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately $800,000,000 of brokered CDs maturing in the 2nd quarter. Though we continue to see some rotation out of non interest bearing in January, balances were relatively flat since February. We have an overview of our diversified loan portfolio on Slide 10. Speaker 100:09:44Period end loans were up 1% from the prior quarter. Loans to mortgage companies are up 17% or $343,000,000 at period end, though average balances were down slightly due to typical seasonality in the business. CRE loans are up $210,000,000 driven by fund ups primarily in multifamily. We added some additional CRE detail in the appendix this quarter, including a geographical breakdown that illustrates the granularity and attractive footprint of the portfolio. Loan yields are up 9 basis points continuing to benefit from wider spreads on new and renewing loans as well as continued repricing of fixed rate cash flows. Speaker 100:10:29Spreads on new loans increased 46 basis points year over year. Fixed rate cash flow should continue to be a tailwind as we have $4,000,000,000 of cash flows coming back over the next year with a roll off yield of approximately 4.4%. On Slide 11, you can see that our countercyclical businesses had a relatively strong quarter. Average daily revenue in our fixed income business increased 200 and $68,000 from 4th quarter, contributing an additional $15,000,000 of fee income. The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market's expectation that short term rates have peaked and were likely headed lower. Speaker 100:11:16Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business will remain solid, though not as strong 1st quarter levels. Mortgage revenue also increased by $4,000,000 primarily due to higher volumes. Service charges and fees decreased $2,000,000 due to seasonality and overdraft fees. Card and digital banking fees rebounded $3,000,000 as 4th quarter included a nonrecurring impact from an accounting methodology adjustment on interchange rebates. Lastly, our non interest income declined $6,000,000 mostly due to lower FHLB dividends as well as a modest reduction in letter of credit and swap fees. Speaker 100:12:03Slide 12. We show that excluding deferred compensation, adjusted expenses are down $4,000,000 Personnel excluding deferred comp was up $17,000,000 from last quarter with a couple of drivers. 1st, salaries and benefits were up $9,000,000 due to our annual merit increase, which were effective January 1, and seasonality in certain benefits lines, such as 401 match and unemployment compensation. 2nd, incentives and commissions increased $7,000,000 driven by incentives on the fixed income revenue growth. Offsetting these personnel increases is a significant decrease to outside services. Speaker 100:12:45As a reminder, our 4th quarter marketing expense was elevated for deposit and brand campaigns as well as 3rd party services engaged on our strategic investments. As 2024 progresses, we expect technology investment expenses to moderately increase over the year, but those costs will be offset by lower retention expenses and continuing to identify and implement operational efficiencies. I'll cover asset quality reserves on Slide 13. Loan loss provision was $50,000,000 this quarter, flat to prior quarter. Net charge offs were $40,000,000 or 27 basis points. Speaker 100:13:28Our largest charge off this quarter was a 9,000,000 dollars C and I loan to a consumer goods company for which we were already fully reserved. We also had $12,000,000 of partial charge downs on 3 commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio. We have remained disciplined in underwriting and our approach to client selection. Speaker 100:14:06While we have seen some additional negative grade migration in the Q1, overall we continue to see stable credit performance across markets and industries. On Slide 14, you can see that we have maintained strong capital levels, while successfully deploying capital to shareholders through the repurchase of almost 11,000,000 shares, utilizing approximately $150,000,000 of our $650,000,000 of share repurchase authority. Share repurchases drew a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. Adjusting for the marks on our securities portfolio and loan book, our pro form a CET1 ratio would be 8.8%, which is well above the regulatory threshold. We will continue to opportunistically deploy capital above our 11% near term target. Speaker 100:15:071st quarter tangible book value per share increased to $12.16 benefiting by $0.35 of net income, offset by $0.15 of dividends, dollars 0.15 from higher mark to market impacts and $0.04 of share buybacks. On Slide 15, we update our 2024 outlook slightly to reflect better than expected performance in our countercyclical businesses. We continue to expect our full year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September November. Though the market's expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact to our outlook. Speaker 100:16:03We saw strong performance from our countercyclical businesses in the 1st quarter with fixed income fees up $15,000,000 and mortgages up $4,000,000 from prior quarter. We expect these businesses to continue to perform well, which has improved our outlook for non interest income growth from a range of 4.6% previously to an updated 6% to 10%. The expense outlook remains unchanged despite increases to revenue driven incentives in our countercyclical businesses due to the benefit of the operational efficiencies we have implemented. I will wrap up on Slide 1st quarter was a great start to 2024. Q1 was a great start to 2024 and I believe this is the beginning to a strong year for First Horizon. Speaker 100:17:00We expect to deliver better revenue performance than we laid out in our original guidance, while finding operational efficiencies to maintain our expense guidance. We are making tremendous progress on the strategic investments we have been talking about for almost a year now, and these initiatives will allow us to offer our clients and associates better products, better service and improved efficiencies. First Horizon has a diversified business model that can provide top quartile results throughout any cycle. We are well positioned to capitalize on our 160 year legacy with our passionate and dedicated bankers, clients and communities. We will continue to demonstrate our commitment, strength and resiliency while increasing