FHN Q3 2024: 3% Deposit Growth & 45-Day Guarantees Support Margins
- Deposits and Repricing Flexibility: Management highlighted continued deposit growth (around 3% or roughly $1 billion in customer deposits) and proactive adjustments to deposit guarantees (shortening promotional terms from 90 to 45 days) to counter rising funding costs. This focus on optimizing the deposit mix supports a more favorable net interest margin outlook.
- Balanced Revenue Streams with Fee Income Upside: Despite the potential for net interest income compression due to rate cuts, executives stressed a dual emphasis on fee income, which has shown momentum—with fee increments and nonrecurring gains—thereby underpinning a diversified revenue base that can cushion margin pressures.
- Robust Loan Growth and Mortgage Opportunities: Management remains optimistic about loan growth driven by increased refinancing and new loan activity, particularly if mortgage rates drop below 6%. Positive shifts in consumer loan yields and a stable credit portfolio provide a promising foundation for future earnings expansion.
- Margin Compression Risk: Executives highlighted a push‐and‐pull environment for net interest margins amid rate cuts, which could lead to greater volatility and pressure on overall earnings.
- Deposit Pricing Uncertainty: Changes in the deposit guarantee terms and adjustments in pricing—such as shortening rates guarantees from 90 to 45 days—add uncertainty about deposit cost management and could pressure profitability.
- Muted Loan Growth and CRE Exposure: Uncertainty around loan demand, particularly in commercial real estate where paydowns and slower growth were noted, could limit future revenue growth.
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Adjusted PPNR
Q: Will adjusted PPNR grow next year?
A: Management expects positive PPNR in 2025 through disciplined expense management and revenue growth, indicating stronger operating leverage and profitability. -
Margin Dynamics
Q: Are NII margins at a trough?
A: They described a push-pull scenario this quarter—with rate cuts causing temporary pressure but potential fee income increases offsetting lower NII—so margins will likely fluctuate before stabilizing. -
Mortgage Outlook
Q: What rate is needed for mortgage improvement?
A: Management stressed that mortgage rates need to fall to a sub‑6% level to boost both refinancing and new home purchase activity. -
Deposit Pricing
Q: What’s new on the $18B deposit pricing?
A: They recently shortened the guarantee term to 45 days, with current money market rates at about 4.25% and a retention offer of 3.5%, setting the stage for further adjustments with upcoming rate cuts. -
Regulatory/CET1 Guidance
Q: How will CET1 and the $100B milestone be managed?
A: The team plans to maintain an 11% CET1 ratio and is investing in infrastructure to prepare for crossing the $100B threshold, while carefully monitoring capital needs. -
Fixed Income Upside
Q: Can fixed income yield improve further?
A: Management noted that after a $47M increase, further headroom exists if additional rate cuts occur, pointing to potential upside in the fixed income business. -
Loan-to-Deposit Ratio
Q: What is the target loan-to-deposit ratio?
A: They remain comfortable with the current ratio around 94%, emphasizing customer relationships over strict ratio targets. -
Short-Term Margin Outlook
Q: Will margins stabilize with upcoming rate cuts?
A: They expect a variable quarter-to-quarter outcome—margin pressure from timing mismatches between loan and deposit repricing will persist until adjustments take full effect. -
Loan Growth Trends
Q: How will loan growth progress?
A: Loan growth is expected to be modest given the generally muted market, although customer conversations suggest pent-up demand may support incremental increases. -
Fixed Income ADRs
Q: What were the ADR levels in recent months?
A: While August and September were similar overall, a notable uptick occurred late in September post-rate cuts, reflecting shifting market sentiments. -
Brokered Deposits
Q: Will brokered deposits play a larger role?
A: The strategy is to prioritize client deposits; brokered funds will remain a secondary source mainly used for mortgage warehouse funding. -
Noninterest Deposits
Q: What are the plans for noninterest-bearing deposits?
A: Efforts continue to grow low-cost, noninterest-bearing deposits, supporting broader customer relationships across retail and commercial segments. -
Loan Yield Benchmark
Q: What is the yield on fixed ARM loans?
A: Although exact figures weren’t detailed, consumer loan yields are around 5.8%, serving as a proxy for the ARM yield performance. -
PPNR Composition
Q: Is PPNR growth driven by revenue or expense discipline?
A: Management attributes improvements to a blend of revenue growth and cost control, aiming for higher returns on tangible common equity. -
Q4 Revenue Variability
Q: What drives Q4 revenue variability?
A: They expect a mix: higher fee income if rates decline, but with lower NII if rate cuts continue, along with one-time items around $5M impacting results. -
CRE Paydowns
Q: What is the outlook on CRE paydowns?
A: Paydowns depend on the construction financing market dynamics, so expected changes remain uncertain in the current environment. -
SNC Impact
Q: Will SNC issues affect charge-offs?
A: There is no anticipated material impact from shared national credits, as SNC performance aligns with the overall loan book. -
Operational Losses
Q: Are there concerns over operational losses or fraud?
A: No significant operational losses or fraud have been reported; variances remain minor and within normal ranges.
Research analysts covering FIRST HORIZON.