First Horizon - Earnings Call - Q1 2025
April 16, 2025
Executive Summary
- Q1 2025 EPS was $0.41 and adjusted EPS $0.42; EPS rose $0.12 q/q and $0.08 y/y, while adjusted EPS dipped $0.01 q/q and rose $0.07 y/y.
- Net interest margin expanded 9 bps to 3.42% on disciplined deposit repricing; interest-bearing deposit cost fell 38 bps q/q to 2.72%.
- Provision increased to $40M (from $10M in Q4) as ACL/loans rose to 1.45% on macro uncertainty; NCO ratio rose to 0.19% but remained within guided range.
- Management maintained FY2025 guidance (revenue flat–up 4%, expenses up 2–4%, NCOs 0.15–0.25%, tax 21–23%, CET1 10.5–11.0%); repurchased $360M of shares, ending CET1 at 10.9%.
- Versus S&P consensus, EPS modestly beat; revenue missed as defined by S&P Global; the broader narrative centers on margin expansion, credit stability, and capital deployment (see Estimates Context). Values retrieved from S&P Global.*
What Went Well and What Went Wrong
What Went Well
- “We delivered solid pre-provision net revenue growth through continued margin expansion and deposit pricing discipline” (CEO).
- Net interest margin up 9 bps to 3.42% on 38 bps reduction in interest-bearing deposit cost, aided by repricing success (retained ~95% of ~$16B promotional deposits while cutting weighted-average rate by 34 bps).
- Shareholder returns: $360M buybacks; TBVPS up $0.32 to $13.17; adjusted efficiency ratio improved to 59.09%.
What Went Wrong
- Provision rose to $40M with ACL/loans up 2 bps to 1.45% amid increased macro uncertainty; NCOs rose to $29M (0.19%) vs $13M (0.08%) in Q4.
- Loans declined 1% q/q (seasonal LMC down $101M; CRE paydowns) and average deposits declined $1.6B q/q (brokered CD payoffs), pressuring balances.
- Fixed income ADR fell to $586K (down 11% q/q) given March’s extreme rate volatility, though non-ADR product revenues offset.
Transcript
Operator (participant)
Hello everyone, and thank you for joining the First Horizon first quarter 2025 earnings call. My name is Lucy, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I will now hand over to your host, Tyler Craft, Head of Investor Relations, to begin. Please go ahead.
Tyler Craft (Head of Investor Relations)
Thank you, Lucy. Good morning. Welcome to our first quarter 2025 results conference call. Thank you for joining us. We are especially appreciative at how nimbly everyone adjusted the conference call number as we had an unforeseen outage this morning from a carrier, and were able to get a new number in place very quickly. We appreciate you all making the call. Today, our Chairman, President, and CEO, Bryan Jordan, and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, after which we will be happy to take your questions. We are 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.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties.
Therefore, we ask you to review the factors that may cause our results to differ from our expectations on page 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. Last but not least, our comments reflect our current views, and you should understand that we are not obligated to update them. With that, I'll hand it over to Bryan.
Bryan Jordan (Chairman, President, and CEO)
Thank you, Tyler. Good morning, everyone, and thank you for joining the call. We 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, we 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 returns despite shifting economic expectations and market uncertainty throughout the quarter. On slide five, we have shared a few highlights from the quarter. We delivered an adjusted EPS of $0.42 per share, which was a $0.01 decrease from the prior quarter. These results include pre-provision net revenue growth of $16 million 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 management, lowering our expenses by $20 million, excluding deferred compensation. We continued to strategically deploy excess capital through our share repurchase program, repurchasing $360 million 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?
Hope Dmuchowski (CFO)
Thank you, Bryan. 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 million 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 million, while our expenses decreased $20 million, which was driven by typical levels of fluctuation and a few specific expenses in the prior quarter. Provision expense increased by $30 million as our ACL to loans ratio increased by two basis points to account for an increased macroeconomic uncertainty and a probability increase of potential recession. Our CET1 ratio ended the quarter at 10.9%, reflecting the $360 million of share repurchases.