shareholder returns. Speaker 100:17:46Now, I'll give it back to Brian. Speaker 200:17:48Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress over the last year on our strategic investments, which will allow our associates to serve our clients more quickly and efficiently. I continue to remain confident that this company has the people, the clients and the enthusiasm to build an unparalleled banking franchise in the South. My expectation is that the next few months for the economy will look similar to the Q1, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout the rest of the year. Speaker 200:18:35Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield has decided to retire later this year. We have named Tom Hung as our successor. Tom currently runs our franchise finance business and brings a wealth of credit and client experience to the role. We have already started the transition process with Tom serving as Deputy Chief Credit Officer as he prepares to officially step into the role on October 1. Susan will remain with the company until the end of the year to help ensure a seamless transition. Speaker 200:19:14Susan's decision to retire is bittersweet and she will be greatly missed. She has been with the company for nearly 30 years having served Chief Credit Officer for 11 of those years. She led us adeptly through a number of credit cycles, maintaining strong credit quality under her leadership. She has been a vital member of our Executive Management Committee as well as a mentor and role model to countless young professionals throughout her distinguished career. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Speaker 200:19:52Thank you, Susan. Carla, we can now open it up for questions. Operator00:20:00Thank you, Our first question comes from Ebrahim Poonawala from Bank of America. Speaker 300:20:24Your line is open. Speaker 400:20:27Good morning, Ebrahim. Speaker 300:20:29Hey, Brian. How are you? I guess maybe just first question for Hope around NII outlook. In the past, Hope, you provided spot rates on deposit costs. Just give us, if you don't mind, if you can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I'm assuming, if we don't get much in terms of rate cuts for the rest of the year? Speaker 100:20:57Thanks, Ebrahim. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest bearing and total deposits, but on average kind of flat. Some of it is mix, some of it is timing. So I really want to focus on what was our overall deposit cost for the quarter. Speaker 100:21:16Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. We're probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us get that first rate cut, the harder I think it's going to be to continue to drive deposit cost down meaningfully. We could be a couple of basis points here or there within a month or a spot rate within a quarter, but I think we're probably close to where the deposit cost will be for the rest of the year within 1% maybe on the beta on either side. Speaker 100:21:53It is really hard to predict. The market is just changing so quick and competition will slow 1 month and then pick up the next week. And so it's going to be kind of a month by month look for the industry, I think. Speaker 200:22:12Go ahead, Ebrahim. Speaker 300:22:14Yes. And I guess just taking a step back, when we look at that 1% to 4% NII guide, is it is the delta going to be around what gets you to 4%? Is it going to be just loan growth or whether or not we get any rate cuts? Like what's more impactful? Speaker 100:22:31Yes. Ebrahim, if you get to the higher end of that guidance, we would definitely have to see less rate cuts. We even asset sensitive balance sheet, And so less rate cuts puts us at the higher end, more rate cuts puts us at the lower end. The thing that I can't handicap right now within 1% to 2% on the full year is what are the deposit costs going to do for the rest of the year. We had originally given guidance assuming we'd see a rate cut at some point early half of the year and we start to see competition for deposit costs be going down as an industry. Speaker 100:23:00And if we don't see any rate cuts, we don't see rate cuts till late in the year, that's where it gets a little harder for me to predict. But think about it as we'll be on the lower end with the current curve and less rate cuts is more positive for us to get to the higher end of that guidance. Speaker 200:23:15You'll remember when we laid out that guidance in the Q4, we laid it out based on 4 rate cuts in 2024 and the over and under bedding seems to be we're going to market has 2 today and there are questions about whether we get 2 or not. So that would dictate it. So deposit and loan pricing will both be affected by how many cuts we actually do get. As Hope pointed out, the most important aspect of managing the margin is we're not playing solitaire. We're doing this in a competitive marketplace and we've seen pricing competition increase fairly significantly. Speaker 200:23:55And I think you're seeing that show up in some of the earnings releases that are out there. And so we'll continue to protect our deposit base. We'll continue to protect our customer base and we'll continue to compete on a long term basis of growing the franchise. I would say we're every bit as focused on managing both sides of the balance sheet. You saw improvement on loan spreads and you've seen improvement on deposit pricing, and we think that will continue. Speaker 200:24:27We just think it's sort of stabilized at this point given what's going on competitively. Speaker 300:24:34Got it. Thanks for taking my questions. Speaker 200:24:37Thank you. Operator00:24:41Our next question comes from Michael Rose from Raymond James. Speaker 500:24:48Hey, good morning, everyone. Thanks for taking my questions. I think in the prepared remarks, you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you just give us a sense for what the magnitude of that could be? And Brian, if you can just generally comment on loan demand in some of your markets at this point. Speaker 500:25:14Obviously, I think some areas of commercial real estate a little bit weaker, but you are seeing some fund ups from existing commitments and just what you're seeing generally on the C and I side? Thanks. Speaker 100:25:26Thanks, Michael. As I mentioned in my prepared comments, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we're forecasting kind of flat to maybe slightly up. As we look at where to