First Horizon Third Quarter 2026 Earnings Conference Call - FIRST HORIZON CORP

Financial Performance:

• Adjusted EPS of $0.53, representing a 4% year-over-year increase.
• Adjusted Return on Average Tangible Common Equity (ROATCE) declined to 14.4% due to temporary elevated average tangible common equity ahead of deploying proceeds from the mortgage sale.
• Net Interest Income (NII) grew $7 million; Net Interest Margin (NIM) settled at 3.48% (compressed 1 basis point) but is projected to improve to the mid-350s.
• Total loans decreased $5.5 billion sequentially, driven by the reclassification of $4.5 billion in mortgage loans for sale; commercial real estate loans grew $97 million, while core commercial and industrial (C&I) loans remained relatively flat.
• Fee income increased $3 million quarter-over-quarter but decreased $8 million year-over-year.
• Non-interest expenses rose $8 million sequentially, excluding deferred compensation, due to new account promotions, technology investments, and mortgage line restructuring costs.
• Non-performing loans (NPLs) remained flat at 81 basis points; net charge-offs increased to $36 million (22 basis point ratio).
• CET1 ratio ended at 10.3%; tangible book value per share declined 5% to $13.84 due to the mortgage transaction impact.

Guidance and Future Outlook:

• Mortgage sale expected to settle early in Q4 2026, driving approximately 4% accretion to 2027 EPS (excluding upside from redeployment) and improving ROATCE by ~150 basis points.
• Loan-to-deposit ratio projected to stabilize around 88% following the sale, providing capacity for future loan growth.
• NIM expected to expand into the mid-350s in 2026, supported by rising rates and redeployment of proceeds into higher-yielding assets.
• Management targets a 60% deposit beta over the rate hike cycle.
• Share repurchase program is set to resume in Q4 2026, targeting a CET1 range of 10.25% to 10.5%.
• The company anticipates positive operating leverage in 2027 and 2028 with inflationary expense growth controlled.

Business Segments and Product Lines:

• Mortgage Business: Executing a strategic realignment to sell $4.5 billion of non-relationship, low-yielding mortgage loans (3.85% weighted avg coupon) to prioritize core client relationships; this includes reducing production lines and aligning closer to deposit-generating clients.
• Commercial Lending: Steady demand in commercial and real estate segments; C&I utilization remains at 44%.
• Treasury Management & Wealth: Identified as primary drivers for the $100 million+ pre-tax PPNR opportunity, with ongoing efforts to deepen existing client relationships and roll out new LPL partnership.
• Mortgage Warehouse: Balances decreased $891 million; business is counter-cyclical and expected to face lower volumes in a rising rate environment, though management maintains strong credit performance.
• Commercial Real Estate (CRE): Maintained discipline despite rate hikes; multifamily supply remains high but absorption is supported by rental demand relative to home prices.

Market and Competitive Landscape:

• Operating in a rising interest rate environment with GDP growth estimated around 4% for Q4, supporting underlying loan demand.
• Deposit costs rose 12 basis points sequentially; management expects competition to remain high but aims to retain clients through relationship depth rather than chasing "hot money."
• Mortgage warehouse sector facing consolidation and potential economic headwinds, but First Horizon's secured collateral structure (holding notes at closing) maintains low loss history (1 basis point annual charge-offs).
• CRE refinancing market remains robust despite some property value adjustments (avg -20% on updated appraisals), supported by underwriting discipline maintaining ~40% borrower equity.

Risks and Challenges:

• Deposit competition and rising funding costs (projected 60% beta) remain a challenge to margin stability.
• Macro economic slowdown risks as rising rates and inflation potentially dampen consumer and business activity in 2027.
• Seasonality in mortgage warehouse and commercial lending balances due to rate fluctuations and summer slowdowns.
• Inflationary pressure on operating expenses, particularly healthcare and technology investments, though managed to maintain operating leverage.

Management Commentary and Tone:

• Tone was confident and forward-looking, emphasizing strategic discipline in balance sheet repositioning to drive "top-tier financial returns."
• Management expressed strong conviction that the mortgage sale creates the necessary liquidity to fund higher-yielding relationship-based lending.
• Emphasized a "blocking and tackling" approach for future growth, focusing on deepening existing client relationships rather than large-scale balance sheet changes.
• Expressed confidence in maintaining independence and optionality, noting the transaction enhances capital flexibility for buybacks and organic growth.

Analyst Questions and Answers:

• Transaction Rationale: Confirmed the sale targets non-relationship assets to free up balance sheet capacity for deeper client relationships; no further large-scale asset sales anticipated.
• EPS Accretion: The 4% 2027 EPS lift is immediate from paying down wholesale funding and buying floating-rate securities, with additional upside from loan redeployment expected over 2-3 years.
• Deposit Strategy: Clarified that the 60% beta is a long-cycle target reflecting competitive retention needs rather than chasing high-rate CD inflows; Q3 cost increase included seasonal promo rate walk-backs.
• Capital Deployment: Confirmed $660 million remaining buyback capacity; capital priorities remain loan growth first, followed by opportunistic share repurchases.
• Credit Quality: CNI charge-offs are considered stable and idiosyncratic; CRE portfolio performance remains robust due to conservative underwriting and strong refinancing markets.
• Hedging Strategy: No immediate plans to unwind existing fixed-rate swaps; balance sheet sensitivity is evaluated regularly based on rate cycles.

Other Key Points:

• The mortgage transaction reduces the loan-to-deposit ratio to ~88% and increases near-term asset sensitivity by approximately 100 basis points.
• Restructuring costs associated with the mortgage line cut are one-time items; the new run rate is expected to be lower.
• The company views the current rate environment as an opportunity to improve net interest income through strategic asset-liability management.
• Management clarified that the $100 million PPNR opportunity is additive to the current run rate and not reduced by the mortgage sale proceeds, which are seen as incremental.