First Horizon Q3 2026 Earnings Results & Report

First Horizon EPS Results

• Actual EPS: $0.53
• Consensus EPS: $0.5240
• Beat/Miss: Beat by +$0.0060
• One Year Ago EPS: $0.51
• EPS Beat Rate: 8 of last 8 quarters

First Horizon Revenue Results

• Actual Revenue: $883.00 million
• Expected Revenue: $889.15 million
• Beat/Miss: Missed by -$6.15 million
• YoY Revenue Growth: N/A

First Horizon (NYSE:FHN) (NYSE:FHN) is a financial services company headquartered in Memphis, Tennessee. Through its banking subsidiary, First Horizon Bank, the company provides a range of financial products and services to consumers, businesses, and institutions.

Its main activities include consumer and commercial banking, lending, deposit accounts, treasury and cash-management services, mortgage banking, and investment and wealth-management services. First Horizon also offers capital-markets and investment-banking services through its specialized businesses, serving clients across various industries and market segments.

The company traces its roots to First Tennessee Bank, which was founded in Memphis in 1864. First Tennessee adopted the First Horizon name as part of a broader corporate rebranding in 2020. First Horizon serves customers primarily across the southern United States through its branch network and other banking and financial-services channels.

First Horizon Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strategic mortgage portfolio sale — First Horizon plans to sell approximately $4.5 billion of low-yielding, largely non-relationship mortgage loans, reducing its loan-to-deposit ratio to about 88% and improving balance-sheet flexibility.
• Positive Sentiment: Management expects the transaction to provide approximately 4% EPS accretion and 150 basis points of ROTCE improvement in 2027, with additional upside from redeploying proceeds into higher-yielding commercial loans.
• Positive Sentiment: Core client deposits grew by more than $1 billion during the quarter, while management expects net interest margin to improve from 3.48% into the 350-basis-point range; share repurchases are expected to resume in the fourth quarter.
• Negative Sentiment: Third-quarter adjusted EPS was $0.53, pressured by lower fee income, higher expenses, and provision costs; revenue expectations were reduced due to weaker mortgage warehouse activity and an unusually strong fixed-income result in the prior-year fourth quarter.
• Neutral Sentiment: Credit metrics were mixed but broadly stable: nonperforming loans remained at 81 basis points, net charge-offs rose to 22 basis points, and the allowance for credit losses increased slightly to 1.25% of loans.

Presentation

[Operator]

I will now hand the conference over to Tyler Craft, Head of Investor Relations. Tyler, please go ahead.

[Tyler Craft, Head of Investor Relations at First Horizon]

Thank you, Erica. 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.

[Tyler Craft, Head of Investor Relations at First Horizon]

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 two 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.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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?

[Hope Dmuchowski, CFO at First Horizon]

Thank you, Bryan. Good morning, everyone, and thank you for joining us today. Starting on slide five, 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%.

[Hope Dmuchowski, CFO at First Horizon]

On slide six, 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 seven, 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%.

[Hope Dmuchowski, CFO at First Horizon]

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.

[Hope Dmuchowski, CFO at First Horizon]

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 eight, 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.

[Hope Dmuchowski, CFO at First Horizon]

This reflects the rate of environment evolving into a flat 2s 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 3.50s. On slide nine, 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.

[Hope Dmuchowski, CFO at First Horizon]

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.

[Hope Dmuchowski, CFO at First Horizon]

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.

[Hope Dmuchowski, CFO at First Horizon]

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 increase 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 non-accrual 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 one basis point to 1.25. This primarily reflects mix shift associated with the reclassification of mortgage loans associated with our mortgage portfolio transaction.

