FIRST HORIZON CORP Q3 FY2026 earnings call

• Strategic Mortgage Portfolio Sale: Initiated the sale of approximately $4.5 billion in targeted residential mortgage loans with minimal deposit relationships ($200 million) and low weighted-average coupons (3.85%). This transaction is expected to settle early in Q4 2026.
• Balance Sheet Realignment: The sale reduces the loan-to-deposit ratio to approximately 88%, improving liquidity and creating capacity for higher-yielding relationship lending. It is expected to be accretive to 2027 EPS by ~4% and improve Return on Deposited Shareholders' Equity (RODSE) by ~150 basis points.
• Deposit Strategy: Client deposits grew by over $1 billion in Q3, replacing declining broker CDs. The bank targets a long-term deposit beta of 60% through the rate cycle, focusing on deepening relationships via treasury management and wealth services rather than chasing 'hot money.'
• Credit Quality: Non-performing loans (NPLs) remained flat at 81 basis points. Net charge-offs increased slightly to $36 million (22 basis points), primarily tied to discretionary consumer spending sectors. Commercial Real Estate (CRE) performance remains strong due to disciplined underwriting and robust refinancing markets.
• Operational Efficiency: Progressing toward the $100 million+ pre-tax, pre-provision revenue opportunity. Restructuring costs in Q3 included mortgage line reductions to align production with core clients.
• Capital Returns: CET1 ratio stood at 10.3%. Share repurchases are scheduled to resume in Q4, consistent with maintaining CET1 targets between 10.25% and 10.50%.

First Horizon did not provide a detailed breakdown of financial performance by specific product segment (e.g., Commercial, Retail, Wealth) in the transcript. The company reported consolidated adjusted earnings per share (EPS) of $0.53, representing a 4% year-over-year increase. Net interest income (NII) grew by $7 million quarter-over-quarter, driven by higher loan yields and a shift from broker deposits to customer deposits. Net interest margin (NIM) remained stable at 3.48%, compressed by only one basis point. Fee income increased by $3 million quarter-over-quarter but was down $8 million year-over-year. Adjusted expenses excluding deferred compensation rose by $8 million due to technology investments and restructuring costs.

• EPS Accretion: Expects the mortgage portfolio sale to be accretive to 2027 EPS by approximately 4%, excluding upside from incremental lending deployment.
• Net Interest Margin (NIM): Expects NIM to improve into the mid-350s range in Q4 2026 and remain strong through the cycle, supported by redeployment of proceeds into higher-yielding assets.
• Expense Outlook: Maintains guidance for full-year 2026 expense growth to be flat or modestly inflationary, expecting positive operating leverage in 2027 as restructuring benefits normalize the run rate.
• Loan Growth: Anticipates deploying roughly half of the $4.5 billion sale proceeds (~$2 billion) into incremental loan growth over the next two to three years, contingent on economic conditions.
• Capital Deployment: Plans to resume share buybacks in Q4 2026, targeting a CET1 range of 10.25%-10.50%, while prioritizing organic balance sheet growth.

• Interest Rate Sensitivity: While the balance sheet is asset-sensitive, rising rates may pressure deposit costs despite the 60% beta target. Competition for deposits remains high, particularly in summer months.
• Economic Slowdown: Potential slowing of GDP growth and consumer stress could impact C&I loan demand and increase credit losses, particularly in discretionary consumer and retail sectors.
• Mortgage Warehouse Seasonality: The mortgage warehouse business is counter-cyclical; however, volumes have declined due to rising rates. Further rate hikes could suppress volumes further, though credit quality remains strong.
• Execution Risk: The success of the strategic realignment depends on effectively redeploying liquidity into high-yield relationship loans and achieving the projected $100 million+ PPNR opportunity.
• Regulatory/Capital Constraints: Must maintain strict CET1 ratios during active M&A or large transactions (e.g., suspension of buybacks during negotiation periods).

Q: Why now for the $4.5B mortgage sale and what drives the 4% 2027 EPS accretion?

A: CEO Bryan Jordan explained the timing was driven by rising rate cycles and the desire to extract non-relationship assets to create balance sheet capacity for deeper client relationships. CFO Hope Dmuchowski clarified the 4% accretion assumes immediate reinvestment of proceeds into floating-rate securities and paydown of wholesale funding, providing an immediate lift before longer-term loan redeployment benefits accrue.

Q: How does the 60% deposit beta assumption hold up given recent cost increases without rate hikes?

A: Dmuchowski noted the 60% beta is a through-the-cycle target, not quarterly. Q3 cost increases were driven by competitive promo rates for new private client deposits and higher wholesale deposit averages. Jordan added that while technology/AI may raise costs long-term, relationship stickiness will help mitigate this, and the lower LDR gives flexibility to compete effectively.

Q: What is the outlook for mortgage warehouse lending and consolidation risks?

A: Jordan stated warehouse volumes peaked in Q2 and are unlikely to see significant seasonality in Q4. CCO Thomas Hung highlighted that operators are well-capitalized post-previous rate cycles, with no major consolidation observed. Dmuchowski emphasized low risk because First Horizon holds collateral notes at close, resulting in near-zero annual charge-offs and short holding periods (~19 days).

Q: Is the $45M after-tax benefit additive to the $100M PPNR opportunity?

A: Yes, Jordan confirmed the restructuring benefits are incremental to the existing $100 million pre-tax, pre-provision efficiency initiatives. Dmuchowski elaborated that remaining opportunities lie in deepening treasury management relationships (which take 3-9 months to fully integrate) and expanding wealth partnerships, alongside pruning low-profitability loan-only relationships.

Q: How does the transaction affect capital priorities and acquisition optionality?

A: Ryan Kenney asked if the liquidity boost reduces the need for depository acquisitions. Jordan confirmed it significantly lowers that priority, enhancing optionality. He outlined capital priorities as: 1) investing in customer/balance sheet growth, and 2) opportunistic share repurchases within the 10.25%-10.50% CET1 range, leveraging the improved liquidity profile.