First Horizon Corporation 2026 Q3 Earnings Call

Good morning. Welcome to our third quarter 2026 results conference call. Thank you for joining us. Today, our Chairman, President, and CEO, Bryan Jordan, and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, after which we will be happy to take your questions. We are also pleased to have our Chief Credit Officer, Thomas Hung, here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations at the end of our presentation and in our SEC filings.

Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items and to other non-GAAP measures. Therefore, it is important for you to review the GAAP information in our earnings release, pages 2 and 31 of our presentation, and the non-GAAP reconciliations at the end of our presentation. Last but not least, our comments reflect our current views, and you should understand that we are not obligated to update them. With that, I will hand it over to Bryan.

Thank you, Tyler. Good morning, everyone. Thank you for joining us. Our adjusted results this quarter are highlighted by EPS of $0.53, which is a 4% increase year-over-year. Over the last year, we have grown our commercial loan portfolio nearly $2 billion, in line with our strategy of growing the balance sheet to generate sustainable returns and drive the most value for our clients. This quarter, we initiated the sale of approximately $4.5 billion of targeted residential mortgage loans as part of our broader realignment of the mortgage business. We entered into an agreement in October and expect to settle the transaction early in the fourth quarter.

This transaction, along with the business line restructuring, is aligned with the strategy we have discussed consistently throughout the past year of prioritizing full client relationships, enhancing the profitability of our balance sheet, and driving improved earnings and returns through the cycle. This repositioning offers several important strategic advantages. It will serve our goal to utilize balance sheet capacity to profitably serve our clients, and it will immediately enhance our goal of delivering top-tier financial returns. We continue to see steady C&I commercial and commercial real estate loan demand across our geographic footprint from both current and new customers. As outlined in our slides, the transaction will reduce our loan-to-deposit ratio to roughly 88%, while maintaining strong capital ratios in line with our stated targets and allowing us to maintain our current share repurchase program.

The financial impact will produce an approximately 4% EPS accretion in 2027 without considering the upside impact of deploying proceeds into incremental lending. As noted, we have conviction that this liquidity will support further growth in new core client relationships lending, which will meaningfully enhance our returns going forward. I will turn the call over to Hope to walk through the results in more detail before I provide some closing thoughts.

Hope? Thank you, Bryan. Good morning, everyone, and thank you for joining us today.

Starting on slide 5, we provide key highlights of our performance this quarter. In the quarter, adjusted EPS declined to $0.53 on lower fee income and slightly higher provision expense in the quarter. Our adjusted ROTCE decreased to 14.4% in the quarter. This is primarily due to the temporary impacts of the timing of capital use in the quarter, which resulted in an elevated average TCE ahead of deployment as part of the mortgage loan reclassification at quarter end. We continue seeing momentum with our strategic focus on relationship banking with client deposits up more than $1 billion this quarter and NIM remaining in line with our expectations at 3.48%.

On slide 6, we cover notable items in the quarter, which includes the impact of reclassifying the loans associated with our mortgage portfolio sale, which I will discuss more in just a moment. Additionally, we recognized costs associated with reorganizing parts of our business, which includes reductions in our mortgage line of business to align mortgage production more closely with core clients. On slide 7, we cover the expected mortgage portfolio sale in more detail. This transaction further ensures our balance sheet is aligned with our strategic focus on delivering relationship-oriented banking and focusing on safety and soundness, profitability, and growth. The loans in this transaction have minimal deposits of approximately $200 million and are concentrated in the lowest-yielding portion of our mortgage portfolio with an overall weighted average coupon rate of 3.85%.

This transaction is expected to settle early in the fourth quarter and will result in selling approximately $4.5 billion in lower-yielding mortgage loans with limited deposits and relationship balances at an approximate 10% discount all in.

Excluding further upside of yields from incremental lending, we expect the transaction to be accretive going forward with 2027 earnings per share benefit of around 4% and improved ROTCE of approximately 150 basis points. Share buybacks will resume in Q4, in line with our CET1 target ratios for the year. This transaction puts our liquidity into an improved position as our loan-to-deposit ratio moves to approximately 88%. It provides immediate improvement to NIM and a future upside as we redeploy to higher-yielding loans while continuing to focus on client relationship growth with deposits and fees. Deployment into incremental lending in the coming quarters and years will further improve these results. On slide 8, we walk through our net interest income and margin performance in the third quarter. Our margin compressed by one basis point, remaining settled in the high 340s.

This reflects the rate of environment involving into a flat 2s/10s expectation. We grew NII by $7 million this quarter, reflecting higher loan yields, and includes customer deposit growth replacing brokered deposits over the course of the quarter. We believe that the flexibility created by our mortgage portfolio transaction this quarter supports continued margin strength into next year and through the cycle, and we expect NIM to improve into the 350s. On slide 9, we cover details around our deposit performance in the quarter. Period end balances decreased by $0.4 billion compared to prior quarter, driven primarily by a decrease in brokered CDs as we grew new client deposits approximately $1.5 billion. The average rate paid on interest-bearing deposits increased to 2.45%, which is a 12 basis point increase from the prior quarter.

This reflects higher average brokered deposits and higher customer deposit costs in the third quarter, which includes impacts from resetting indexed client deposits. Our exit rate for the quarter on a spot and a September average basis is low single-digit basis points above the average for the quarter, and we do expect that the environment for deposits will remain competitive. As we enter into a rate increase cycle, we will focus on betas through the cycle, targeting approximately 60%. As always, we remain focused on growing our core deposit base and prioritizing relationship growth as a way to sustainably and profitably grow our balance sheet. On slide 10, we cover our quarterly loan growth. Period end loans decreased $5.5 billion from the prior quarter, driven primarily by the reclassification of mortgage loans for the $4.5 billion mortgage portfolio sale.

Loans to mortgage companies decreased $891 million in the quarter, which steadily decreased in the quarters as rates rose. C&I, excluding loans to mortgage companies, decreased $96 million, and commercial real estate grew $97 million. Total line utilization ended the third quarter essentially unchanged from Q2 at 44%. This dipped in July and August before rising again in September to near prior quarter levels. Commercial lending remained competitive through the quarter. Spreads on new lending are typically in the mid-100s to mid-200 basis points in the current environment. Turning to slide 11, we detail our fee income performance for the quarter, which increased $3 million from the prior quarter, excluding deferred compensation, and is down $8 million year-over-year. We saw a 6% quarter-over-quarter increase in fixed income revenues due to an increase in average daily revenue to $629,000.