[Hope Dmuchowski, CFO at First Horizon]

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 PPNR opportunity discussed over the last 18 months and believe our balance sheet restructuring will provide further catalyst for return growth in 2027. And with that, I'll give it back to Bryan.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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 Jon Arfstrom with RBC Capital Markets. Your line is open. Please go ahead.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Thanks. Good morning, everyone.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Good morning, Jon.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Yeah, good morning. Just a question on the realignment, Bryan. Not being critical, but why now, and how did you determine the size of the sale, the $4.5 billion, and anything more left to do, or is this it?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. So the why now is it, one, became clear that we are 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. The intent there was mainly to create capacity on our balance sheet to fund continued growth in investing in longer, deeper relationship opportunities that we see in the marketplace. 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. As Hope pointed out, when you do that, you come up with about $4.5 billion of loans, about 200 or so million dollars of deposit base in a low-yielding portfolio.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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. 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, basically, 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.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Yeah. Okay, good. 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 redeployed the proceeds, but what are you assuming right now in terms of the drivers of that 4% lift?

[Hope Dmuchowski, CFO at First Horizon]

Good morning, Jon. 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 rate at a 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, immediately putting that to work between paying down our wholesale funding and putting it in our securities portfolio in short-term floating rate.

[Jon Arfstrom, Analyst at RBC Capital Markets]

All right. Thank you very much.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Jon, while you're dropping off, I'll add that you should start to see the benefit, two-thirds of it or so, beginning in the fourth quarter of this year. As Hope said, 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]

Good morning, Bryan. Good morning, Hope.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

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. 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. I have a follow-up.

[Hope Dmuchowski, CFO at First Horizon]

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. When we look at the rate competition, I've said this previously, the summer months is the most competitive time for us. It's when we mention now three years running that we bring new customer deposits, specifically in private client, retail, some of our commercial clients in at a promo rate. You'll see the $6 million of expenses that we paid out this quarter, which is the cash offers associated with those private client and consumer offers. You start to walk those back.

[Hope Dmuchowski, CFO at First Horizon]

I do think a portion of what increased in Q3 is similar to the last two years when we start to lead with rate before we deepen that client and walk it back. As far as exactly what I expect in Q4, Ryan, it really depends on the rate scenario. Do we see one hike? Do we see two? Is it earlier in the quarter or later? That is why I really focus on the beta part of it because I do think there will be noise quarter-to-quarter, as there has been in past rising and decreasing rates on how that leads and lags in a quarter. But as I said in my prepared remarks, we expect margin to be in the 3.50s next quarter and continuing to focus on expanding that with the redeployment of this mortgage sale into higher yielding assets.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Ryan, one follow-on thought is in the third quarter, we did have a higher average balance of wholesale deposits, and they did pull the aggregate rate of deposits up some over the quarter. With this transaction and our ability to repay that, particularly as mortgage warehouse has come down some, that should take some pressure off deposit costs. More macro, I have often said and long said that over time, technology, it started with the internet and cell phones and mobile technology provides a lot more clarity and upward. There is going to be some upward movement of deposit costs over time. I know here recently, there has been a lot of focus on agentic AI and tools like Muse and other things like that impacting deposit costs.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

While that may be a long-term adoption trend, it is not something that we expect to have a lot of impact in the very near term, that that will take a lot of time. Fundamentally, I do believe that customer relationships, customer stickiness is still an important part of the business, and we believe that, one, our focus on relationships and all that will help us ameliorate some of the upward drift in deposit costs over time. It will not eliminate it, but will help ameliorate some of that. But at the end of the day, we think that we have the ability in this rising rate environment to be very competitive. We think with the adjusted balance sheet with a loan deposit ratio at 88% or so, it gives us more flexibility. So we think we are extraordinarily well positioned to navigate this period of rising rates.

[Ryan Nash, Analyst at Goldman Sachs]

Got you. Appreciate all that color. Bryan, you have been relatively upbeat on loan growth. Maybe outside of warehouse, C&I balances and CRE had a little bit of growth, a little bit of shrinkage. Maybe just talk a little bit about the performance, and given the freed up balance sheet capacity, how are you feeling about the ability to lean in a little bit further on loan growth? Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yes. I still am upbeat. You get a political environment where the consumer is feeling under some degree of stress, and there are parts of the economy that are somewhat weaker than others. But generally speaking, demand in the economy is still pretty good. GDP growth, GDPNow at Atlanta Fed, I think is still around 4% for the fourth quarter. So underlying activity is still pretty good, and we think that loan demand will continue to be reasonably steady. If you look at the mix of our balance sheets, you pointed out mortgage warehouse lending came down during the quarter. C&I was relatively flat. We're still seeing some funding up in commercial real estate deals. We follow the market in terms of prognosticating about what the future of rates will do.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