On slide eight, we will take a closer look at the factors contributing to our $1 million 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 million 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 million of incremental 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 imbalances was largely driven by the payoff of $559 million of brokered CDs. Our base rate and non-interest-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 billion 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 3.10%. Our continued pricing discipline resulted in an 80% interest-bearing deposit beta since the Fed began cutting rates in Q3 2024.
The interest-bearing spot rate ended March at 2.70%, down 10 basis points from the 2.80% at the end of 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 that 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 paydowns with commercial real estate. This includes payoffs 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&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 million from the prior quarter. Fixed income remains flat compared to last quarter, despite an 11% decline in ADR, as this decline was offset by an increase in revenues from other products, comprised 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 income reflects normal fluctuation levels that we see quarter-to-quarter. On slide 12, we show that excluding deferred compensation, adjusted expenses decreased by $20 million from prior quarter. Personnel, excluding deferred compensation, increased by $9 million from last quarter. The increases in salaries and benefits totaled $2 million 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 million to the quarterly increase as we make our annual adjustments to long-term awards during the first quarter.
Outside services declined by $8 million, 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 non-interest expense was down $22 million, with the largest items being a $10 million 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 million-$29 million, or 19 basis points of average loans. Loan loss provision was $40 million this quarter, with our ACL to loan ratio increasing two basis points to 1.45% as outlook turned less favorable on broad macroeconomic uncertainty. Non-performing 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. We believe that our discipline 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 and 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 million 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 in 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 a natural revenue hedge to our somewhat asset-sensitive balance sheet. Continuing with our adjusted expense guidance, we expect year-over-year increases between 2% and 4%. 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 15-25 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 CET1 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 Horizon. 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%+ 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 Bryan.
Bryan Jordan (Chairman, President, and CEO)
Thank you, Hope. Our team did a tremendous job capitalizing on the momentum that we brought into 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 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 revenue 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. We are deeply invested in understanding their credit needs and working closely with them to navigate the current economic cycle. This partnership mentality extends across 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 15%+ 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.
Operator (participant)
Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. 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.
Michael Rose (Analyst)
Hey, good morning, everyone. Thanks for taking my questions. Maybe I want to just start on the PPNR growth outlook, just given some of the uncertainty and volatility. Specifically, 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. Just on the upper and lower end, what does it assume in terms of potential rate cuts? And then 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 going to come with revenue as well. Just wanted to dig into the confidence in the ability to generate PPNR growth and then maybe some of the puts and takes. Thanks.
Hope Dmuchowski (CFO)
Good morning, Michael. Thanks for the question. We are confident in the guidance we ran. 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 did not see that first rate cut, and so that does help us on an asset-sensitive balance sheet. You 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 Financial business as well as mortgage and mortgage warehouse. In January, when rates did drop, we did start to see a tick up in applications in the industry. They did get pulled back when rates went the other way, but we do believe that our countercyclicals will offset any type of economic condition that we can see at this time. 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. 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. As noted in my prepared remarks, we already saw January and February were seasonally low, but March has begun to pick up, and we're starting to see pickup in April as well. Rates have been pretty stable now for the last year. On the expense side, as you mentioned, in order to get to the mid-range of the expense guide, a higher proportion of our revenue has to come from those commissioned businesses. If we think about the contribution, it's about a 60% expense on those commissioned businesses when they ramp up.
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.
Michael Rose (Analyst)
Very helpful. I appreciate it. Maybe just as a follow-up, good amount of share buyback this quarter. I heard the color on kind of the near-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 PP&R growth and just given where the stock is trading at? Thanks.
Bryan Jordan (Chairman, President, and CEO)
Hey, Michael, this is Bryan. 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 uncertainty that we see with the volatility in the stock markets, one, and two, really where these tariff levels are and where they're going to 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. We will use excess capital that we can't deploy in organic growth opportunities. We will continue to use that to repurchase shares. We are confident in our ability, as Hope said, to generate positive PP&R for the year and given PPNR growth for the year. Sorry.
