First Horizon Corporation Price & Performance (FHN)

Good morning. Welcome to our first quarter twenty twenty five results conference call. Thank you for joining us. And we're especially appreciative at how nimbly everyone adjusted the conference call number as we had an unforeseen outage this morning from a carrier and we're able to get a new number in place very quickly. So we appreciate you all making the call. Today, our chairman, president, and CEO, Brian Jordan, and Chief Financial Officer, Hope Domchowski, provide prepared remarks, after which we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Thomas Hung, here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.bursarizoncom. As always, I need to remind you that we will make forward looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on page two of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results which exclude the impact of notable items. These are non GAAP measures, so it's important for you to review the GAAP information in our earnings release and on page three of our presentation.

And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them. And with that, I'll hand it over to Brian. Thank you, Tyler. Good morning, everyone, and thank you for joining the call. Appreciate your continued interest in First Horizon. As we sit here today, the economic environment is being shaped by heightened macroeconomic uncertainty as the impacts of tariffs and related policies contribute to a wait and see mindset among many. The efforts by the Trump administration to address tariffs and trade imbalances have created a period of near term uncertainty. Over the coming weeks and months, will all gain greater clarity about how these moving parts come together to impact the overall economic environment. While there is much we do not know today, we remain optimistic that we can avoid a recession. In my view, the risk of recession is likely to increase the longer current levels of market volatility and uncertainty persist. Our focus remains on safety and soundness profitability and growth. Our disciplined approach has positioned us well. Particularly given our strong Southeast footprint and diversified business model. I'm extremely pleased with the results we achieved in the first quarter as we carried forward the momentum from the end of last year.

We successfully delivered solid pre provision net revenue growth through continued margin expansion and deposit pricing discipline. While consistently prioritizing our credit quality. We once again demonstrated our ability to deliver steady return despite shifting economic expectations and market uncertainty throughout the year. Throughout the quarter.

On Slide five, have shared a few highlights from the quarter. We delivered an adjusted EPS of $0.42 per share which was a $01 decrease from the prior quarter. These results include pre provision net revenue growth of $16,000,000 from the fourth quarter. We achieved nine basis points of net interest margin expansion as we continued to manage deposit rates. We also maintained our focus on efficient expense lowering our expenses by $20,000,000 excluding deferred compensation. We continue to strategically deploy excess capital through our share repurchase program, repurchasing $360,000,000 of stock in the first quarter. Our credit performance is once again a highlight of our results with our charge off ratio of 19 basis points remaining in line with the strong performance in 2024. We did increase our coverage ratio for potential losses reflecting macroeconomic uncertainty. And we will continue to prioritize prudent management of our portfolio. To ensure that we maintain our outstanding credit culture. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?

Thank you, Brian. Good morning, everyone. On Slide six, you will find our adjusted financials and key performance metrics for the quarter. Our net interest income was up $1,000,000 this quarter as our continued focus on deposit repricing resulted in a 38 basis point reduction to interest bearing deposit costs. Offsetting lower loan yields as well as the impact of two fewer days. Our fee income, excluding deferred compensation, declined 5,000,000 while our expenses decreased 20,000,000 which was driven by typical levels of fluctuation and a few specific expenses in the prior quarter. Provision expense increased by 30,000,000 as our ACL to loans ratio increased by two basis points to account for an increased macroeconomic uncertainty and a probability of potential recession. Our CET1 ratio ended the quarter at 10.9%, reflecting the $360,000,000 of share repurchases. On slide eight, will take a closer look at the factors contributing to our 1,000,000 increase in NII and nine basis point expansion of net interest margin. Our net interest margin expansion to 3.42% was driven by a 27 basis point decline in average total deposit costs.

Which more than offset a 20 basis point reduction in average loan yield. As you can see in our NII and NIM walk forward, the largest improvement came from $42,000,000 of incremental NII driven by the reduction of deposit rates paid. Which is predominantly driven by customer deposit pricing reductions, a testament to our bankers and their ability to work with clients to price deposits in the current rate environment. Our results also include $8,000,000 of NII in the first quarter as a result of the portfolio restructuring that we executed at the end of last year. On Slide nine, we provide more information about our deposit performance in the quarter. The decline in period end balances was largely driven by the payoff of $559,000,000 of brokered CDs. Our base rate and noninterest bearing deposits remained stable compared to last quarter, and the remaining balance changes occurred in promotional and index price deposits. We continue to see strong retention in our promotional deposits as we have retained 95% of the $16,000,000,000 of deposits and CDs, which repriced in the first quarter. While achieving a 34 basis point reduction in the weighted average rate. The average rate paid on interest bearing deposits decreased to 2.72% down from the fourth quarter average of 3.1%.

Our continued pricing discipline resulted in an 80% interest bearing deposit beta since the Fed cut began cutting rates in 3Q twenty twenty four.

The interest bearing spot rate ended March at 2.7% down 10 basis points from the 2.8% at the December. Pending additional changes in Fed rates, we anticipate some leveling off of deposit rates in the short term, which may also reflect the pickup of any deposit acquisition campaigns at typically occur in the spring and summer months. On slide 10, we have an overview of loans.