But it will have some marginal impact on the ability of the economy to create additional lending, simply because more deals will not pencil out. But at the end of the day, we feel good about our asset generation capability. We have a unique set of businesses that are in many ways are national in our specialty lines of business, whether it be mortgage warehouse lending, where we think we'll have additional market share, our franchise finance business, our equipment leasing business, our trucking and transportation businesses. So we think our asset generation capability is still very strong on a relative basis. But I would put all of that against a backdrop. We're going to be smart about what the customer base and the economy gives us. We're going to pick our spots and participate.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

We think that this economy, while solid, is still at a place where rising rates and inflation are likely to slow it down some as we transition into 2027.

[Ryan Nash, Analyst at Goldman Sachs]

Thanks, guys. Appreciate all the color.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

The next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open. Please go ahead.

[Ebrahim Poonawala, Analyst at Bank of America]

Good morning.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Morning. How you doing, Ebrahim?

[Ebrahim Poonawala, Analyst at Bank of America]

Good, Bryan. Hey, Hope. I guess maybe just on this restructuring, maybe I missed it. When we think about the loan to deposit ratio shifting to 88%, I know you've been very reluctant, Bryan, to deploy deposits to low-yielding government securities. But as we think about where it's resetting now, is that the new normal? Does that also sort of set the stage for you to be able to become a $100+ billion asset bank where a mid to high 80s loan to deposit ratio feels the right place to be? If you, yeah.

[Hope Dmuchowski, CFO at First Horizon]

Thanks for the question. As I mentioned in my prepared remarks, we will put a good portion into securities immediately. But we do expect to redeploy that into loan growth. The intention is not to grow our securities portfolio. As we think about where loan growth will come from, one of the comments Bryan and I have made consistently on this call and conferences is our ability to grow loans previously was dependent on our ability to grow deposits, balance both sides of the balance sheet. So this does allow us to have some additional growth on the loan side with the deposit side slightly lagging. Whether it's either quarter-to-quarter or year-over-year, 88% loan to deposit ratio gives us a little bit more ability to loosen up those reins for the right side of the balance sheet to grow.

[Hope Dmuchowski, CFO at First Horizon]

As we think about where we redeploy this, as I mentioned in my prepared comments, we are going to put it in floating rate securities. We are expecting rate increases in the coming quarters. So that will also increase the immediate payback as we see that forward curve play out.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

It positions us with a slightly more asset sensitive balance sheet, which is a positive, we think, in this rising rate environment. We're not in any measure reducing our desire to continue to grow the right side of our balance sheet, to grow our deposit relationships and broaden and deepen. We've talked a lot over the course of the last year and a half, two years, about our desire to continue to sell our treasury management products, to penetrate operating account relationships, and to continue to broaden and deepen with our credit customers. We think that freeing up the opportunity to take this pool of largely non-relationship assets and move it off the balance sheet and create capacity to put more relationship generating assets on the balance sheet is going to be a net positive for that loan to deposit ratio over the long term.

[Hope Dmuchowski, CFO at First Horizon]

One additional comment on that is that the mortgage sale does shorten our duration and make our immediate asset sensitivity about 100 basis points higher in the near term in a rising rate environment.