Speaker 400:25:42redeploy that mortgage warehouse is one of those that Speaker 100:25:42is a seasonal product for us. Warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3, and it's our highest yielding assets that we have. So when we look at kind of how will the year project, you do need to look at the seasonality of that business. We continue to see on renewing business and new business expanding margins anywhere from 150 basis points spread all the way up 300 and some above 300 in our top businesses. And so when you think about our specialty businesses, they have a higher spread. Speaker 100:26:14When you think about regional businesses, they are slightly on the lower end of that. But feel confident that we will be able to even with slowing loan demand that we'll be able to put this into our portfolio on the client side and be able to be there for our existing clients and bring new clients into the first horizon franchise with an expanding loan margin. Speaker 200:26:36Michael, I'll pick up on loan demand. Loan demand is okay. It's not great. It really is in pockets that you see real strength. You have some aspects of the Carolinas where loan demand has been very good and you see other pockets where it is probably a bit softer. Speaker 200:26:54As you mentioned, we do have the benefit of some fund up on some existing relationships And you started to see the tick up in seasonality in our mortgage warehouse lending business and that's usually stronger in the second and third quarters of the year as the moving season kicks in. But overall, we're still seeing good opportunities. We're still being very selective about how and where we participate, particularly on price and structure, but we're looking for long term growth and really those generational opportunities to move business. But I expect that the loan demand is likely to remain somewhat more modest, broadly speaking, in the economy simply because we're in that space between rates not going up anymore and rates not coming down. And I think people are still a little bit cautious and it's going to take a little bit more certainty about when the Fed is going to move and I think people will start to lean in. Speaker 200:27:57The economy is still very good in our view relative to all that's going on in the world and how much rates have been moving up. And as you know, we benefit from being in a sector of the U. S, the South that has a very strong general economic dynamic. So we think loan demand will be fairly soft, but improve over the course of the year. Speaker 500:28:26That's great color. And maybe just as my follow-up, maybe one for Susan and congratulations on your upcoming retirement, well deserved. Can you just describe or what drove kind of the increase in non performers? And then if you have an update to the criticized balances at quarter end, I think they were a little over $2,000,000,000 at the end of the 4th quarter. Thanks. Speaker 600:28:48Sure. Thanks. And thanks, Michael, for the nice comments. As it relates to new non performing, we saw non performing go up about $43,000,000 and that's a few new non performing loans. That increase was largely driven by 2 credits. Speaker 600:29:09One was a senior living facility, a senior living assisted living memory care facility and the other was a consumer finance company. Again, so when we're seeing some slight movement in NPLs, we're still seeing it kind of not any specific industry or sector. And as it relates to criticize, we have had a continued focus on conservative grading and as we somewhat seasonal getting in year end financials on borrowers, we did see criticized balances go up about 20%, but most much of that was in special mentions kind of a watch status. So those are not defined weaknesses at this point. They're more potential weaknesses where we're just taking a more frequent look working with borrowers. Speaker 600:30:04The other thing that I'm really pleased to see and this is in commercial real estate as well as C and I is borrowers really coming to the table, wanting to work with us, we're wanting to work with them. We've seen good opportunities to bring in additional equity reserves, etcetera, as we have loans that may be temporarily challenged due to interest rate environment. And then classified loans were up less than 10% quarter over quarter. Operator00:30:46Our next question comes from Jon Arfstrom from RBC. Speaker 700:30:53That's close. Jon Arfstrom. Good morning, everyone. Speaker 200:30:56Hey, Jon. How are you? Speaker 700:30:58It's like trying to pronounce Hope's last name. It's just as challenging. Just Susan for you, any just to follow-up on Michael's question, anything new or surprising that you're seeing on credit? And what do you think we should expect on nonperforming trends for 2024? Can you just set the expectation there? Speaker 600:31:19I'm not really seeing anything that surprises me. Again, we're still each one kind of has its stories. We're talking borrower by borrower. We've had a number of deep dives and portfolio reviews across lines of business in different regions, great conversations with our bankers about what's going on. Our bankers are having great conversations with clients. Speaker 600:31:47As I mentioned earlier to Michael's question, I'm still really pleased to see how we're able to be at the table, talk about rightsizing alone or what do we need to do? What do you think is going to happen getting updated projections from clients? So we still feel good about the ultimate performance of the portfolio. I think depending on what happens with interest rates, John, that's probably going to affect if obviously if we start seeing rates start to go down, I think you'll see non performing loans start to slow in terms of any increases. The good news about not having any increased rates right now though, you're seeing a lot of borrowers who have adapted to this new interest rate environment. Speaker 600:32:38Whether they're able to pass along costs in their businesses or just learning how to do things differently, being more efficient, learning how to operate in a higher interest rate environment. So at this, we're still being cautious. Brian mentioned we're always selective with discipline in how we underwrite, discipline in client selection. And so that's serving us well, but we're keeping an eye on the portfolio. Speaker 200:33:07John, I would add to that. I'm not really surprised at all by anything I see in terms of credit