Given that, we believe that there will be opportunities for us to continue to repurchase stock over the next several quarters.
Michael Rose (Analyst)
I appreciate you taking my questions. I'll step back. Thanks.
Bryan Jordan (Chairman, President, and CEO)
All right. Thank you.
Hope Dmuchowski (CFO)
Our next question is from Jon Arfstrom of RBC Capital Markets. Your line is now open. Please go ahead.
Jon Arfstrom (Analyst)
Hey, good morning.
Bryan Jordan (Chairman, President, and CEO)
Morning, Jon.
Jon Arfstrom (Analyst)
Can you talk a little bit more about C&I? It's good to see that the balances were stable. You referenced, I think, the term some pause. There was some pause. Can you just talk a little bit about what you're hearing from borrowers and maybe if that's had any impact on pipelines?
Bryan Jordan (Chairman, President, and CEO)
Yeah. Thank you, Jon. I'll start. This is Bryan and Tom, probably to finish it up. It is interesting today. I would tell you that in all of our conversations over the last 90 days, the uncertainty has led to not a pessimism in our borrower base, but simply a, "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?" There is still an inherent optimism. 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. Given the inherent optimism that we see and hear from our customers and what we hear in our communities, pipelines are still reasonably strong.
We're optimistic that once these things get settled down, 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.
Thomas Hung (Chief Credit Officer)
Hey, Jon. 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. I would characterize the general sentiment as being that there's a pretty wide range in terms of how people are thinking about things. A lot of factors come into play, including how their 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 people believe it's more long-term. 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&A, given just the amount of uncertainty in the economy right now, a lot of these types of projects are being paused until there's more clarity around the longer-term impact. The general sentiment, as Bryan mentioned, has actually remained quite optimistic. It's more just really waiting for the dust to settle before making major commitments.
Jon Arfstrom (Analyst)
Okay. Good. That's helpful. Then, Thomas, as long as you have the mic, can you talk a little bit more about the reserve increase? I know maybe it's hard to quantify. I think we all get it. Have you seen any evidence of deterioration, and how are you feeling about reserve levels from here if we're maybe kind of stuck in the same spot in a quarter? Thanks.
Thomas Hung (Chief Credit Officer)
Yeah. No, sure. Happy to address that. As you saw in our first quarter performance, having 19 basis points of net charge-off, I believe that is a strong performance considering the overall economy, and it's consistent with what we have delivered over the last 12 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-off, and so this is including 2020 when we were going through COVID impacts, we're reserved at over 9x our average annualized charge-off. And that's among the strongest in our peer set. So we believe we are conservatively reserved and ready for a wide range of outcomes.
Jon Arfstrom (Analyst)
Okay. Thank you very much.
Operator (participant)
Our next question is from Ebrahim Poonawala of Bank of America. Your line is now open. Please go ahead.
Ebrahim Poonawala (Analyst)
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 an ROTCE 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% ROTCE?
Bryan Jordan (Chairman, President, and CEO)
Yeah. Thank you, Ebrahim. Look, we've said 15%+. If you go back pre-pandemic, we were clearly doing that and more. I think it is appropriate for a mid-size 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, 10-10.5% is probably more appropriate.
Over time, that coupled with the 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%+ returns. We are very focused on driving a very profitable and efficient use of capital. That is where we start our conversations. We will continue to do that. We are confident in that regard.
Ebrahim Poonawala (Analyst)
Understood. Maybe Bryan or Hope, just tell us about how you are thinking about the mortgage warehouse business. It feels like mortgage rates are not budging lower. You have added a lot of sort of client commitments over the last, I guess, year or two in that business. Just give a sense of what is going on in absent a big drop-off in rates, how you're thinking about the size, how the business is structured, and what drives growth there in the absence of a big move lower in interest rates.
