First Horizon Reports Q3 Adjusted EPS of $0.53, Plans $4.5 Billion Mortgage Sale

On Thursday, First Horizon (NYSE: FHN ) discussed third-quarter financial results during its earnings call. The full transcript is provided below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

Access the full call at Summary First Horizon reported an adjusted EPS of $0.53, marking a 4% year-over-year increase despite lower fee income and higher provision expense. The company is executing a strategic realignment by selling $4.5 billion of lower-yielding residential mortgage loans, aiming to enhance profitability and focus on relationship banking. Management expects the mortgage sale to result in a 4% EPS accretion by 2027, with plans to redeploy proceeds into higher-yielding loans. Capital ratios remain strong with a CET1 of 10.3%, allowing for the continuation of share repurchases.

The company anticipates improved net interest margin (NIM) into the 350s by next year, supported by customer deposit growth and higher loan yields. First Horizon is focused on maintaining a competitive deposit position while growing core deposits, with a target deposit beta of approximately 60% through the cycle. Loan demand remains steady, with particular growth in commercial and commercial real estate sectors, while managing a loan-to-deposit ratio target of 88% post-transaction. The strategic initiatives aim to enhance the bank's flexibility, asset sensitivity, and profitability, aligning with its long-term growth and client relationship goals.

Full Transcript Tyler, Investor Relations Today, our Chairman, President and CEO Bryan Jordan and Chief Financial Officer Hope Dmuchowski will provide prepared remarks, after which we'll be happy to take your questions. We're 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's 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. And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them.

And with that, I'll hand it over to Bryan. Bryan Jordan, Chairman, President and CEO Thank you, Tom. Excuse me. Thank you, Tyler.

Good morning, everyone. Thank you for joining us. Our adjusted results this quarter are highlighted by EPS of 53 cents, which is a 4% increase year over year. Over the last year, we've 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 and 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'll turn the call over to Hope to walk through the results in more detail before I provide some closing thoughts. Hope Dmuchowski, Chief Financial Officer 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 ROTC 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 recognize 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 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 ROTC of approximately 150 basis points.

Share buybacks will resume in Q4 in line with our CET1 targeted ratios for the year. This transaction puts our liquidity into an improved position and 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 1 basis point remaining settled in the high 340s. This reflects the rate environment evolving into a flat to up expectation. We grew NII by 7 million this quarter reflecting higher loan yields and includes customer deposit growth replacing broker 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 covered 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 broker 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 broker deposits and higher customer deposit costs in the third quarter, which includes impacts from the resetting index 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 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-100 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. Higher ADRs were driven primarily by favorable restructuring activity during the quarter. On slide 12 we cover adjusted expenses that, excluding deferred compensation, increased 8 million from prior quarter. Other non-interest expense increased by 6 million driven by the timing of new account promotions and occupancy and equipment increased due to internal technology projects and AI investments.

Turning to credit on slide 13, NPLs remained flat at 81 basis points on a 49 million reduction in nonaccrual balances driven by strong resolutions during the quarter. Net charge-offs increased by 3 million to 36 million bringing our net charge-off ratio to 22 basis points. Excluding the mortgage restructuring impact, our provision for credit losses was 20 million in the quarter. Our ACL-to-loans ratio increased by 1 basis point to 1.25.

This primarily reflects mix shift associated with the reclassification of mortgage loans associated with our mortgage portfolio transaction. On slide 14 we ended the quarter with CET1 of 10.3% which is down slightly from the prior quarter and reflects the impact of notable items including the mortgage transaction we discussed. Our tangible book value per share ended the quarter at $13.84 and is down 5% quarter over quarter, also reflecting the impact of the mortgage portfolio transaction. Our tangible common equity to total assets ratio remains strong at 7.93%.

Now I'll wrap up with slides 15 and 16. We shared some refinements to our 2026 outlook that include the impacts of the expected mortgage transaction as well as the revenue impacts from the current rate environment. We continue making progress towards the 100 million plus PPNR opportunity discussed over the last 18 months and believe our balance sheet restructuring will provide further catalysts for return growth in 2027 and with that I'll give it back to Bryan. Bryan Jordan, Chairman, President and CEO Thank you, Hope.