performance. You're getting what you would expect with higher inflation and higher interest rates and a lot of movement in a fairly short period of time. And across the entire economy, you're going to have borrowers who are a little more stressed by that and it's going to show up in terms of their performance. I would say Susan and her credit teams as well as our relationship teams, our RMs and PMs have been very proactive and doing deep dives through our portfolio, understanding at a transaction level borrowers financial position. Speaker 200:33:53As Susan said, being very proactive in working with borrowers. And as Susan also said, we've had tremendous success with borrowers who want to work with us and stepped up with rightsizing loans, etcetera. So I'm not surprised and in fact, I'm very pleased with the performance that I see given the nature of what's going on in the underlying economy and the way we structured this loan portfolio. I'm very comfortable that we're in a pretty good position. Speaker 700:34:26Okay, good. Fair enough. And then Hope for you on slide 8, the bottom of slide 8, you're highlighting $5,000,000,000 in loans and securities that are rolling off. Can you talk about what the repricing uplift is from that? And I think the message here is that you expect the margin to grind higher because of some of this repricing, the deposit repricing opportunities are probably done. Speaker 700:34:54So it's more about this asset repricing that's going to drive the margin higher over time. Is that the right message? Speaker 100:35:02That's the right message, John. I think deposit unless they could go a couple of basis points lower, a couple of basis points higher and quarter to quarter that may change until we see that first rate cut. But we have $4,000,000,000 rolling off at 2.25 percent yield. And you're seeing 6% and 7% yields pretty steadily in the market and some 8% in our specialty businesses. And so absolutely putting that to work on the client side of the balance sheet versus parking in securities or something else is our intention with that money to be able to increase our spread. Speaker 700:35:34Okay. All right. Thank you very much. Speaker 200:35:37Thank you. Operator00:35:41Our next question comes from Casey Haire from Jefferies. Speaker 800:35:48Great. Thanks. Good morning, everyone. Hope, question for you on the NII outlook. The DDA attrition a little bit lower as you guys kind of highlighted in January. Speaker 800:36:02Just wondering what does this guide presume for DDA mix going forward? Speaker 100:36:09Yes. The guide is a range a 4 basis point range there. So it is assuming today, we're assuming kind of flat balances with non interest bearing. If we were to see a larger pickup in that, again, that could help us get to the higher end of the range. But I don't see any risk to that taking us below the range if we saw immaterial runoff. Speaker 100:36:31We think we're at the bottom, right? We saw some January outflows, February March are really stabilized. Q1 does tend to be a little bit more seasonally low and then come back through the year. Speaker 800:36:43Okay, very good. And then just big picture question on getting ready for the $100,000,000,000 and CAT IV. When I compare you guys versus the CAT IV group, you guys are in pretty good shape. If there is a weak link, it's on the liquidity side. And I'm just wondering when do you guys start to I know you have time, but when do you start to address that and build out the securities book and or drive down that loan to deposit ratio? Speaker 200:37:17Yes. There's a lot of work going on all around the industry to understand the impact on potential Category 4 banks. As you know, Casey, we've done a lot of work around it. And I think we are in pretty good shape. We have continued to run stress testing. Speaker 200:37:36We have some of the infrastructure in place, not all, and we will build that infrastructure out on the compliance side. The balance sheet structure issues really fall into 2 major categories. 1 you highlighted, which is liquidity. The other is the potential for TLAC. And we don't have a lot of total loss absorbing capital or long term debt on our balance sheet either. Speaker 200:38:03And in some sense, those 2 can be mutually solving in the sense that if we raise debt, we can use that to fund high quality liquid assets. So, as you said, we have time. We don't feel any particular balance sheet hurdles that we would have to get balance sheet hurdles that we would have to get over. And as we get greater clarity from the Basel III in game, the FDIC's proposals around TLAC, we'll have a better sense of the steps that we need to take over the next 2 or 3 years to get prepared for crossing that threshold. Speaker 800:38:48Great. Thank you. Just last question for Susan. You mentioned or Hope mentioned a handful of losses within the CRE bucket on updated appraisals. Just wondering if you could provide some color as to what the price decline was on those underlying properties? Speaker 800:39:06Yes. Speaker 600:39:07I mean on the specific ones, I'd say on average, we saw probably about a 20% decline. I did talk to getting close contact with our Chief Appraiser just on a larger perspective, Casey, just on what we're seeing in terms of reappraisal, both non performing properties, but also just office in general. And it really varies a good bit by market. Strong markets like Florida, you're seeing small declines of 3% to 5%, 3% to 5%, not 3%. And then some markets or certain office properties that may have had a major tenant that they haven't yet replaced, you can see it in the 25% range. Speaker 600:39:56So it is kind of on an individual basis. As it relates to the credits where we took a partial charge related to new updated appraisals this quarter, it was in 3 different markets and one was actually more of a mixed use facility, just that office had the most space and so we classify that as office. All three were in our footprint. Speaker 800:40:26Okay. And so there it sounds like most were office, one was a mixed use or was are these varied by underlying property type? Speaker 600:40:37Of the $12,000,000 that we took in charge offs in commercial real estate, 2 were pure office and then one was a mixed use that had some office space, which was the predominant space, but it also had some retail and multifamily. Speaker 800:40:55Got you. Thank you. Speaker 200:40:58Thanks, Casey. Operator00:41:02Our next question comes