Bryan Jordan (Chairman, President, and CEO)
Yeah. I'll start. This is a business 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 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. We think we've picked up some market share. We think, one, we've raised the floor on the business in terms of balances.
We think there is a tremendous amount of opportunity if, in fact, rates start to fall for refinance activity to pick up. We think that benefits. As Hope said, falling rates while negative to our margin would be very positive for businesses like this, our fixed income business and our mortgage business. We think it is a great countercyclical play. It has very good efficiency and very high returns.
Ebrahim Poonawala (Analyst)
Got it. 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 do not want to pull that out?
Bryan Jordan (Chairman, President, and CEO)
In terms of hedging?
Ebrahim Poonawala (Analyst)
Yes. In terms of hedging the margin for downside, by adding duration or swaps, is that even in consideration?
Bryan Jordan (Chairman, President, and CEO)
Yes. We have those conversations. We have, as I sort of pointed out with the countercyclical, some natural hedges in our margin. Our balance sheet is less asset-sensitive at times than it appears, and it is less impacted by falling rates than it appears because of the countercyclicals. We do have conversations about the long-tail events. When we sit here today, I can make almost as good an argument for higher rates with inflation as I can for lower rates with a slowdown in economic activity. We have those conversations. We will continue to have those conversations and make appropriate decisions. Uncertainty is clearly uncertainty. We will be much smarter about all these things in the next three, four, five months as some of this settles down.
Ebrahim Poonawala (Analyst)
Good. Thank you.
Hope Dmuchowski (CFO)
Ebrahim, one thing I'll add to that is in the last 18, 24 months, we used to think of interest rate sensitivity as a 100 and 200 basis point shock. We do now, for ALCO, and with our board, discuss 300 and 400 up and down. We are 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 inside the interest rate sensitivity that we're comfortable with.
Ebrahim Poonawala (Analyst)
Got it. Thanks, Hope.
Operator (participant)
Thank you. Our next question is from Chris McGratty of KBW. Your line is now open. Please go ahead.
Chris McGratty (Analyst)
Oh, great. Good morning. Bryan or Hope, just a question on the reserve, the scenarios that you're using. You touched upon the tweaking to some of your scenarios. Could you share, I guess, what's your baseline scenario for unemployment in your base case?
Bryan Jordan (Chairman, President, and CEO)
I'm sure I'd be happy to take that one, Chris. Thanks for joining our call. For our overall CECL modeling, we use Moody's Analytics for running our macro scenarios. Within that, we have weightings that we assign to baseline and, if 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. What that essentially does is we're looking at potentially a decreasing GDP over the next couple of years, but not into recessionary levels. Also, an increase in unemployment over the next couple of years as well, up to around the 5% mark.
Chris McGratty (Analyst)
Okay. Great. Thanks for that.Hope, in terms of just dialing in the balance sheet, the earning asset levels, given the seasonality in the mortgage warehouse and the effects of loan growth, how should we think about just earning asset trajectory relative to first quarter levels? Ultimately, I'm trying to get at, NII, if you're right on the three cuts, will NII grow off these levels from here? Thanks.
Hope Dmuchowski (CFO)
Yep. Let me start with a question you did not answer. As we think about mortgage warehouse, we do match fund that with wholesale funding. If you see in my prepared remarks on the deck, we do talk about paying off a significant amount of wholesale debt this quarter, which matches almost dollar for dollar with what we saw on average mortgage warehouse come down. We do have that natural hedge.
When that seasonality happens, we take away the funding costs not sitting on our balance sheet long-term. 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 best embedded hedge in that there is seasonality for Q2 and Q3 that's going to happen. Bryan talked about it previously. We saw last year that mortgage warehouse get almost $4 billion in what was one of the lowest mortgage origination years in the last 20 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'll probably look similar to last year. When we look at that mix, as Bryan mentioned earlier, we see about 25% of that still being refi.