Period end loans were down 1% from the prior quarter. As we saw continued pay downs with commercial real estate. This includes payoff of some criticized and classified loans in the quarter that contributed to the balance decline. While minimal, it was good to see growth within our C and I portfolio. While the current environment has created some pause for borrowers, we see encouraging pipeline activity and engagement with our bankers. Average balances saw a slightly larger decline quarter over quarter as January and February are typically lower months for loans to mortgage companies causing seasonality to have an impact on our average balances. As I mentioned a moment ago, loan yields were down 20 basis points from fourth quarter, due to the full quarter impact of lower short term rates on our 55% index portfolio. On Slide 11, we take a look at our fee income performance for the quarter. Fee income excluding deferred compensation, decreased $5,000,000 from the prior quarter. Fixed income remained flat compared to last quarter despite an 11% decline in ADR. As this decline was offset by an increase in revenues from other products compromise of investment advisory fees, loan trading, derivatives and other service related businesses, which are not included in ADR.

The ADR decline reflects a particularly volatile March As we note in our appendix, a moderate amount of volatility is generally positive for FHN Financial. However, extreme volatility like what we saw in March becomes a headwind for fixed income revenue as clients take a cautious approach and reduce trading activity. Fee income declines in areas like brokerage, wealth, and trust, and in other fee fee income reflect normal fluctuation levels that we see quarter to quarter. On slide 12, we show that excluding deferred compensation, adjusted expenses decreased by $20,000,000 from prior quarter. Personnel, excluding deferred compensation, increased by $9,000,000 from last quarter. The increases in salaries and benefits totaled 2,000,000 as annual merit adjustments and the seasonality of benefits resetting were partially offset by the lower day count in the quarter. Incentives and commissions contributed $7,000,000 to the quarterly increase as we make our annual adjustments to long term awards during the first quarter. Outside services declined by $8,000,000 as we saw a reduction in third party expenses associated with recently completed technology projects. These expenses will fluctuate over time as we have third party needs with different technology projects in the future. Lastly, other noninterest expense was down $22,000,000 with the largest items being a $10,000,000 contribution to the foundation that occurred in the fourth quarter as well as the expenses associated with customer incentives that we noted last quarter.

I'll cover credit on slide 13. Net charge offs increased by 16,000,000 to $29,000,000 or 19 basis points of average loans. Loan loss provision was $40,000,000 this quarter, with our ACL to loan ratio increasing two basis points to 1.45% as outlook turned less favorable on broad macroeconomic uncertainty.

Nonperforming loans increased slightly by two basis points from the fourth quarter. Overall, we are pleased with how well our portfolio continued to perform to start 2025. Believe that our disciplined, through the years has us well positioned to withstand challenges the economy may face over the remainder of the year. We will continue monitoring the portfolio closely working with our clients to identify any emerging credit risks in their businesses.

On slide 14, you can see that we successfully deployed capital and lowered our CET1 ratio to 10.9%. As we mentioned earlier, this quarter we deployed $360,000,000 of capital through share repurchases which was equivalent to 51 basis points of CET1 impact. Our priority for capital utilization remains safety and soundness, followed by profitable deployment of excess capital with organic loan growth remaining our top choice.

We will discuss our capital outlook more on the next slide. On slide 15, you will see that our 2025 guidance remains unchanged as we remain confident in our ability to adapt and pull the necessary levers order to achieve the targets we laid out coming into this year. We are focused on delivering PPNR growth while prioritizing ongoing safety and soundness. Our outlook base case coming into the year was built upon three rate cuts beginning in March. As we have seen, rate expectations are rapidly evolving in our current economic environment. Although there is a lot of uncertainty at this time on the macroeconomic outlook we still expect our total revenue growth to fall within the provided ranges. The revenue guidance covers a range of possible interest rate scenarios that result in various revenue mixes, between NII and our countercyclical businesses. Our balanced business model creates a resilient earnings stream across economic environments with our countercyclical businesses providing natural revenue hedge to our somewhat asset sensitive balance sheet. Continuing with our adjusted expense guidance, we expect year over year increases between 24%. This range is most impacted by the proportion of revenue driven by fixed income and mortgage production as these businesses have higher degrees of variable compensation.

Our approach to underwriting and our deep client relationships continues to give us confidence in our ability to deliver strong risk adjusted outcomes. Reflecting this, our net charge off guidance for the year remains at 15 basis to 25 basis points as increased macroeconomic uncertainty is partially offset by possible interest rate cuts. We will continue monitoring our loan portfolio as conditions evolve. Lastly, our near term 1 target will remain at 11% as conditions in the economy and growth prospects shift throughout the year, we may move above or below this target. A secure capital foundation through any business cycle is a top priority for First Drive. I'll wrap up as we turn to slide 16. As we have stated over the last several months, our intermediate term objective is to deliver 15% plus return on tangible common equity. We believe this is an achievable and sustainable level of profitability for our business. While short term economic conditions and market factors may create quarter to quarter fluctuations, we focus on the value created by having our diversified business model in one of the country's best footprints. Long term capital normalization, along with the benefits of our prudent credit model and ability to generate profitability through revenue opportunities and continued expense discipline give us a full suite of tools to deliver on our return expectations.

Now, I will turn it over to Brian.

Thank you, Hope. Our team did a tremendous job capitalizing on the momentum that we brought in 2025. Even though the economic outlook for our country and even the world has become a lot less clear over the last three months, our teams have remained focused focused on delivering value to our clients and continuing to make First Horizon a top tier regional bank. Our diversified business model provides us with a notable edge, offering countercyclical revenues support that allows us to maintain stability during economic fluctuations. First Horizon continues to have unique levers we can pull that will allow us to remain successful in a changing environment. We remain committed to our clients. Are deeply invested in understanding their credit needs and working closely with them to navigate the current economic cycle. This partnership mentality extends across Owl esque all aspects of our business. You see evidence of it in the level of deposit retention we see amidst our successful deposit price management. You see it in our expense management. You see it in our ongoing credit performance. And you see it in our ability to generate returns. As we look forward to the future, we remain focused on achieving a fifteen plus percent return on tangible common equity over the next few years.

