First Horizon Corporation (FHN) Earnings

Management highlights

- **Overall Performance & Strategy**: Management reported strong year-over-year growth, with adjusted EPS up 20% (9 cents) and adjusted pre-provision net revenue (PPNR) up 8% compared to Q2 2025. The company maintains a counter-cyclical business model focused on building long-term full client relationships, with disciplined execution and a focus on delivering through-cycle performance. The company prioritizes expanding product penetration with existing clients to drive incremental profitability, rather than just balance sheet growth. - **Balance Sheet & Funding**: Management remains focused on growing the core client deposit base to fund loan growth sustainably. Current deposit cost trends are aligned with historical seasonality following the end of 2024 rate cuts. Loan pipelines remain strong across all business lines, and commercial loan spreads are stable relative to prior quarters despite a competitive lending environment. - **Expense & Investment Strategy**: Expense discipline remains a core priority. The company expects expenses to be flat sequentially from Q2 2026 over the second half of the year, with seasonal movement between expense categories tied to marketing campaigns for deposit growth. Strategic investments are focused on three core areas: 1) hiring client-facing talent (commercial relationship managers and wealth advisors) across the existing footprint, 2) technology (including mobile banking and AI efficiency tools), and 3) branch expansion in high-growth existing markets. AI is enabling front-office scaling without proportional increases in back-office headcount, with the only exception being targeted hiring for fraud prevention. - **Capital Management**: The near-term target for CET1 is 10.5%, which balances support for organic loan growth and opportunistic share repurchases. Management expects that under the currently proposed Basel III rules, the company will see an approximate 10% reduction in risk-weighted assets under the standardized approach, which will free up excess capital over time. Long term, the company expects to operate at a lower CET1 ratio as market conditions allow.

Guidance

- Management reiterates its full-year 2026 guidance framework provided earlier in the year, maintaining the original revenue growth target range of 3% to 7%. The company expects full-year net interest margin (NIM) to settle in the mid 3.4% to high 3.4% range, which matches current Q2 2026 NIM of 3.49% and is consistent with prior expectations. - Deposit costs are expected to increase in the second half of 2026 consistent with the pattern seen in 2025 after rate cuts stopped. The pace of increase will depend on future Federal Reserve rate movements, with cumulative deposit beta expected to shrink slightly. Seasonal deposit acquisition campaigns are expected to increase deposit competition in Q3, as seen in prior years. - Expenses are expected to hold flat at the Q2 2026 run rate for the second half of 2026, with one-time expenses from 2025 initiatives not repeating in 2026. Net charge-offs are expected to remain near the current 20 basis point level for the full year, in line with original expectations. - The $100 million+ PPNR growth opportunity from improving penetration of existing client relationships remains on track, with progress expected to unfold over a 2-3 year timeline that was originally communicated.

Segment performance

First Horizon does not break out formal product segments in this call, but provides performance across key business lines: - **Loans**: Period-end loans increased $953 million quarter-over-quarter, with total period-end loan balances growing ~$2 billion year-over-year. Commercial loans drove all net growth, adding $1 billion: C&I loans (excluding mortgage company loans) grew $710 million, commercial real estate grew $175 million, and loans to mortgage companies grew $118 million (driven by normal homebuying seasonality). New loan commitments increased over 50% year-over-year, led by commercial real estate activity. - **Deposits**: Period-end deposit balances increased $1.6 billion quarter-over-quarter, driven primarily by growth in brokered deposits. The average rate paid on interest-bearing deposits increased 5 basis points to 2.33% sequentially, with cumulative deposit beta holding at 66% since September 2024 rate cuts; average client interest-bearing deposit costs were flat sequentially. - **Fee Income**: Adjusted fee income decreased $1 million quarter-over-quarter (excluding deferred compensation) but increased $14 million year-over-year. Fixed income revenues declined quarter-over-quarter due to lower average daily volumes (ADRs) of $594,000 amid macro volatility, though ADRs are still up 8% year-over-year. This decline was partially offset by growth in brokerage, trust, and insurance income from momentum in the wealth management business. Fee income from wealth management is a key contributor to the company's targeted $100 million+ PPNR growth opportunity. - **Credit**: Net charge-offs increased $4 million quarter-over-quarter to $33 million, for a net charge-off ratio of 20 basis points, in line with full-year expectations. Provision for credit losses was $15 million in the quarter; the allowance for credit losses (ACL) to loan ratio declined to 1.24%, while non-performing loans (NPLs) declined 13 basis points to 81 basis points. - **Capital**: Common Equity Tier 1 (CET1) ended the quarter at 10.5%, in line with the company's near-term target. The company repurchased 4 million shares for $100 million in the quarter, and cumulative buybacks year-to-date total $857 million. Tangible book value per share ended at $14.53, up 7% year-over-year.