[Ebrahim Poonawala, Analyst at Bank of America]

Got it. So the action obviously from a client relationship, ROTCE, asset sensitivity. Understood. Maybe given just the change in the rate outlook or what's happened for the markets, talk to us about the mortgage warehouse business. Obviously, it's been an attractive business for you. But maybe how are you thinking about it today given where rates have headed? And talk just the health of the underlying clients. Are you seeing consolidation in that space? Just how should we think about where that may trend over the coming quarters or over the next couple of years?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. I'll come right back to the mortgage warehouse question. I want to add one other benefit. This repositioning of the balance sheet does not impact our ability to continue to repurchase stock or return capital to our shareholders. We have strong capital ratios, and we're comfortable in this 10.25%-10.5% range, and we intend to resume our repurchase program. With respect to mortgage lending or mortgage warehouse lending, the third quarter was unique in some ways. We talk about our counter-cyclical businesses and how through the cycle we tend to be less asset sensitive than stated in terms of our asset sensitivity disclosures because we have these counter-cyclical businesses that perform in opposite directions. The third quarter was unusual in the sense that we started to see the impact on the counter-cyclical businesses well in advance of the Fed raising rates.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

We think there is likely to be a little less seasonality impact in the fourth quarter in mortgage warehouse lending. We will see how that plays out with mortgage rates where they are. At the end of the day, the mortgage warehouse lending business came down about $900 million in the quarter. We think it peaked sometime in the second quarter of this year. That is a very unusual dynamic. We think that we have built share in that business. We have broader lines, and we think we have deepened share with our customers. We expect that there will be some consolidation in the mortgage space. We think we are well-positioned to continue to serve that customer set, and we will continue to be there.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

We are positioned with strong participants, and while the economics of the mortgage business broadly for us and for everybody else will be a little bit tougher in a lower volume environment, we think we are well-positioned. Tom, I do not know what you would add to that.

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah. Good morning, Ebrahim. I would add that we have seen some, but not what I would call any outsized consolidation so far. A lot of these operators have obviously been through a rapid rate increase cycle only a handful of years ago. They are well aware of what would happen in that environment again if we were to see multiple rate increases. So in terms of sizing their companies appropriately from an infrastructure and fixed cost, fixed expenses standpoint, we are working with very experienced operators. I would continue to expect very strong credit performance even in the face of multiple rate increases.

[Hope Dmuchowski, CFO at First Horizon]

What I will add to what Tom and Bryan already said is this is not an NDFI line. We do table funding. So we have the underlying notes at close. Should something happen to one of our clients, we have those notes, we can sell them. We do not have the same risk that some of the different mortgage warehouse structures have. We continually talk about, we have had 1 basis point of charge-off annually in this business as long as we can go back and calculate because we hold the collateral at closing. The other one is that we always point to is this typically stays on our balance sheet 19 days per note. It is just from the time the deal closes to the time it is delivered to the other side.

[Hope Dmuchowski, CFO at First Horizon]

If we were to see something happen in this business, we had concern, we can bring those lines down pretty quickly.

[Ebrahim Poonawala, Analyst at Bank of America]

Got it. Thank you for all the answers. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you. Good to talk to you.

[Operator]

The next question comes from the line of Michael Rose with Raymond James. Your line is open. Please go ahead.

[Michael Rose, Analyst at Raymond James]

Hey, good morning, everyone. Thanks for taking my questions. Just wanted to talk about the $100+ million PPNR opportunity. I think the slides say you're about 40% of the way through. How should we think about the repositioning and the $45 million in after-tax benefits in relation to that? Should we think about this as in addition, or should we think about it as maybe just accelerating the progress and the path that you're already on? Thanks.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Think about the $45 million, to use your word, in addition or incremental to the $100 million pre-tax, pre-provision efforts that we have in place.

[Michael Rose, Analyst at Raymond James]

Okay, perfect. Maybe if you can just outline from here the extra 60% to get to the original amount. What is still left to happen, and how does the rate picture kind of potentially impact the timing? Thanks.

[Hope Dmuchowski, CFO at First Horizon]

Some of it is just timing when you annualize it as you deepen with customers. We've talked a lot about our treasury management success with deepening with existing commercial clients. On average, when you deepen a treasury management relation with a client, it can take three to nine months to actually get that treasury management relationship moved over because of their payroll, their A/P, their A/R. It is a long process for them to move that all over. So some of that is just the annualization. So when we say it's 40%, that's kind of an exit rate, and then you pick that up on a full year. The other is we continue to see great success with wealth. We keep talking about how we've rolled out a new partnership with LPL. We've hired new wealth advisors.