We believe this target is achievable and sustainable and it reflects our confidence in our strategic initiatives and the resilience of our business model. Thank you to our associates for all that you do to take care of our customers, shareholders and each other. Lucy, please open it up for questions now.

Thank you.

When preparing to ask your question, please ensure your device is unmuted locally. Our first question is from Michael Rose of Raymond James. Michael, your line is now open. Please go ahead.

Good morning everyone. Thanks for taking my questions. Maybe want to just start on the PPNR. Growth outlook, just given some of the uncertainty and volatility. Specifically, if you on the revenue side, I think you talked about a bunch of different scenarios. Last quarter, I think you had baked in three rate cuts into kind of the baseline outlook. So just on the upper and lower end, what is it assume in terms of a potential rate cut? And then on the on the expense side, just to even get to the low end, it assumes a pretty big ramp over the next three quarters. I assume that's gonna come with with revenue as well, but just wanted to dig into the confidence and the ability to generate PPNR growth and then maybe some of the puts and takes? Thanks.

Good morning, Michael. Thanks for the We are confident in the guidance we ran a as we've mentioned before, we ran a whole series of different opportunities for what could happen in 2025 coming into the year. We did land with kind of the base case or the middle of the guidance being a three rate cut with the first being in March. We didn't see that first rate cut, and so that does help us on an asset sensitive balance sheet also saw our ability to expand margin this quarter by nine basis points. Both of those lead us into a strong beginning to 2025. As we think about how rate cuts could play out, more rate cuts would be negative. More than three would be negative for our NII outlook, but we believe that we'd make it up in our FHN finance business as well as mortgage and mortgage warehouse. In January, when rates did drop, did start to see a tick up in applications in the industry, industry. But it did get pulled back when rates went the other way. But we do believe that our countercyclical will offset any type of economic condition that we can see that we can see at this time that there's always the unexpected opportunity that could come up that would push us off this guidance.

We don't see it We also had low loan growth baked in. And so when we gave this guidance, we said it was three rate cuts with low single digit loan growth. We still feel confident that that's achievable, especially with our mortgage warehouse business that's going into their seasonal time of the year where it starts to pick up. We've noted in my prepared remarks we already saw January and February were seasonally low, but March has begun pick up or starting to see pick up in April as well as rates have been pretty stable now for the last year. On the expense side, as you mentioned, in order to get to the [indiscernible] proportion of our revenue has to come from those commission businesses.

If we think about the contribution, it's about a 60% expense on those commission businesses when they ramp up. And so the high if we saw more rate cuts, we'd see, more of our revenue come from fee income, which would have our expenses drift a little bit higher.

Very helpful. I appreciate it. And maybe just as a follow-up good amount of share buyback this quarter. I heard the the color on kind of the nearer term CET1 target, maybe around 11% could be a little bit lower. Can you just discuss the appetite to continue buying back at elevated levels? Just given your confidence in positive PPNR growth and given where the stock is trading at, Thanks.

Hey, Michael. This is Brian. Thank you for joining us. Look, we have said that we intend to target 11% CET1. At some point when the economic environment is appropriate, we'll bring that target down probably closer to the 10.5% area. But that's a decision that we'll make in conjunction with the Board. I don't think given the near term near term uncertainty that we see, with the volatility in the stock markets, one and two, really where these tariff levels are and where they're gonna end up. It still feels like an 11% CET1 target is appropriate. Given that we have been very clear that we think that our stock valuation is appropriate to buy. We bought, as we said earlier, a significant amount of stock in the first quarter. It is further on sale so we will use excess capital that we can't deploy in organic growth opportunities. We will continue to use that to repurchase shares And we are confident in our ability as Hope said to generate positive PPNR for the year And given PPNR growth for the year, sorry, And given that, believe that there will be opportunities for us to continue to repurchase stock over the next several quarters.

Appreciate you taking my questions. I'll step back. Thanks.

All right. Thank you.

Our next question is from Jon Arfstrom of RBC Capital Markets. Your line is now open. Please go ahead.

Hey, good morning.

Morning, John. [indiscernible] K. Can you talk a little bit more about C and I? It's good to see that the balances were stable But you you referenced, I think, the the term some pause. There was some pause. Can you just talk a little bit about what you're hearing from borrowers maybe if that's had any impact on pipelines?

Yes. Thank you, John. I'll start. This is Brian. And [indiscernible] [indiscernible] ought to to finish it up, but it it is interesting today I would tell you that that in all of our conversations over the last ninety days, the uncertainty has led to not a pessimism in our borrower base, but simply let's wait and see. Let's take a minute and understand how all of this is going to play out, what's it going to cost, what are the variable components. But there is still an inherent optimism. So I've I've as I said in my prepared comments, the longer the uncertainty persists, the more likely that it leads to something problematic. Potentially even a recession. But given the inherent optimism that we see and hear from our customers and what we hear in our communities. [indiscernible] are still reasonably strong, and we're up to optimistic that once these things get settled down, that the economy can continue to do what it's been on track to do over the last really several years, which is to reach a soft landing and that we can have very strong and stable economic growth. Hey, John.