Risks & headwinds

- Macroeconomic and interest rate uncertainty: Uncertainty around future Federal Reserve rate moves (hike vs cut), persistent geopolitical volatility (including the Middle East conflict), and oil price volatility create uncertainty for fixed income ADRs, deposit costs, and credit performance. - Competitive pressure: Intense competition for both loans and deposits continues to put mild pressure on spreads and incremental increases in deposit costs, particularly in the company's core Southeast U.S. footprint. Jumbo deposit rates are currently very competitive as market participants lock in funding ahead of potential rate hikes. - Credit concentration risk: Consumer-sensitive sectors including trucking, auto, and restaurants remain areas of focused monitoring, with increasing pressure on lower-income consumer spending power that could impact performance in these segments. - Regulatory implementation risk: The final implementation timing and terms of the Basel III endgame reforms remain uncertain, which creates near-term uncertainty for capital planning. - Seasonal funding volatility: Brokered deposit balances have grown in the first half of 2026, and any unexpected unwind of these balances could create funding pressure if core deposit growth underperforms expectations.

Analyst Q&A

• Q: What is the outlook for deposit costs, and is loan competition still rational? /

  A: Management expects deposit cost increases in the second half of 2026 to follow the pattern seen in 2025 after rate cuts stopped. While deposit competition is intense, cumulative deposit beta remains strong and the current 5 basis point sequential increase in Q2 was in line with expectations. Loan markets are surprisingly optimistic with strong pipelines, and while mild spread pressure continues from competitive demand, overall competition remains rational and volume growth is on track.

• Q: What is the outlook for fixed income ADRs, and could Basel III capital reform drive higher fixed income volume? /

  A: ADRs are highly sensitive to interest rate volatility: volumes rise when rates move higher as investors see opportunities, and fall when rates trend down. Management expects the back half of 2026 will likely be weaker than the back half of 2025, though recent weekly performance has been strong. Basel III reform is expected to be broadly positive for fixed income activity, as lower effective capital requirements may push some lending activity back to the secondary markets, but the magnitude of this impact is uncertain at this stage.

• Q: What is driving growth in brokerage, trust, and insurance fees, and what is the mix of recent hiring? /

  A: Growth in these lines is primarily driven by momentum in wealth management, following the 2025 conversion to the LPL platform, which allowed deeper product penetration for existing clients and attracted new clients. Hiring is almost entirely focused on front-office client-facing roles (commercial bankers and wealth advisors) across key growth markets, with no broad investment in back-office headcount: AI is creating efficiency to support scaling without extra back-office staff, with the only exception being targeted hiring for fraud prevention.

• Q: What are the top three areas for growth investment, and how will excess capital from Basel III be deployed? /

  A: Top growth investments are: 1) hiring client-facing commercial and wealth talent across the existing footprint, 2) incremental branch expansion in high-growth existing markets (not new geographies), and 3) continued technology investment in mobile banking and AI tools. Capital allocation prioritizes organic loan growth first, followed by dividend increases, then opportunistic share repurchases. Management notes that faster-than-expected economic growth in core Southeast markets could push loan growth higher than the original low-to-mid single digit target, absorbing a larger portion of excess capital before buybacks are increased.

• Q: What is the outlook for ACL and NPL reduction, and how low can ACL go? /

  A: The 18 basis point year-over-year decline in ACL and 13 basis point quarter-over-quarter decline in NPLs reflect diligent credit portfolio management, successful credit resolutions, and improving broader economic outlook. The current ACL ratio of 1.24% is well over 6x average annual net charge-offs over the last year, so reserves are well positioned relative to performance. Management will continue prioritizing resolutions to drive further NPL reduction, but declines are dependent on external factors like unemployment and interest rates so no specific target for the minimum ACL ratio is provided.