[Hope Dmuchowski, CFO at First Horizon]

We're continuing to see that work as we deepen with some of our commercial business owners and others that already are a First Horizon client, then we introduce them to the wealth side of it. I would say those are the two biggest that we still have the tail on. We've continually talked about loan-only relationships, low economic profit, low only, and not renewing those at renewal if we can't get the profitability up or deepen the relationship. This mortgage sale goes hand in hand with that. These are mortgages that were seasoned on our balance sheet where we did not deepen the relationship. To Bryan's first question, this is additive to the number, but is completely in line with how we've been rethinking out our portfolio to increase profitability for every single dollar we lend out.

[Michael Rose, Analyst at Raymond James]

That's very helpful, Hope. I don't want to get ahead of myself and ask about 2027, but just given the benefits from the repositioning, how much opportunity is there as we think about incremental investment in the franchise in things like you mentioned, Hope, just on treasury management wealth, also leaning into commercial loan growth to basically, how should we think about positive operating leverage for next year? I know it's early, but just trying to better understand the outlook there. Thanks.

[Hope Dmuchowski, CFO at First Horizon]

We do not expect to have a significant reinvestment like we did three years ago coming out of the termination. We believe we have the right run rate of expenses. We continually say we'll be inflationary from here on out for expense growth year-over-year, and we expect positive operating leverage next year.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah.

[Michael Rose, Analyst at Raymond James]

All right, perfect.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Michael, we see a number of opportunities to continue to invest. Our plans today would include refreshing banking centers, building new banking centers, continuing to hire, to invest in technologies, et cetera. We feel good about our ability to control our expense base. We think we have enough levers in that. We will feel some of the impacts of inflation in certain things like healthcare and costs and, in general, inflationary type costs. But we think we can maintain a reasonable growth rate in our expense base, that we can deliver positive operating leverage into 2027. I would say, as we sit here and think about 2028, that's our plan going into 2028 as well.

[Michael Rose, Analyst at Raymond James]

Very helpful. Thanks for taking my questions.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. Sure. Thank you.

[Operator]

The next question comes from the line of Bernard von Gizycki with Deutsche Bank. Your line is open. Please go ahead.

[Bernard von Gizycki, Analyst at Deutsche Bank]

Hey, guys. Good morning. Just on commercial real estate, it seems expectations have improved throughout the year. I just wonder if you could just share some thoughts on forward expectations and how the outlook for higher rates impacts that at all.

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah, sure. Good morning, Bernard. I am happy to answer that one. The commercial real estate group has had a lot of momentum, but most importantly, we have remained very disciplined in how we manage that book. My expectations are if rates go up, I would expect us to continue to perform very well. I think the two main reasons I will point to, one is if you look at our strong loss history, if you go back to the start of 2023 when we were seeing our peak interest rates, since then, our CRE net charge-offs have averaged 17 basis points. I think that speaks to even in a high rate environment, our discipline really holds up. Those numbers I mentioned are on projects underwritten in a very low post-COVID rate environment. Obviously, the more recent vintages are underwritten to our higher interest rates.

[Thomas Hung, Chief Credit Officer at First Horizon]

The other thing I would point to is, especially on the multifamily side, I think the real root cause has been supply and absorption rate. On the supply side, CoStar shows since the peak in 2022, starts are down 70%, units under construction are down 50%. There is a lot more supply coming on. On the absorption side, with what consumers are dealing with right now on top of elevated home prices and higher interest rates, renting is relatively more attractive than buying. I think the absorption will be there as well.

[Bernard von Gizycki, Analyst at Deutsche Bank]

Okay, thank you. Just as a follow-up, maybe just on the fixed income side, it seemed maybe it came in a little bit better than expected, just given the rate vol during the quarter. You did highlight some higher client restructuring activity. I am just wondering, is that maybe just specific to the quarter? Do you think that kind of continues? Just some thoughts on the go forward expectations on some of those trends.