from Jared Shaw from Barclays. Speaker 900:41:08Hey, good morning. Speaker 200:41:10Good morning, Speaker 900:41:12Jerry. Maybe sticking with Casey's question on the CRE, what drove the revaluation? Is that because you saw individual credit migration or is this part of a broader revaluation of all CRE? I guess if it's not broader, what happens to drive a revaluation? Speaker 600:41:35Yes. There are a number of things, Jerry, that first of all, whenever we downgrade loans to non pass, we have a policy where we do updated appraisal on commercial real estate loans that get downgraded to non pass within several months of a downgrade. And then if we start to see further deterioration and in this case these were non performing loans, then we'll in these three cases, these were we reappraised 6 months later, just having to look at what may be going on. The other thing that can trigger it is if there's something in an individual loan, it could be the loss of the tenant that was maybe it was being renegotiated, thought it was going to come up or maybe renegotiated at a lower rate, that could cause the need for an appraisal. So we believe in being conservative. Speaker 600:42:30And if we need to reappraise, like in this case within 6 months of the last one, then we'll do that to make sure we've got the valuations correct. Speaker 900:42:40Okay. So those three loans you talked about, they were previously non performers and they hit the 6 month. So you did an additional reappraisal. I guess what happened with that first reappraisal? So if these are down, call it 20%, what was that first reappraisal step down from maybe peak to current? Speaker 300:43:01On one of them? Speaker 900:43:05Well, I guess on those three loans that were previously non performer, I guess what you talked about a 20% markdown now from what I'm assuming is the 6 month prior reappraisal. What's the magnitude of sort of origination to current markdown? Speaker 600:43:24Right. So in terms of I have to look back at that, but again, on average, what we're seeing and I hate to do averages because it really does vary by property. So in one case, it was down 20%, 25% from an original appraisal. But then our charge was not nearly that much because we've got significant equity that we've gotten these properties when we underwrite them. In other cases, we're seeing appraisal changes of 10%. Speaker 600:44:00So there's a different number for each building. Speaker 900:44:04Okay. All right. That's good color. Thanks. And then maybe shifting to the fixed income business, really good trends in ADRs this quarter. Speaker 900:44:14I guess in a stable rate environment, what's driving the expectation for lower ADRs going forward? Was that just you saw some maybe a spurt of activity early on and then it tapered off? Or how should we be thinking about the pace of that for the rest of the year? Speaker 100:44:33Yes. Jared, I'll start that. The first is there was a pent up demand, right? There had not been a lot of balance repositioning. There had not been a lot of liquidity put to use. Speaker 100:44:43So we started to see it happen in December. We had a really good December, which we talked about in our last earnings call and that just carried through to Q1. And so we think some of that is behind us and it was more of just kind of a catch up. Additionally, the current week has given us a little bit of pause in that we are talking about not if we'll see rate cuts, but could we see a rate increase this year, what will it look like and that has stalled will stall that business for a period of time. And if you do run the current guidance, I know you all do after this call, it assumes kind of a 500 ks ish ADR for the rest of the year, which is still significantly stronger than we saw last year in every quarter except for Q4. Speaker 900:45:27Okay. Okay, thanks. And then finally just for me on the buyback, strong activity this quarter. Should we be thinking that you continue being pretty aggressive on that $650,000,000 authorization? Or was there anything unique in Q1 that may have accelerated some of that? Speaker 200:45:50No, we'll continue to be very opportunistic, manage our excess capital relative to that 11% manage our excess capital relative to that 11% near term target and the buyback is a great vehicle for doing that in the absence of a significant pickup in balance sheet growth, I. E. Loan growth. Speaker 900:46:18Great. Thanks a lot. Speaker 200:46:20Sure. Thanks. Thank you, Jared. Operator00:46:24Our next question comes from Chris McGratty from KBW. Speaker 400:46:31Great. Thanks. Good morning. Just wanted to follow-up on Jared's question on the buyback. Brian, you mentioned 11% as the near term. Speaker 400:46:40I guess, what would lead you to change that directionally either up or down? And maybe is there something you could consider this year? Speaker 200:46:51Well, right now, I don't think about changing the 11% near term. I think there's still enough uncertainty in the economy and the interest rate environment that we want to see a few more cards. If anything changed, it would it'd have to be a significant pickup in the economic environment and inflation abating significantly. And I don't anticipate either one of those at this point. So, we'll manage to the 11% near term. Speaker 200:47:23We'll have greater clarity probably by the end of this year about what Basel III is likely to Basel III Endgame is likely to look like and we can manage from there. So, we're comfortable with that target. And as we pointed out earlier, we start with 11.3% ratio in CET1 and so we have a little bit of gap there and we're going to have some earnings. So, we think we've got the capacity with the authorization that we can make a significant dent in that authorization over the next three quarters. Speaker 1000:48:00Okay, great. Speaker 400:48:02And just maybe one more on the fee income business, a lot of talk about the fixed income. The mortgage banking is a smaller line item, but directionally had a decent jump linked quarter. Maybe what's in your assumptions and your guide hope for the mortgage just to gain on sale business? Speaker 100:48:19It's not materially up from here. Q1 was coming off a pretty record low last year for mortgage originations and Q4 was somewhat anemic in that space. And so we're not expecting a big upturn, but just a continued originations coming in. Speaker 1000:48:40Okay. Thank you. Operator00:48:46Our next question comes from Steven Alexopoulos from JPMorgan. Speaker 200:48:53Hey, good morning. Good morning, everyone. Speaker 1100:48:56Brian, I wanted to go back to your answer to Casey's question across the $100,000,000,000 And I'm curious, given how this New York community situation played out, how has that impacted how you think about crossing the threshold? Previously, you said that you thought a transaction was a preferred method. Curious if you still feel that way. Speaker 200:49:19Say the last part again, you broke up a little bit. I still feel what way about what? Speaker 1100:49:25Well, in the past yes, in the past you indicated that you didn't want to fall over $100,000,000,000 you wanted to more or less leap over it via transaction. I'm just curious if you still feel that way just seeing how your community played out? Speaker 200:49:40Well, yes, that's a yes, I guess you have to couple of thoughts. 