Thanks for joining the call. I would just add we have had and continue to have a lot of conversations with all of our customers across the entire footprint across a lot of different industries. And I would characterize general sentiment as being there's there's there's a pretty wide range in terms of how people are thinking about things. You know, a lot of factors come into play, including how that specific industry is affected by potential tariff impacts. How they're responding to these actions, There's also just a wide range in terms of how long people expect the tariff impact to last. Some people believe it's more short term. Some will believe it's more long term. But I would say the overall impact if I have to sum it up, is really more of a temporary pause effect If there are major investments in terms of CapEx or m and a, given just the amount of uncertainty in the economy right now? A lot of these type of projects are are being paused until there's more clarity around the longer term impact. But the general salmon, as Brian mentioned, is actually quite remains quite optimistic. It's more just really waiting for the dust to settle.

Before making major commitments.

Okay. Good. That's helpful. And then, Thomas, as long as you have the mic, can you talk a little bit more about the reserve increase? I know maybe hard to quantify. I think we all get it.

But you seen any evidence of deterioration and and how are you feeling about reserve levels from here? If, you know, we're maybe kind of stuck in the same spot in a quarter? Thanks.

Yeah. Yeah. No. Sure. Happy to address that.

As you saw in our first quarter performance, having 19 basis points of net charge offs, I believe that is strong performance considering the overall economy, and it's consistent with what we have delivered over the last twelve over the last twelve months In terms of outlook, the reason we did increase reserves by two basis points is really just around the uncertainty. Given the uncertainty and the higher potential for potentially some increases in unemployment and decreases in GDP. We felt like the prudent move was to make sure we're adequately reserved I believe we very much are. If you look at our ACL relative to our last five years, of average annualized net charge offs. And so this is including 2020 when we were going through COVID impact where we felt that over nine times our average annualized charge offs, and that's among the strongest in our peer set. So we believe we are conservatively reserved and and ready for a wide range of outcomes.

Okay. Thank you very much.

Our next question is from Ebrahim Unwala of Bank of America. Your line is now open. Please go ahead.

Hey, good morning.

I guess Good morning. Maybe just first Brian, for you, big picture. As we think about what this bank should deliver from a ROTC perspective, You've talked about the 15% target for, I think, the last year. Just give us a sense of the timeline of when you see that happening. Is it just operating leverage Is it a certain type of macro environment that gets us there? And structurally, do you think a bank of First Horizon's size business mix, is that the right level? Or as a shareholder, should you expect that this can do better than 15%, I'd say?

Yeah. Thank you, Ebrahim. Look. We we've said 15 plus percent and if you go back pre pandemic, we clearly doing that and more And I think it is appropriate for midsized regional banking organization. Part of what we've talked about is an economic environment that permits us to bring that CET1 ratio down to something less than 11%, as I've said, 10% to 10.5% is probably more appropriate. And over time, that coupled with strong footprint, the economic drivers that we have just in the footprint that we serve coupled with our ability to drive more profitability out of our balance sheet some of which we demonstrated in the first quarter. Gives us a high degree of confidence that we can deliver 15 plus returns and we are very focused on driving a very profitable and efficient use of capital and that's where we start our conversations. And we will continue to do that. So we're confident in that regard.

Understood. And maybe, Brian or Hope, just tell us about how you're thinking about the mortgage warehouse business, It feels like mortgage rates are not budging lower. You've added a lot of a sort of client commitments over the last, I guess, year or two in that business. Give a sense of what's going on in absent a big drop off in rates, like, you're thinking about the size how the business is structured? And, what what drives growth there the absence of a big move lower in interest rates?

Yeah. I'll start. This this is a business that that we like a tremendous amount. It is a very efficient business for us. It does have some cyclicality in it. The fourth and first quarters tend to be cyclically the lowest. More true in environments where the the business is driven by purchase money origination versus refinance, which the current market has been for several quarters. We think that as you pointed out that we have really expanded the base of that business. We are very comfortable with the broadening of that base. And we think we've picked up some market share. So we think one, we've raised the floor on the business in terms of balances and we think there's a tremendous amount of of opportunity if in fact rates start fall for refinance activity to pick up. And we think that benefits us. As Hope said, falling rates while negative to our margin would be very positive on for businesses like this, our fixed income business and our mortgage business. So think it's a great countercyclical play. It has very good efficiency and very high returns.

Got it.

And and just one, if I could follow-up very quickly on the falling rates. Given the persistently sort of relatively high rates, is there any sort of discussion internally to protect the margin a little bit to the downside, or you just don't wanna take go that route?

In terms of hedging, In terms of hedging the margin for downside, like, by adding duration or swaps Like, is that even in consideration?

Yeah. So we have those conversations, and we have as I sort of pointed out with the countercyclical, we have some natural hedges in our margin. Our balance sheet is is less asset sensitive at times than it appears and is less impacted by falling rates than it appears because of the countercyclical. We do have conversations about the long tail events. And when we sit here today, you know, I I can make almost as good argument for higher rates with inflation as I can for lower rates with a slowdown in economic activity. And And we have those conversations. We will continue to have those conversations and make or appropriate decisions. And, you know, uncertainty is is clearly uncertainty. And and we will be much smarter about all these things in the next three, four, five months some of this settles down.

Good. Thank you. Thank for having me. One thing I'll add to that is, you know, in the last eighteen, twenty four months, we used to think of interest rate sensitivity as a 200 basis point shock. We do now for ALCO and with our board discussed 304 up and down. So we're constantly monitoring what that would mean to our balance sheet and what is the hedging strategy that we should have to make sure we stay in the interest rate sensitivity that, we're comfortable with.