[Hope Dmuchowski, CFO at First Horizon]

Yeah. We have continued to see in this business over time that as you enter a rising rate environment, a quick rising rate or quick decreasing rate, some of our clients will try to get ahead of that and restructure their balance sheet. We saw this when rates were decreasing about this time last year. I do think depending on how quickly rates increase, if we do, I do not know where the forward curve is this morning, but yesterday it had 1.5 increases in the back half of the year. I do believe that we could see additional restructurings, but it really is very related to how quickly rates move up and down and our clients' appetite to try to hedge that in advance.

[Bernard von Gizycki, Analyst at Deutsche Bank]

Great. Thanks for taking my questions.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

The next question comes from the line of Ryan Kenny with Morgan Stanley. Your line is open. Please go ahead.

[Ryan Kenny, Analyst at Morgan Stanley]

Hey, good morning. Thanks for taking my questions. Can you unpack what you're seeing in terms of non-interest-bearing deposit balances and mix shift? On one hand, you could argue customers are already broadly optimized. You're growing operating accounts, you're deepening relationships. On the other hand, we have some rate hikes in the forward curve. How do you think about NIB mix? Is there a scenario where NIB balances and IB balances can grow?

[Hope Dmuchowski, CFO at First Horizon]

Yeah. On the first part, we're not seeing mix shift, and we haven't seen it for well over a year now. Customers that were rate sensitive had already taken advantage of that in a rising rate scenario, and we had stabilized. What we are seeing is the cost of inflation has them have less money in their operating and checking accounts, right? They're spending it more quickly, so their average days at a higher balance is a little bit lower. We absolutely believe that we have a franchise, we have a product set and bankers that can continue to grow deposits, both in non-interest bearing and interest bearing, as you saw this quarter. There's always seasonality in deposits with commercial clients when they pay their annual taxes or there's seasonality around consumer and private client around tax season or bonus season.

[Hope Dmuchowski, CFO at First Horizon]

But we absolutely believe we will continue to grow both of those in the coming quarters and years as we refocus on strong relationship business with our clients.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. If I had to take a side on the trade, I'd say customers are much more optimized today than they were a year ago or six months ago. There's a lot of data out there about rates. There's very good transparency in the marketplace. As Hope said, most of the mix shift we see today is just in spending patterns.

[Ryan Kenny, Analyst at Morgan Stanley]

And as a follow-up, in terms of your capital priorities, you used some capital for the mortgage sale. Seems like looking forward, you will use some capital for resuming buybacks, for loan growth. Is it a fair interpretation that this means less of a priority to maybe use capital for a depository acquisition?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Well, I think, that is one of the tangential benefits. I have talked about over the last year, the optionality about doing something small that would create incremental liquidity. I think that makes that significantly less of a priority in our view. And in many ways deals with that need. So capital priorities are one, investing in customer growth, customer and balance sheet activity. Two, being smart with our capital and repatriating it to shareholders opportunistically through repurchasing shares in the marketplace. And we have a little over $660 million of capacity remaining. So we are in a good place to have a lot of optionality around investing with customers and returning capital to shareholders.

[Ryan Kenny, Analyst at Morgan Stanley]

Thank you. Very clear.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah, thank you.

[Operator]

The next question comes from the line of Janet Lee with TD Cowen. Your line is open. Please go ahead.

[Janet Lee, Analyst at TD Cowen]

Good morning.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Morning.

[Janet Lee, Analyst at TD Cowen]

Could you help unpack a little bit about the decline in core C&I ex-LMC? You talked about how the line utilization dipped in July and August before rebounding again in September. Is there any more things that could explain the decline in C&I outside of those July and August being summer months?

[Thomas Hung, Chief Credit Officer at First Horizon]

No, not particularly. The loans to mortgage companies is really seasonally driven as well as just the interest rate environment. In terms of other core C&I, as you would expect, there were increases in some sectors and decreases in other. There wasn't any major driver in one direction or the other.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

It's speculation/projection, but I think customers are like all of us. They see headline fuel cost inflation going up significantly during the course of the summer, diesel fuel supplies. You see a lot of competitive dynamics. I think people are just being doubtful about where are we in the economy, what's next. I don't read anything into it of a negative bent at this point. I think it's just ordinary course of business. We increased the level of lines that are outstanding in the quarter. I fully expect that over time customers will take those lines, use them, and put them to work in growing their businesses.