1, if you put M and A in a separate bucket, I still have significant reservations about 1, what can get approved and 2, how long it takes to get it approved. And so that's not something without greater clarity that looks like a good idea independently. And then you couple it with crossing the $100,000,000,000 threshold. And in particular, how much readiness do you have to have? Speaker 200:50:13Is there really a 3 year phase in if you cross in the context of an M and A transaction? I would tell you, while I don't have any inside information, my gut would tell me that what happened recently is likely to make it more difficult to cross. And I think you'll have to show a significant significantly greater degree of preparedness to be a Category 4 bank or a very near term path for achieving that. So I think it makes it and said another way, it makes it more likely that if you cross the $100,000,000,000 threshold in the near term, it's likely to be in an organic fashion and then you sort of deal with is M and A the right strategy and does it make sense from a shareholder and a capital deployment perspective independent of trying to cross that threshold. Speaker 1100:51:12Okay. That's helpful. That makes sense. Speaker 400:51:16If I could shift Speaker 1100:51:17gears and talk about C and I loan growth, when I look at balances, they're pretty flat versus the prior quarter, up a bit versus last year. And it's funny, when I look at your markets, whether it's what's going on in Nashville or Texas or Florida, they're on fire. GDP is probably 4% in your markets. Why are you not seeing stronger commercial loan growth here? Speaker 600:51:41I'll take care of that, Stephen. In terms of C and I loan growth, first of all, we have been focused on making sure that we're taking care of existing clients first. We're also very focused on sole relationship businesses. And as Brian said earlier, we continue to remain selective in terms of new underwriting and bringing on new clients. That being said, we are open for business and we are seeing some good opportunities and have brought in both new to bank as well as some increased opportunities with existing clients. Speaker 600:52:21And we are hearing when we have pipeline calls, we are hearing some additional opportunities for us to again lend existing customers, but also bring in some generational opportunities in our communities as well as in our specialty lines of business. So I think that you will continue to see some opportunities for loan growth across our markets and our business. Speaker 200:52:48As I pointed out earlier, Steve, there are pockets that are stronger than others and some that are a little softer. And Susan is exactly right. If you step back, we are looking to build relationships and do relationship banking and we really want to move and bank relationships. Doing the transaction, lending money, getting it out the door is the easy part of the business. It's really how you build relationships and long term nature of the banking business. Speaker 200:53:21And I think our teams are doing an outstanding job of working for a relationship. And we've taken some opportunities where there is not the opportunity for a long term relationship to step away from some transactions. So we're trying to manage our balance sheet in a way that manages the balance between profitability and growth. Speaker 1100:53:46Okay. That's fair. And maybe Susan, if I could squeeze one more in for you on commercial real estate. I see the maturity schedule here on the slide. Can you tell us what was the balance of commercial real estate loans that came due here in the Q1? Speaker 1100:54:02And how did those work out in terms of refinance extensions, things like that? Thanks. Speaker 600:54:08Well, in terms of things that came up through, we've had in terms of things that come up, we have been again, as I said earlier, we've had good really good outcomes in terms of working with borrowers on the appropriate way to refinance when there is a maturity. It could be things are clicking along like they should and we look at just kind of a traditional renewal, looking at rates and structure. Sometimes we do talk with borrowers about bringing money to the table either in terms of a pay down or some reserves. So we're again, we're having, I think, really good success. One of the things that I do want to emphasize is that we can I mentioned this earlier, we've been very disciplined in our underwriting really through all the cycles? Speaker 600:55:01And if you look at things like our office portfolio, and this is with updated appraisals in them, our stabilized loan to value on office is about 60%. So there's a lot of cushion that we have in our commercial real estate book of business. And that allows us, 1, to continue to have good outcomes, but also the ability to work with borrowers. And when borrowers have that kind of equity in front of our debt, there's even more of an incentive to work with us. The last thing I would add is that we've also seen in certain cases where we have been able to and Brian talked about exiting things that aren't relationships, but I would tell you I've also still will occasionally see us get refinanced out of something that might not hurt our feelings that we're being refinanced out of either because of a credit grade or potentially a borrower that didn't come to table Speaker 100:56:01was quite the right approach network for us. Speaker 600:56:04So it's good to see that there are still some opportunities out there too when it doesn't set our risk profile going forward that there