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

Explicit Guidance:

• 2027 EPS Accretion: Expecting an approximate 4% earnings per share (EPS) benefit in 2027 from the mortgage portfolio sale transaction, excluding upside from incremental lending.
• 2027 ROPSI (Return on Average Assets): Anticipated improvement to approximately 150 basis points following the transaction.
• Net Interest Margin (NIM): Expect NIM to improve into the 350s in the coming quarters, moving from the current high 340s.
• Expense Guidance: Forecast positive operating leverage for 2027 and 2028, maintaining a run rate with inflationary expense growth but controlling overall base. Full-year expense outlook remains flat for 2026, implying a step-down in Q4 relative to Q3.
• Share Repurchases: Resume buybacks in Q4 2026 contingent on maintaining CET1 ratios within the 10.25% to 10.5% target range; approximately $660 million of buyback capacity remains.

Business-Segment Outlook:

• Loan Growth: Target incremental loan growth of approximately $2 billion (roughly half of the $4.5 billion sale proceeds) over the next two to three years.
• Commercial & Industrial (C&I): Anticipate steady C&I demand and expect utilization rates to rebound; loan growth will be disciplined and selective based on economic conditions.
• Commercial Real Estate (CRE): Expect continued strong performance despite rate hikes; multifamily absorption expected to remain robust due to high home prices and rates favoring renting. Refinancing market remains solid, with underwriting discipline (60% Loan-to-Value) absorbing potential 20% declines in property valuations.
• Mortgage Warehouse: Anticipate a flattening of seasonality in Q4 2026 following a peak in Q2 2026; expect market consolidation but view the company as well-positioned to gain share.
• Fee Income: Fixed income revenues expected to remain elevated driven by client restructuring activity in rising rate environments; wealth management and treasury management deepening expected to drive further revenue growth.

Market and Competitive Outlook:

• Deposit Pricing: Project a deposit cost beta of approximately 60% through the cycle in response to rate hikes; acknowledges competitive pressure but aims to retain clients through fair pricing rather than chasing "hot money."
• Mortgage Portfolio Sale: Transaction will settle early in Q4 2026, reducing the loan-to-deposit ratio to ~88% from previous levels; sale price is an ~10% discount all-in.
• Competitive Landscape: Expect continued competition in deposit markets; believe relationship banking and "blocking and tackling" (deepening existing client relationships) will sustain market share and pricing power.

Macro / Industry Outlook:

• Interest Rate Environment: Operating in a flat-to-rising rate cycle; believes rising rates will eventually slow GDP growth as the economy transitions into 2027.
• GDP Growth: Cites Atlanta Fed "GDP Now" model estimating growth around 4% for Q4 2026.
• Inflation & Costs: Anticipates inflationary pressure on expenses (healthcare, technology) but expects to manage this through operational efficiency and asset sensitivity.
• Technology Impact: Believes AI and agentic tools may drive upward drift in deposit costs over the long term, but impact in the near term will be limited; long-term adoption will take time.

Strategic Initiatives:

• Balance Sheet Restructuring: Completion of $4.5 billion mortgage loan sale to exit low-yielding, non-relationship assets, creating capacity for higher-yielding core client lending.
• Capital Deployment: Proceeds will initially be deployed into floating-rate securities and pay down wholesale funding; subsequently redeployed into incremental lending.
• Technology & Infrastructure: Planned investments in banking center refreshes, new branches, hiring, and technology upgrades (including AI) to support growth; no significant large-scale capital reinvestment expected in the immediate term beyond this.
• Organizational Focus: Continued focus on "relationship banking" to replace low-yield loans with profitable, fee-generating products (treasury management, wealth management).

Risks and Headwinds to Outlook:

• Economic Slowdown: Rising rates and inflation could slow economic activity and loan demand in 2027.
• Deposit Competition: Competitive environment could lead to higher deposit costs (beta >60% or >60% retention costs) if client relationships are not deepened.
• Rate Volatility: Unexpected speed or magnitude of rate changes could impact client restructuring activity and mortgage warehouse volumes.
• Asset Quality: While CRE discipline is strong, potential for 20% property value declines in oversupplied markets (e.g., Texas multifamily) remains a risk, though well-covered by underwriting standards.
• Execution Risk: Timing of deployment of $4.5 billion into higher-yielding loans is dependent on economic conditions and market opportunities.

Management Tone on the Future:

• Confidence: Management expresses high confidence ("conviction") that the balance sheet restructuring will enhance profitability and returns through the cycle.
• Strategic Clarity: Tone is decisive regarding the exit of non-core mortgage assets; views the move as a catalyst for "meaningful upside" in 2027 rather than a defensive retreat.
• Cautious Optimism on Growth: Upbeat on loan demand but emphasizes being "smart" and selective, acknowledging potential economic headwinds in late 2026/2027.
• Capital Return: Committed to returning capital to shareholders via buybacks once transaction settles, with no hard floor/ceiling on CET1 but a target comfort zone of 10.25%–10.5%.

Miscellaneous:

• CET1 Ratio: Current level is 10.3%; transaction has already been marked to fair value, so no immediate material change to CET1 is expected post-settlement beyond the release of buyback restrictions.
• Asset Sensitivity: The mortgage sale increases asset sensitivity by approximately 100 basis points in the near term, benefiting the bank in a rising rate environment.
• Hedging: Will continue to evaluate interest rate derivatives and swaps (maturing in 2027) based on evolving rate environments; no immediate plan to unwind existing hedges unrelated to the transaction.