People that were in ARMs or people that had a higher rate and are now refying down. 75% of it is new homes. We have an MD program that we talk about pretty frequently when Brian and I are in front of you all and on calls, which is we go on match day to doctors, and they still want to buy homes now that they have a paycheck and are coming out of med school. 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 $1 billion of roll-off at approximately 2.5%-2.6%. We are currently actively reinvesting that. The current yield, when we look at last quarter, we are about 5%.
Chris McGratty (Analyst)
Okay. Great. I mean, this is pointed to growth of NII. Yeah.
Hope Dmuchowski (CFO)
Sorry, Chris. Yeah. Growth in NII. The growth in.
Chris McGratty (Analyst)
Yeah. I think it's growth in. Yeah. Okay.
Hope Dmuchowski (CFO)
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 refis. We only have 25% of the production right now in refis and a lot of ARMs sitting out there that could benefit from a 100 basis point decrease.
Bryan Jordan (Chairman, President, and CEO)
Circling back 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. We do not sit around and claim that our crystal ball is any more polished than anybody else's. There is a tremendous amount of uncertainty, and things can take a lot of directions from here. Given what we see, what we are hearing from our customer base, and the myriad of scenarios that Hope described earlier, we still feel very confident in our ability to meet the guidance that we laid out last December and deliver positive PP&R growth over the course of the year.
Chris McGratty (Analyst)
That's great. Thanks so much.
Bryan Jordan (Chairman, President, and CEO)
Sure thing. Thank you.
Chris McGratty (Analyst)
Thank you.
Operator (participant)
Our next question is from Jared Shaw of Barclays. Your line is now open. Please go ahead.
Jared Shaw (Analyst)
Hey. Good morning.
Bryan Jordan (Chairman, President, and CEO)
Morning.
Jared Shaw (Analyst)
Maybe just going back to 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?
Bryan Jordan (Chairman, President, and CEO)
Hey, Jared. We do not get into specifics in terms of the percentages we use in each scenario. What I will say is this is a process that obviously involves management judgment 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. I would say in 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. We believe the scenarios we're using and the weightings we're using is an accurate reflection of where we believe the economic outlook is.
Jared Shaw (Analyst)
Okay. Great.
Thomas Hung (Chief Credit Officer)
I was just going to add, look, I think it was stated earlier in the week, CESOL implies a degree of precision that doesn't really exist. At December 31st, it's supposed to be a reflection of anticipated losses in the portfolio, and the same is true in March. Given that we built reserves with essentially a flat balance sheet, you can infer that we've applied more to the downside.
Jared Shaw (Analyst)
Got it. Got it. It is sort of a combination of a weighting change as well as that qualitative or quantitative overlay.
Bryan Jordan (Chairman, President, and CEO)
Yeah. That's right. That's consistent with our process quarter-to-quarter in any environment.
Jared Shaw (Analyst)
Got it.
Hope Dmuchowski (CFO)
Jared, while I'll add to that, Moody's also got Jared, just one more comment. Since you're asking about Q4, Moody's did get slightly worse from Q4-Q1. It came out mid-quarter, and then we did add overlays because we felt that things had a lot more uncertainty of possible downside. It is not just how did we weight 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 GDP assumptions and unemployment assumptions got worse quarter-over-quarter.
Jared Shaw (Analyst)
Yeah. Okay. Got that. Thank you. 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 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 those other fees stay elevated, or should we think of those as moving around?
Hope Dmuchowski (CFO)
Yep. Jared, typically, we see between $8 million-$10 million in other fee income in the fixed income business. It is not ADR related. From time to time, we see a tick up. If you look back over the last few quarters or last couple of years, we have had a couple of quarters where we have 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 a new high level. Some quarter, you just get more of advisory fees, loan portfolio sales, and we just happen to have that fall in our favor this quarter. 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.
Jared Shaw (Analyst)
Okay. Any updates or quarter to date on how ADRs are shaping up in April?