are opportunities for them to refinance. So all in all, I feel good about things that have come up for maturity, our ability to work with them and the options that we have. Speaker 1100:56:28Thanks for the color. And Susan, congratulations on the upcoming retirement. Speaker 600:56:33Thank you. I really appreciate it. Operator00:56:40Our next question comes from Timo Braziler from Wells Fargo. Speaker 1200:56:47Hi, good morning. Speaker 200:56:49Good Speaker 1200:56:51morning. One more for you, Susan, on commercial real estate. Just looking at the allowance build over the last couple of quarters compared to the coverage ratio on the CRE book. The coverage ratio looks like it's 115% today. That's been tracking lower. Speaker 1200:57:09I guess, how should we be thinking about coverage ratio here? And if we don't get any kind of improvement in rates and we see some broader kind of degradation in that space, Are you modeling it to a coverage ratio? Are you modeling it to an allowance ratio? Maybe just give us the puts and takes of those 2. Speaker 600:57:28As it relates to the allowance process, I would tell you, we don't really we don't shoot for a specific number. We go through a disciplined process each and every quarter and look at various scenarios such as different economic outlooks, things that are base case, things that are ultra stressed cases. We don't put a lot of emphasis on upside cases, but there are those out there as well. And then we have qualitative overlays related to certain segments that we may decide needs either that may need more than what just an economic outlook would look like. As you know, with CECL, CECL is considered a lifetime loss approach. Speaker 600:58:18So based on what we know today and what we're what external autonomous and our own internal experts are saying, we believe this is the right reserve coverage based on several different outcomes that could emerge. But as I mentioned earlier, each quarter we're reevaluating that. And as you know, as we all know, things like interest rate outlooks can change pretty dramatically quarter to quarter. All that being said, I do think the economy, Brian talked about this, I think the economy remains strong. We're still seeing borrowers being able to adapt to higher inflation, higher interest rates, but this is something that we take a look at each and every quarter. Speaker 1200:59:08Great. Thanks. And then my follow-up, looking at Slide 22 on the C and I loan buckets. The 12% of C and I that's to finance and insurance companies. Can you just give us a reminder what that composition is? Speaker 1200:59:24And maybe more specifically, what component of that balance is to borrowers that are then using those funds as leverage for commercial loans? Speaker 600:59:35Yes. So the finance and insurance bucket has a number of different things in it. Probably one of the things our asset based lending business, we lend to companies that lend to others. A good part of that is consumer finance company. And we've had we've been in that business for many, many years. Speaker 600:59:59We've got very sophisticated borrowers. I would tell you just as a sidebar, we've also seen them adapt nicely to our interest rate environment as it relates to how they deploy. I don't have the exact number with me on how much of it is to then further commercial funds. It's not a big number for us. We do have some of that kind of a business to business type lending arrangements, but it's not a significant portion of that finance and insurance bucket. Speaker 601:00:34So those are the ones I would highlight in that bucket. Speaker 1001:00:40Okay, thanks. Thank you for the questions. Speaker 401:00:44Thank you. Operator01:00:47Our question comes from Ben Gurlinger from Citi. Speaker 401:00:54Good morning, everyone. Good morning, Vince. Speaker 101:00:57Good morning. Speaker 401:00:59I was curious, I know you belabor it quite a bit here on guidance change. It seems like the uptick in fees, one that's a big positive. So I think from going from 4 to 6 now 6 to 10. Speaker 801:01:14Should we Speaker 401:01:14kind of assume the expenses are closer to that 6 range given you've cited being fixed income and mortgage which are typically higher percentage ratio businesses or can you also see fees at the high end and expenses on the lower end? Just kind of think about the cadence of the 2 throughout the year. Speaker 101:01:36Ben, thanks for the question. I would not say that the expenses will be on the high end, but that's a foregone conclusion. As we mentioned, we are continuing to look at operational efficiencies. We are looking at what is the right way to run the organization in a lower loan growth environment. We have spent a significant amount of technology that's going to go into place this year that creates additional efficiency. Speaker 101:01:58We're looking at every contract that's coming up and looking at what we're doing for it. And so our goal would not to be on the high end of that, but things can change. But no, I would not make that assumption. If I thought we were in the high end of that, honestly, I probably would have just increased guidance. At the same time, I told you to be increased revenue and derisk it. Speaker 401:02:18Got you. Okay, that's great. It kind of leads to my next question actually because I know you're after sensitive, you took out a cut in your guidance. To me, it kind of implies that you're close to a higher end. Like if we get to the middle of the year, would it even be worth going from plus 1 to 4 to something like 2 to 5? Speaker 401:02:37Or is that too nuanced to think about? Speaker 101:02:42Ben, I wish I could. If you saw the number of models we run every single month and as soon as we get to ALCO every month, somebody has said something, Powell released something, there's new CPI data, which puts it out there. So I just don't think we're in an environment where we could be that specific. And we thought it was going to be kind of like our fee income, we knew that the high end of the guidance was probably the low side, but we immediately let you guys know that we don't expect to we don't expect to come because we expect to be on the high side. Instead, we said previous high side and our low side. Speaker 101:03:12Forecasting NII in this environment is very, very hard even within a 3% range with as much moving parts as we have. Speaker 401:03:22Got you. Okay, I appreciate it. For what it's worth, I want I remember one