Got it. Thanks, Hope.

Thank you. Our next question is from Chris McGratty of KBW. Your line is now open. Please go ahead.

Great. Good morning.

I hope there's a question on the reserve, the scenarios that you're using. I think you touched upon the tweaking to the to some of your scenarios. Could you share guess, what's your baseline scenario for unemployment in your base case?

I'm sure. I'd be happy to take that one, Chris, and thanks for joining our call. For our overall feasible modeling, we use Moody's Moody's Analytics for running our macros and areas. And then within that, we have, waiting that we assigned to baseline and its appropriate upside and downside scenarios. Given just the level of uncertainty right now, as you can imagine, we did increase our weighting on the downside scenarios. And so what that essentially does is we're looking at a a potentially a decreasing GDP over the next couple of years. But not into recessionary levels. And then also an increase in unemployment over the next couple of years as well. Up to around the 5% mark. Okay.

Great. Thanks for that. And, Hope, in terms of just dialing in the balance sheet, the earning asset levels given the seasonality in the mortgage warehouse and and the effects of loan growth. How should we think about just earning asset trajectory relative to first quarter levels? And also ultimately, I'm trying to get it, will NII, if you're right on the three cuts, will NII grow off these levels? From here? Thanks.

Yep. Let me start with a question you didn't answer. As we think about mortgage warehouse, we do match fund that with wholesale funding. So if you see in in my prepared remarks on the deck, do talk about paying off, you know, a significant amount of wholesale debt this quarter, which matches almost dollar for dollar with what we saw on average mortgage warehouse come down. And so we do have that natural hedge. And when that seasonality happens, we take away the funding costs not sitting on our balance sheet long term. On on the second piece of that, as we think about where the margin can go from here, Chris, I think it's really mortgage warehouse is our our best embedded hedge in that there is seasonality for '2 and q three that's going to happen. Brian, you know, talked about it previously. We saw last year that mortgage warehouse get, you know, almost a $4,000,000,000 in what was a, you know, one of the lowest mortgage origination years in in the last twenty years on record. We were supposed to mortgage industry coming in expected to be a little higher this year. Now it's come down and said it will probably look similar to last year.

We look at that mix, as Brian mentioned earlier, we see about 25 of percent of that still being refi. People that were in arms or people that had a higher rate and are now refi ing down, and 75% of it is new homes. We, have a MD program that we talk about, you know, pretty frequently when when Brian and I are in front of you all and on calls, which is we go on match data doctors, and they still wanna buy homes now that they have a paycheck and are coming out of med school. And so we feel confident in our balance sheet, really having that built in growth regardless of which economic scenario plays out this year and being a natural hedge. On the security side, we note in our deck that we do have a billion dollars of roll off at approximately 2.5%, 2.6%. And we are currently actively reinvesting that.

The current yields when we look at last quarter were about 5%.

Okay.

Great. Let me just point to growth of NII. Yeah.

Yeah.

Sorry, Chris.

Yeah.

Growth in NII.

The growth in Yeah.

Think it's Growth in Yeah. Okay. Yep. The growth in NII will be all of those factors kind of coming together along with rate cuts. Not having rate cuts definitely allows us to grow NII easier than having to overcome 55% of our balance sheet being net down. Again, for us, if we see significant rate cuts, mortgage warehouse will probably have billions more on the balance sheet as we see some of these refi. We only have 25% of the production right now in refis and a lot of R sitting out there that could benefit from 100 basis point decrease.

Circling back to to what Hope said earlier in terms of the guidance we laid out, we still expect low single digit loan growth during the course of the year. And don't sit around and claim that our crystal ball is any more polished than anybody else's. There's a tremendous amount of uncertainty, and things can take a lot of directions from here. But given what we see, what we're hearing from our customer base, and the myriad of scenarios that hope to described earlier we still feel very confident in our ability to meet the guidance that we laid out last December and deliver positive PPNR growth over the course of the year.

That's great. Thanks so much.

Sure thing. Thank you.

Thank you.

Our next question is from Jared Shaw of Barclays. Your line is now open. Please go ahead.

Hey, good morning. Good morning.

Just going back to the the question on the Moody's scenarios. Could you just tell us what the percent weight to the downside is now versus 4Q? Was that just a little bit of a tweak or is that more substantial?

Hey, Jared. We don't get into specifics in terms of the percentage we use in each scenario. But but what I will say is, you know, this is a process that obviously, we involved management's, judgment and and our views on potential variability in the economic outcomes. We also do apply qualitative overlays to adjust the factors. That are unique to the composition of our portfolio, and those can vary quarter to quarter. And I would say, totality, also this quarterly process, and all of the results are approved through a credit risk governance committee. That is made up of multiple functions throughout the bank. And so we believe the scenarios we're using and the weightings we're is a accurate reflection of where we believe the economic outlook is.

Okay. Great. So so it's a I was just going to add, look, this I think it was stated earlier in the week, CECL implies a a degree of precision that doesn't really exist. But at December 31, it's supposed to be a reflection of anticipated losses in the portfolio and the same is true in March. And given that we built reserves with essentially a flat balance sheet, you can infer that we've applied more to the downtime.

Got it. Got it. So it is sort of a combination of of waiting change as well as that qualitative quantitative overlay?