Bryan Jordan (Chairman, President, and CEO)
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 10-year sold off was close to 60 basis points, and it's moving all over the place. As you would expect, customer activity and ADRs are seeing, to some extent, those volatilities show up in ADRs.
Jared Shaw (Analyst)
Understand. Thanks. 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 is that comment of future expenses more just as projects come up, they'll backfill?
Hope Dmuchowski (CFO)
I think it's a little bit of both. As we think about what we've talked about, we had a three-year $100 million investment. We're through the first half of that investment period with a lot of it being the run the bank specifically, my very exciting and very add benefit to our investor general ledger. We replaced that after 40 years.
We also went through a treasury management conversion. 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 cannot be capitalized. As you go to hosted software, as we did with both GL and BBOL, what you can capitalize is just less. It is really going to be dependent on what type of projects are in the pipeline and what type of labor can be capitalized versus not. I do think I do not expect that we will see that spike up in 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.
Bryan Jordan (Chairman, President, and CEO)
We laid out in the guidance Hope talked about earlier sort of an outline of where our expenses are. We think expenses are one of the levers that we have an opportunity to pull over the course of the year. If the economic cycle turns bad, we think there is some opportunity for us there. We did not come into the year with a bare bones budget. We recognized that we needed to continue to invest in building the franchise. There were some things that were residual following the termination of the merger agreement. We are comfortable with our expense levels. We think there are some opportunities there or levers if necessary. If the economic environment supports it, we are going to continue to invest in the franchise and build it out for the long term.
Jared Shaw (Analyst)
Thanks a lot.
Bryan Jordan (Chairman, President, and CEO)
Thank you, Jared.
Operator (participant)
Our next question is from Casey Hare of Autonomous. Your line is now open. Please go ahead.
Casey Hare (Analyst)
Thanks. Good morning. Bryan, I wanted to follow up on that because that was kind of the crux of my question here. You guys sound pretty optimistic on the revenue front and rebounding from here. It sounds like if loan growth doesn't materialize and fixed income kind of muddles through the extreme volatility, you can pull the expenses below this guide to keep the PP&R. Is that a fair way of summarizing?
Bryan Jordan (Chairman, President, and CEO)
Yes. That's a fair way of summarizing.
Casey Hare (Analyst)
Okay. Great. On the NIM, with a focus on the deposit costs, the loan-to-deposit ratio at 97%, obviously, if we get Fed cuts, there's more leverage on the deposit costs. If we don't, how will that loan-to-deposit ratio be managed by way of deposit costs given it's swinging a little high relative to peers?
Hope Dmuchowski (CFO)
Casey, we've been in the 94-97 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. 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. As we think about where liquidity is in the 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 of the pack. That being said, we're always looking at loan-to-deposit ratio.
We'd like to stop answering this question. We're continuing to bring deposits in, but we want to bring them in for relationship business. We focused for the last two years on talking about what the new-to-bank campaigns 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, it leaves. We focus on a client relationship, starting with a new-to-bank deposit. How do we get a loan relationship or a wealth relationship? That is how we're running our business, and that's how we're going to continue to grow our deposit franchise in line with our loan franchise.
Casey Hare (Analyst)
Gotcha. Thank you.
Operator (participant)
Thank you. Our next question is from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.
Timur Braziler (Analyst)
Hi. Good morning. Following up on the deposit. Good morning. Following up on the deposit line of questioning, just some of the campaigns that you had mentioned that are going to hit in kind of 2Q, 3Q. I'm just wondering the ability to further bring down deposit costs. I know, Hope, you had mentioned that deposit costs kind of stabilize here, subsequent any additional rate cuts. The ability to maybe bring down deposit costs if loan growth does not materialize outside of warehouse. Just talk to the new-to-bank campaigns that are going to be rolling out here in the summer months and just kind of what types of rates we are looking at for those.