model and we're calling it with similar numbers. So appreciate Speaker 1001:03:29the heavy lifting you guys Speaker 401:03:30are doing on your end. Speaker 201:03:33Thanks, Ben. Operator01:03:39Our next question comes from Christopher Marinac from Janney Montgomery Speaker 1301:03:46Scott. Thanks. Good morning. Susan, I wanted to ask about loan modifications. How often are you seeing now? Speaker 601:03:56Chris, you broke up the last part of that question. Can you repeat it? Speaker 101:04:05Chris, are you there? Speaker 401:04:16And Speaker 101:04:32Yes, Carlos, move on to the next question and Chris can hop back in Operator01:04:34the queue if he needs to. All right. Our next question comes from Brennan Crowley from Baird. Speaker 301:04:44Hey, good Speaker 1001:04:45morning guys. Thanks for taking my question. Given to me's guide and I know one point last year kind of 2024 positive operating leverage was discussed and kind of walk back a bit. And I know it's difficult with the investment initiative underway here, but given what you've seen through 3 months and the lifting guide today, is that something that's a possibility for this year? Speaker 101:05:07Thanks for the question, Brandon. I think if you look at where the guide is, it is neutral on operating leverage or slightly positive depending on which side of the range we come in. Speaker 201:05:20So in short, Andrew, yes, it's possible. Speaker 1001:05:26Great. Thank you, guys. And then just as a quick follow-up, and maybe I missed this in the prepared remarks, but saw that the investment portfolio yield actually fell sequentially. So just kind of wondering if you could talk about the driver there and then maybe how you guys plan to manage portfolio and roll off over the next couple of quarters? Speaker 101:05:43Yes. First, I'll mention we're currently not reinvesting in our securities portfolio. So we're letting it run off and redeploying that into the loan side of our balance sheet. But a lot of the volatility that you saw this quarter is just the mark to market with where the market is at the end of the quarter. There was nothing material change in our balance sheet. Speaker 1001:06:05Okay, great. Thanks guys. Operator01:06:11Our next question comes from Samuel Largo from UBS. Speaker 1001:06:18Good morning. Good morning. I just Speaker 401:06:23wanted to ask one last follow-up on NII. I appreciate you touched on the $4,000,000,000 of the fixed rate loan repricing. Could you give some color on how even that is through 2024? Is it similar to securities where it's pretty much the same every quarter? Or is it a bit more front or back loaded? Speaker 101:06:41Yes, it's pretty consistent through the quarter. There is not a bulge quarter or it's being back loaded. Speaker 401:06:49Okay, great. I appreciate it. Speaker 901:06:50Thanks for taking my question. Operator01:06:56And our next question comes from Christopher Marinac from Janney Montgomery Scott. Speaker 1301:07:02Thanks. Sorry for my issue there earlier. Susan, I want to ask you about loan modifications and how often they are a tactic for resolving any type of loan this year or next? Speaker 601:07:17Well, I mean anytime we have either one if there's a true maturity, we're always looking at what do we need to do that's really not a true modification. In terms of modifications, when we have loans that are non cash or handled in our special assets groups, There are situations where it might be in our best interest if we're the lead bank or the sole bank to work with them on modifications. And then obviously, on some of the deals where we're part of a bank group and the bank group has to work together on what could be an appropriate loan modification. I would tell you, Chris, that we have a history of wanting to work with borrowers and figure out the best outcomes that obviously for us are the best outcomes for our shareholders. But we've also are complemented frequently by our borrowers about our ability to work with them and in some cases keep them in business. Speaker 601:08:20And as I mentioned earlier, in many cases, they've got a lot of equity ahead of us. And so they have a vested interest in working with us for to come up with something that makes sense and is economically viable for both the bank and the client. Speaker 201:08:37Yes, loan modifications used to be an accounting term of art and I'll echo what Susan said. I often say this and I don't say it lightly to our clients, but we look at it as a partnership. And so we use that long term relationship and we work through the ups and downs and I don't consider that modification. I just consider that supporting the long term relationships that really drive the profitability of our organization our balance sheet and at the same time makes our customers and our community stronger. Speaker 1301:09:18No, that's great. Thank you both for your color on that. And Susan, just a quick follow-up on debt service coverage ratios. How is the stress process going for customers? Are you seeing instances where you have to criticize a loan due to just higher interest rates and the DSCR is falling? Speaker 1301:09:34Yes. Speaker 601:09:35Chris, I would say that's actually the predominant reason that we're taking loans to special mention in the initial criticized status would be that debt service coverage while still over still able to service the loan, it might be it's less than either a covenant or where the borrower expected to be at a certain point in time. We do expect and I mentioned earlier that the downgrades mostly had been into that special mention category. That's a very dynamic category and we do see borrowers come back out of it as they adjust either their operating expenses or if interest rates do start coming down, I expect you'll see a good bit of a lot of upgrades at that point. Speaker 1301:10:23Great. Thank you again and best wishes for your success, Susan. Operator01:10:32We currently have no further questions. I will hand back over to Brian Jordan to conclude. Speaker 201:10:38Thank you, Carla. Thank you, everyone, for joining the call this morning. We appreciate your time and appreciate your interest in our company. Please reach out if you have any further questions or if you need any additional information. We'll be happy to try to help. Speaker 201:10:51Hope everyone has a great day. Operator01:10:55This concludes today's call. Thank you for joining. You may now disconnect your lines.Read moreRemove AdsPowered by