Yeah. That's right. And that's consistent with our process quarter to quarter in any environment.

Got it.

And then Moody's also done. Jared, just one more comment. Moody's did since you're asking about q four, Moody's did get slightly worse from q four to q one. It came out mid quarter, and then we did add an overlay. We felt that things had a lot more uncertainty and possible downside. So it's not just how we weigh the downside, also do account for the fact that Moody's increased their risk of a recession which is the baseline of our model and their GDS GDP assumptions and unemployment assumptions got worse quarter over quarter.

Yeah.

Okay. So that's so okay.

Got that.

Thank you. And then separately, looking at the fixed income business and that dynamic between the ADRs down a little bit and then some of the revenue from the other areas. Should we think of that going forward as as maybe a little bit of an inherent natural hedge? Or is that other revenue growing just because of more of a focus of growing that business. If we do see ADRs up could we see maybe some of that other those other fees stay elevated or should we think of those as moving around?

Jared, typically we see between 8,000,000 to 10,000,000 in other, fee income in the fixed income business. It's not ADR related. From time to time, we we see a tick up. If you look back over the last few quarters or last years, we've had a couple quarters where we we spiked up like this, had to talk about it. There's nothing unusual that happened this quarter. There's not anything that I would say that this is you know, a a new high level. Some quarter, you just get more of advisory fees, loan portfolio sales, and we happened to have that fall in our favor this quarter. So I don't see it indicative of any type of macroeconomic environment, just kind of timing of the way those deals can sometimes come our way.

Okay. Any, any updates or quarter to date on how ADRs are shaping up in April?

Yeah. It depends on which week you're looking at. Last week was a really good week. First quarter was a little slower. First week of the quarter was a little slower. It's tied up in the volatility of the bond markets and you've seen how much interest rates have moved around the ten year sold off was close to 60 basis points and it's moving all over the place. And as you would expect, customer activity and ADRs are seeing to some extent those volatilities show up in ADRs.

Understand. Thanks. And then just finally for me, looking at the outside services going down, are there other projects near term that are going to be implemented to sort of rebuild that expense or that comment of future expenses more just as projects come up? They'll backfill?

I think it's a little bit of both. As we think about what we've talked about, you know, we had a three year hundred million dollar investment. We're through the first half of of that investment period with a lot of it being the the run the bank specifically. My very exciting and and very you know, add benefit to our investor general ledger We replaced that after four years. We also went through a treasury management conversion. Those both of those projects were two of the most expensive projects we have in the pipeline that did require a lot of third party expenses that can't be capitalized. As you go to hosted software, as we did with both GL VDOL, what you can capitalize is just less. So it's really gonna be dependent on what type of projects in the pipeline and what type of labor can be capitalized versus not. But I I do think, don't expect that we'll see that spike up in the near term future quarters. We just had, some very large projects that we had to get through following the Iberia merger and the hold coming out of the, TD merger.

We we laid out in in the guidance Hope talked about earlier sort of an outline of where our expenses are. And we think expenses are one of the levers that we have and an opportunity to to pull over the course of the year and if the economic cycle turns bad, we think there's some opportunity for us there. We did not come into the year with a bare bones budget. We recognize that we needed to continue to invest in building the franchise. And there were some things that were residual following the termination of merger agreement. So we are comfortable with our expense levels. We think there are some opportunities there or levers if necessary. And if the economic environment supports it, we're going to continue to invest in the franchise and build it out for the long term.

Thanks a lot.

Thank you, Our next question is from Casey Haire of Autonomous Your line is now open. Please go ahead.

Thanks. Good morning. Brian, I want to follow-up on that because that that was kind of the the crux of my question here. So it like, you guys sound pretty optimistic on on the on the revenue front and and rebounding from here. But it sounds like if that if loan growth doesn't materialize and and fixed income kind of models through, you [indiscernible] extreme volatility. That you can can pull the expenses below this guide. To to keep the PPNR. Is that is that a fair way of of summarizing?

Yes. That's fair way of summarizing. Okay. Great. And then on on the on the NIM with with the focus on the deposit cost, the the loan to deposit ratio at 97% Obviously, if we get Fed cuts, there's more leverage on the on the deposit cost. But we don't, know, how will that loan to deposit ratio be managed by way of deposit cost given it's swinging a little high relative to peers?

Yeah. Casey, we've been in the 94 to 97 pretty consistently over the last few years, you'll see that kind of swing, especially as we get in and out of wholesale funding. Our deposit ratio did tick up, but it's because we paid off wholesale funding as our loan balance sheet shrunk quarter to quarter. And we that you know, that's a pretty typical lever for us. As we think about our loan to deposit ratio, the way we screen it is we look at our loans plus securities as a percentage of deposits. We run a much smaller securities portfolio than our peer group. And so as we think about where liquidity is system, whether it's in a loan or it's in a security, it's the same. When we screen that versus our peer group, we're right middle middle of the pack. That being said, we're always looking at loan to deposit ratio. We'd like to stop answering this question, so we're continuing to bring deposits in. We want to bring them in for relationship business. We focused our last two years on talking about what the new to bank campaigns we are and what the retention rates are.

We don't focus on, really buying deposits, what we call hot money, which comes in and when you reprice it down, at least we focus on a client relationship. Starting with a, you know, new to bank deposit. How do we get a loan relationship or a wealth relationship And so that is how we're running our business, and that's how we're gonna continue to grow our deposit franchise in line with our loan franchise.

Gotcha. Thank you.

Thank you. Our next question is from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.