The results in the third quarter position First Horizon for continued success, meaningful upside opportunities and deepening strategic alignment. Over the past year we have shared with you how our strategic framework provides clarity for our associates on the results we expect, understanding of the ways we earn our right to win, precision on the types of clients that value our approach, discipline on how we go to market and urgency on the opportunities we have to further enable our strategy.

Our third quarter results, which include an important business restructuring, a strategic portfolio transaction and consistent banker engagement with our clients to deliver deeper relationships and drive profitability, enable us to deliver enhanced profitability going forward. Thank you to our associates who continue to work hard at delivering these objectives. I reiterate my gratitude to our clients and shareholders who continue to be central to the First Horizon story. Erica, with that, we can open it up for questions.

OPERATOR We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one.

Again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Arfstrom with RBC Capital Markets.

Your line is open. Please go ahead. John Arfstrom, Analyst at RBC Capital Markets Thanks. Good morning, everyone.

Just a question on the realignment, Bryan. Not being critical, but why now? And how did you determine the size of the sale, the four and a half billion, and anything more left to do? Or is this it?

Bryan Jordan, Chairman, President and CEO Yeah. So the why now is it became clear that we're in a cycle of rising interest rates. We sized the portfolio based on trying to extract out, or sell, what was essentially non-relationship portfolio assets. And the intent there was mainly to create capacity on our balance sheet to fund continued growth and investing in longer, deeper relationship opportunities that we see in the marketplace.

And we believe that we have the asset generation capability to put that to use. So we looked at the portfolio. We tried to exclude anything that was related to private client or wealth. We tried to basically extract a portfolio that was very minimal relationship outside of a loan transaction.

And as Hope pointed out, when you do that, you come up with about $4.5 billion of loans, about $200 million of deposit base, and a low-yielding portfolio. So the timing was it was a low-yielding set of assets, non-relationship. We thought we could use the capacity for other and deeper relationships. And then the tangential benefit is it gives us much greater flexibility in terms of how we think about competing in the deposit markets and the use of wholesale deposits on a go-forward basis.

So we think it has very positive profitability characteristics. In terms of the work left to be done at this point, we should settle the transaction in the next few days to a week. We have to deliver some loan files and we have a signed agreement. So the transaction is essentially done at this point.

John Arfstrom, Analyst at RBC Capital Markets Okay, good. And then maybe for you, Hope, can you frame the assumptions around the 4% 2027 EPS accretion? I think you both mentioned some upside as you redeploy the proceeds. But what are you assuming right now in terms of the drivers of that 4% lift?

Hope Dmuchowski, Chief Financial Officer Good morning, John. Thank you. The 4% is really the immediate lift, which is a portion of it going to pay down wholesale funding and the rest going into our securities, very, you know, floating rate securities, as we continue to, as Bryan mentioned, redeploy this into loans. So that 4% is really, as we get the cash in in the next week or so, immediate, putting that to work between paying down our wholesale funding and putting it in our securities portfolio in short-term floating rate.

Bryan Jordan, Chairman, President and CEO All right, thank you very much, John. I'll add, while you're dropping off, that you should start to see the benefit, you know, two-thirds of it or so beginning in the fourth quarter of this year. As Hope said, as we get this closed, we'll start immediately reinvesting the cash. OPERATOR Your next question comes from the line of Ryan Nash with Goldman Sachs.

Your line is open. Please go ahead. Ryan Nash, Analyst at Goldman Sachs Morning, Bryan. Good morning, Hope.

Hope Dmuchowski, Chief Financial Officer Morning, Ryan. Ryan Nash, Analyst at Goldman Sachs Hope, maybe to start, you noted that you expect a 60% beta from the rate hike. I think that implies about a 15 basis point or so deposit cost increase. When we look in this quarter, obviously deposit costs were up 12 without a rate hike.

So can you maybe just help us better understand the 12 basis point increase? How much was related to the hike? How much were client deposit costs actually up? And do you expect there to be residual pressure outside of the rate-driven increases that we've seen?

Do you expect those to persist? Thank you. And I have a follow up. Hope Dmuchowski, Chief Financial Officer Thanks, Ryan.

Starting with the 60% beta comment, that is through the cycle, and so quarter to quarter, depending on when you have a rate increase, early or late in the quarter, that is not meant to be a quarter in, quarter out. We also only had two weeks of this rate hike baked into this quarter.