Hope Dmuchowski (CFO)
Timur, on the deposit costs, we are thinking about total deposit costs. 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 Q2 the 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. We do have a new-to-bank checking offer out there that's $450. You can go online and look it up and see all the specifics, but what you need to qualify for that campaign just kicked off and will run through Q2. We've seen a lot of success with the cash offer last year and a lot of success with the retention. That is a lever we have to grow deposits 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 3.85% for 45 days. As we bring in new money, it does not stay at 3.85% when it comes in at the end of those 45 days. We have a very thought-out walkback program, which is we do not take them from the promo rate down to base rate overnight. We look at how much deposits they have with us, have we deepened the relationship, and really think about relationship pricing there. I believe we have the ability to continue to maintain this cost of deposits. I do not see it drifting up materially in the near term, especially with there not being a need for loans. The biggest risk to deposit costs going back up is the fight for deposits when loan growth starts. On the downside, I think you are right.
I don't know that we can pick up 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 Q1. I do think as competition picks up, the new-to-bank offers would have to kind of compete like we saw last summer.
Timur Braziler (Analyst)
Okay. 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 using your own liquidity, is that going to 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 the last couple of quarters?
Hope Dmuchowski (CFO)
On the deposit side, I think we'll be able to attract new clients. We've seen success with that. The question is, what do tariffs do to their cash flow? If they're spending more of it, there's less sitting in their accounts, both on the consumer side and on the treasury management operating accounts. Inflation has a direct correlation to how much money that they have in their accounts. Longer term, absolutely. I believe we will continue to grow our non-interest bearing and our operating accounts that are our treasury management operating accounts, which are in the non-interest bearing account line for us.
Bryan Jordan (Chairman, President, and CEO)
It's a core objective to grow customer relationships 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. We are very focused on growing deposits, and specials make some difference. Special rates make some difference depending on what's happening with loan growth, but we are always in the market to grow customer relationships as both lending and deposit-taking activities.
Timur Braziler (Analyst)
Okay. Great. Lastly for me, I 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 the come there? I guess as we go to the next half of that $100 million spend, the Change the Bank, what's kind of the gap to hitting some of those projects and maybe capitalize versus not? How much of that outside service cost do you expect to come back online as some of those projects get going?
Bryan Jordan (Chairman, President, and CEO)
I'm going to start because I'm going to tell you I don't want to spend any more on the GL. I think we've gotten the treasury conversion work largely completed. It's true with the GL project, and Hope said that's up and running. 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? 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 provide our own online mobile banking tools.
We're continuing to make investments across all of these platforms. That outside services will ebb and flow a little bit, but all of that is built into our expectations around expenses. As I said, we have some flexibility there if the economic environment does not unfold the way we think it will.
Hope Dmuchowski (CFO)
The other thing on outside services, Bryan talked about the technology piece very well, is that is where our marketing expenses hit for new client acquisitions. If you look back at Q3 and Q4, we did have those elevated. We called them out as seasonality in marketing. You will see that. I do not think technology in the near term will impact that as much quarter to quarter in 2025 as the seasonality around marketing offers.
Timur Braziler (Analyst)
Great. Thank you for that, color. Appreciate it.
Bryan Jordan (Chairman, President, and CEO)
Thank you.
Operator (participant)
Our next question is from Anthony Elian of JPMorgan. Your line is now open. Please go ahead.
Anthony Elian (Analyst)
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 which could offset the new deposits coming in?
Hope Dmuchowski (CFO)
Second quarter should be a growth quarter for deposits for us. As we mentioned in my prepared remarks, Q1 is seasonally lower for us. On the broker side, mortgage warehouse is already picking up in March, and I expect that it will continue to pick up in Q2. 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. We will match fund that as we typically do, or at least a portion of that growth for timing. I do believe when we look back at Q2 for the last two years, 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.
Anthony Elian (Analyst)
Thank you. My follow-up, just on the impact from tariffs, uncertainty, trade war, or I guess what are the loan portfolios that you're paying 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.