Following up on the deposit line of questioning, just some of the campaigns that, you had mentioned that are going to hit and kind of 2Q, 3Q. I'm just wondering the ability to further bring down deposit costs and I hope you had mentioned that deposit costs kind of stabilize here. Subsequent any additional rate cuts. But the ability to maybe bring down deposit costs if loan growth doesn't materialize outside of warehouse. And then just talk to the new to bank campaigns that are going be rolling out here. In the summer months and just kind of what type of rates we're looking at for for those Timur, on the deposit cost, we're thinking about total deposit cost. The best way to bring that down besides repricing clients on the interest bearing is to bring in more non interest bearing. We've had successful non interest bearing campaigns in q two, last two years. That is seasonally when you see the most consumer clients willing to move their account. They tend to not move it at the end of the year and not in the early part of the year. So we do have a new to bank checking offer out there that's know, $450.

You can go online and look it up and see all the specifics, but what you need to qualify for that That campaign just kicked off and will run through q two. We've seen a lot of success with the cash offer last year and a lot of success with the retention. So that is a lever we have to grow deposits and and bring down the total weighted deposit cost. On the interest bearing, we still are bringing new clients in every month with the new to bank offer. We just brought down the duration of our new to bank offers. Our new to bank money market is currently at a three eighty five for forty five days. So as we bring in new money, it stay at three eighty five when it comes in at the end of those forty five days. We have a very thought out walk back program, which is we don't take them from the promo rate down to base rate overnight. We look at, you know, how much how much deposits do they have with us, how we deepened the relationship and really think about pricing there? But I believe we have the ability to continue to maintain this cost of deposit.

I don't see it drifting up, mature in the near term, especially with, there not being a need for loans. The biggest risk to deposit cost going back up is a fight for deposits when loan growth starts. On the downside, I think you're right. I don't know that we can pick up a a, you know, the same quarter over quarter impact that we've seen the last two quarters unless we see a rate cut. Rate cuts, I think, will really be meaningful for deposit costs coming down.

The other thing I'll mention, we really didn't see a whole lot of competition in q one. And so I do think as competition picks up, the new to bank offers would would have to kind of compete like we saw last summer.

Okay. And I guess just tying all of that together, looking at demand deposits, looking at kind of broader uncertainty versus the new campaigns, do you think you'll be able to actually grow DDA deposits here in the coming quarters? Or are some of the lack of borrowing needs and use your own liquidity? Is that gonna cause borrowers to continue kind of leaning on their own balance sheets? And maybe you see additional pressure in that line item, just maybe not at the same extent that we've seen in the last couple of quarters?

On the deposit side, I think we'll be able to attract new clients. We've seen success with that. The question is, what does tariffs do to their cash flow? If they're spending more of it, there's less sitting in their account. Both on the consumer side and on the treasury management operating account. Inflation has a direct correlation to how much money that they they have in their accounts. Longer term, absolutely, I believe, you know, we will continue to grow our noninterest bearing our operating accounts that are our treasury management operating accounts, which are in the noninterest bearing account line for us.

It's a it's a core objective to grow customer and to broaden and deepen relationships particularly on the deposit side of the balance sheet, whether it's treasury management services to single product only.

Loan customers or whether it's to further expand our retail consumer customer base or private client customer base So we're very focused on growing deposits. And and specials make some difference, special rates make some difference. Depending on what's happening with loan growth. But we're always the market to grow customer relationships. And as both lending and deposit taking activities.

Okay, great. And then just lastly for me, want to circle back to expenses. Again, that outside services line, is that fully reflective of kind of sunsetting the GL related expense and the treasury management related expense? Or is there more on come there? And then I guess as we go to the next half of that hundred million dollars spend, the change the bank What's kind of the gap to hitting some of those projects? And maybe capitalized versus not, how much of that outsized service cost do you expect to come back online as some of those projects get going?

I'm a start because I'm a I'm a tell you, I don't wanna spend any more on the GL. We we have I think we've gotten the treasury conversion work largely completed. It's true with the GL project and hopes that's up and running. And and the the investments that we're continuing to make and run the bank, we're looking at how much more activity we can get into cloud operating environments, Can we take our mainframe operations and get that completely off premises? And so there are a number of investments like that that we continue to make. That will better position us to run the banking organization for the long term and make technology at its base more efficient which gives us more capability to invest in other tools and technology. We're building out today the capability to to provide our own online mobile banking tools. So we're continuing to make investments across all of these platforms. And that outside services will ebb and flow a little bit. But all of that is built into our expectations around expenses. And as I said, we have some flexibility there if the economic environment does not unfold the way we think it will.

The other thing on outside services you know, Brian talked about the technology piece very well, is that is where our marketing expenses hit. For new client acquisitions. And so if you look back at q three and q four, we did have those elevated. We called them out as seasonality in marketing. And so you will see see that. Yeah. I don't think technology in the near term will that as much quarter to quarter in 2025 as the seasonality around marketing offers.

Great. Thank you for that color. Appreciate it.

Thank you.

Our next question is from Anthony Eliane of JPMorgan.

Hi, everyone. Just to follow-up on Timur's question on deposits.

Could the second quarter actually be a growth quarter for total deposits given the campaigns that Hope you mentioned that are coming? Or are there still reductions of broker that you expect would could offset the new deposits coming in?

Second quarter should be a growth quarter for deposits for us. As as we mentioned in my prepared remarks, q one is seasonally lower for us. So On the broker side, mortgage warehouse is already picking up in March. And I expect that it will be continue to pick up in q two. The the traditional home buying season is that May, June timeframe, people want to move over the summer, especially people with kids as well as the medical MD program people are graduating this spring, and we have a very successful partnership there with private wealth. And so we will match fund that as we typically do or at least a portion of that growth for timing. But I do believe when we look back at Q2 for the last two years, we've shown we've demonstrated we've been able to grow new to bank deposits with our promotion and sales campaigns that we kick off, in the spring.

Thank you. And then my follow-up, just on the impact from tariffs on certainty trade war, are there or I guess what are the loan portfolios that you're paying a closer attention to today that may have borrowers with outsized exposure to tariffs trade war, Asia? Can you size these up for us in terms of loans outstanding? Thank you.

Yeah. Hi, Anthony. I can help address that one. I think, you know, first and foremost, I'll say depending on where Karen terms end up landing and how long they last, the the list of industries we'd look at closely can can obviously, get longer or shorter. But as it currently stands, the sectors that we're paying particular attention to would be retail trade, consumer finance, manufacturing, and construction. You'll notice that skews more towards the c and I side because that is where we expect to see more of the tariff impact In terms of sizing of these portfolios, I think one of the things we've done a really good job of overall is having a very diversified C and I portfolio. There is no single industry that is more than 12%, C and I exposure. And so even within the other specific sectors I mentioned, these are all it's well diversified throughout our portfolio.

Thank you.

Anthony, I I would add to that. I think while it it's likely if if there are issues they're likely to start in tariff related areas. I think it's quickly spread. It's gonna be because the consumer got knocked out. And if the consumer gets knocked out, it's not going to be just who's paying higher prices based on tariffs. It really will be a broader credit cycle. And that's why we're we're still very optimistic and most especially hopeful that these discussions that are going on today, like with Japan, that they yield some real tangible results where we can start to see these tariff related issues settle down and more broadly The U. S. Economy can get to sort of that stable place around what the rules of the road are and and the economy can build from there.

Yeah. That's right. But, but we we expect it to probably consumers for us, especially lower income households. And so that's why a lot of the industries I mentioned are essentially consumer retail adjacent type of sectors.

That's great. Thank you.

Our next question is from Christopher Marinac of Janney Montgomery Scott. Your line is now open. Please go ahead.

Thanks very much. Brian and team, does this second, third quarter remind you at all of the early part of COVID back in 2020 from a reserve and uncertainty standpoint? Does any of that sort of kind of apply to what we learned five years ago?

Well, I I think in terms of severity, no, not as bad as 2020. But I do think that if anything, we're going to have to deal with the impact of a supply shock. And supply shock is what happened when supply chains got shut down in 2020. So there are some echoes of it, but at this point, nowhere near the severity of what we were all trying to deal with in March of of twenty twenty.

Yeah. And Christopher, I would just add, I think we've all used the word uncertainty a lot and there's certainly more of it now than there was three months ago. But I would point out you know, uncertainty itself isn't new just in the last five years. We've dealt with COVID, supply chain shortages, rapid inflation, higher for longer rates. And unique to us, even a pending merger. And throughout all of that, we continue to deliver consistent, strong credit performance. And I think that really comes back to something Holt mentioned earlier, which is our our principles around being a relationship focused working with our borrowers and and that's why we continue to see consistently strong performance working through these cycles and working through uncertainty with our customers.

Great. Tom and Brian, thank you. I appreciate it. Thank you.

Our last question is from Brennan Crowley of Baird. Your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. I was hoping to hear a little more commentary around trends in CRE lending. Some of your peers have highlighted increased competition. Wanted to hear some more detail around your outlook for any potential loan growth this year or are these kind of ongoing fund ups going to limit upside in that portfolio? Yeah. Hey hey, Brandon. I'm happy to answer that one. You know, within CRE lending, we do see a good amount of competition, and, and you know, that's not new. But if you look at our pipeline, we actually have a pretty solid pre pipeline as, we've mentioned on previous calls. Relative to other lenders, we focus more on the construction side and construction financing. And and so the the one caveat I would have is given the the the tariff uncertainty and what that means for particularly lumber and steel prices.

I do think that's going to have an impact, at least a temporary pause until there's more clarity as you can imagine, until builders can get a good handle around what their raw materials costs will be There's going to be more hesitation for a new project starts. And so to me, that's actually gonna be kind of a the biggest driver in terms of how much of the pre pipeline we have comes to fruition in the near term versus being pushed a little further out. [indiscernible] are a little bit of a a mathematical anomaly in the sense that had very strong pre growth in in the last four, five years. And with the open secondary markets, a lot of things are prepaying and doing what they should do, which is go to more permanent excuse me, permanent forms of finance. And with higher rates over the last couple of years, [indiscernible] initiation of of new projects has been hampered a bit and then further by the impacts that Tom just described. So we still are very positive on that business. We see very good opportunities and we think that this will level out. We're very optimistic about how we're positioned in our commercial real estate lending broadly speaking across the entire footprint.

Okay.

Great. Thanks for that. I think the rest of my questions have been answered. So appreciate the time today.

Thank you. Appreciate you joining us.

We have no further questions. So I hand back to Chairman, President and CEO, Brian Jordan, for closing remarks.

Thank you, Lucy. Thank you all for joining us this morning. We appreciate your interest in our company. If you have any further questions or need additional information, please reach out to us, and we'll be happy to try to respond. Hope everyone has a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.