Thomas Hung (Chief Credit Officer)
Yeah. Hi, Anthony. I can help address that one. I think first and foremost, I'll say depending on where tariff terms end up landing and how long they last, the list of industries we'd look at closely can obviously get longer or shorter. As it currently stands, the sector 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&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&I portfolio. There is no single industry that is more than 12% C&I exposure. Even within the specific sectors I mentioned, these are all, it's well-diversified throughout our portfolio.
Anthony Elian (Analyst)
Thank you.
Bryan Jordan (Chairman, President, and CEO)
Anthony, I would add to that. I think while it's likely if there are issues, they're likely to start in tariff-related areas, I think it quickly spreads. It's going to be because the consumer got knocked out. 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. That is why we're still very optimistic and most especially hopeful that these discussions that are going on today, like with Japan, yield some real tangible results where we can start to see these tariff-related issues settle down. More broadly, the U.S. economy can get to sort of that stable place around what the rules of the road are, and the economy can build from there.
Thomas Hung (Chief Credit Officer)
Yeah, that's right. We expect it to probably hit consumers first, especially lower-income households. That is why a lot of the industries I mentioned are essentially consumer retail-adjacent type of sectors.
Anthony Elian (Analyst)
That is great. Thank you.
Operator (participant)
Our next question is from Christopher Marinac of Janney Montgomery Scott. Your line is now open. Please go ahead.
Christopher Marinac (Analyst)
Thanks very much. Bryan and team, does this sort of 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?
Bryan Jordan (Chairman, President, and CEO)
I think in terms of severity, no, not as bad as 2020. I do think that if anything, we are going to have to deal with the impact of a supply shock. Supply shock is what happened when supply chains got shut down in 2020. 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 2020.
Thomas Hung (Chief Credit Officer)
Yeah. 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. I would point out 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. Throughout all of that, we've continued to deliver consistent, strong credit performance. I think that really comes back to something Hope mentioned earlier, which is our principles around being relationship-focused, working with our borrowers. That's why we've continued to see consistently strong performance working through these cycles and working through uncertainty with our customers. Great.
Christopher Marinac (Analyst)
Tom and Brian, thank you. I appreciate it.
Operator (participant)
Thank you. Our last question is from Brennan Crowley of Baird. Your line is now open. Please go ahead.
Brennan Crowley (Analyst)
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. Just 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?
Thomas Hung (Chief Credit Officer)
Yeah. Hey, Brennan. I'm happy to answer that one. Within CRE lending, we do see a good amount of competition, and that's not new. If you look at our pipeline, we actually have a pretty solid CRE pipeline. As we've mentioned on previous calls, relative to other lenders, we focus more on the construction side and construction financing.
The one caveat I would have is given 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 cost will be, there's going to be more hesitation for the new project starts. To me, that's actually going to be kind of the biggest driver in terms of how much of the CRE pipeline we have comes to fruition in the near term versus being pushed a little further out.
Bryan Jordan (Chairman, President, and CEO)
Our CRE portfolios are a little bit of a mathematical anomaly in the sense that we have very strong CRE growth in the last four or five years. With the open secondary markets, a lot of things are prepaying and doing what they should do, which is go to more permanent forms of finance. With higher rates over the last couple of years, the initiation of new projects has been hampered a bit, and then further by the impacts that Tom just described. We still are very positive on that business. We see very good opportunities, and we think that this will level out. We are very optimistic about how we are positioned in our commercial real estate lending, broadly speaking, across the entire footprint.
Brennan Crowley (Analyst)
Okay. Great. Thanks for that. I think the rest of my questions have been answered, so appreciate the time today.
Bryan Jordan (Chairman, President, and CEO)
Thank you. Appreciate you joining us.
Operator (participant)
We have no further questions, so I will hand back to Chairman, President, and CEO, Bryan Jordan, for closing remarks.
Bryan Jordan (Chairman, President, and CEO)
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.
Operator (participant)
This concludes today's call. Thank you for joining. You may now disconnect your lines.