[Janet Lee, Analyst at TD Cowen]

Right. Thank you. It seems like you're expecting for commercial lending growth momentum to increase versus the third quarter. On the mortgage sale, it looks like the 4% EPS accretion seems like a floor since that's not assuming any benefit from partial deployment into higher yielding loans. Can you help us quantify what partial means here? Of the $4.5 billion coming off the balance sheet, how much should we expect to redeploy into C&I and CRE? Is mid-single digit kind of growth still a right place to be?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Well, yes. I think the pro forma is invested in securities. My working assumption is that over the next two to three years, we can deploy half of the $4.5 billion. Call it a little over $2 billion in incremental loan growth activity over the next two to three years. Again, it's dependent upon what the economy gives us and how interest rates and inflation affect things. We think with our asset generation capability, we can pick up incremental growth in that range.

[Janet Lee, Analyst at TD Cowen]

Got it. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of Jared Shaw with Barclays. Your line is open. Please go ahead.

[Jared Shaw, Analyst at Barclays]

Hey, good morning.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Good morning, Jared.

[Jared Shaw, Analyst at Barclays]

Thanks. Just going back, I guess to the bigger strategic view with this sale. Should we expect any additional bigger moves to execute on that First Horizon strategy, or is it more of executing on the blocking and tackling, like Hope mentioned around treasury management and wealth management and things like that?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. I think in terms of big balance sheet, profile changing things, I wouldn't expect anything else at this point. I think you used a great phrase, blocking and tackling. The $100 million is a blocking and tackling exercise. Hope did a great job describing some of the actions. But it really is customers work on cycles, our relationship with them on cycles. And it really is hundreds, if not thousands of bankers every single day interacting on the premise that I laid out in my prepared comments, that we want to broaden and deepen customer relationships and thinking about how we proactively look for opportunities to deliver more valuable advice, counsel, and support for our customers, and at the same time deepen our relationship. But it is a blocking and tackling exercise.

[Jared Shaw, Analyst at Barclays]

Okay, thanks. Then just a follow-up from me, more bookkeeping. When we look at the securities portfolio, apart from what you're going to be putting in from this sale, what's the cash flow been looking like there, and what's your new reinvestment rate versus the roll-off on that?

[Hope Dmuchowski, CFO at First Horizon]

Yeah, Jared, we have that in our deck. I'm just trying to turn the page. I think it's approximately $1 billion of securities with a roll-off yield of currently 2.9% as of today, floating rates in the mid-4.50s. Mid-SOFR, sorry, SOFR plus. If we do see rate increases obviously that 2.9 gets higher as a reinvestment. That mid SOFR moves up 25, 50 basis points, et cetera, as SOFR and Fed funds move up in the future quarters.

[Jared Shaw, Analyst at Barclays]

Great. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of Anthony Elian with JPMorgan. Your line is open. Please go ahead.

[Anthony Elian, Analyst at JPMorgan]

Hi, everyone. Can you help unpack what drove the reduction to the revenue outlook? You have tailwinds to NII from the bottom of slide eight, and you noted a few times Hope that NIM is expected to increase to the 3.50s in 4Q. Is that not enough to offset the lower countercyclical revenue in 4Q?

[Hope Dmuchowski, CFO at First Horizon]

Yeah. Thank you for the question. I think we're sitting right at about 4% for the first nine months of the year. If you look at 4Q of last year, it's not as much about momentum quarter-over-quarter, but we had a really strong 4Q last year in our countercyclicals. It was a high point for mortgage warehouse balances, which is typically a low point of the year that they had a significant increase in 4Q. We also saw really strong ADR in FHN Financial that we do not expect to repeat in 4Q of this year.

[Anthony Elian, Analyst at JPMorgan]

Thank you. On expense, you saw a step up in expense ex deferred comp in 3Q, but you're still pointing to flat for the full year expense range. I think that would imply a step down in 4Q. What's driving that and the unchanged expense outlook? I ask because if I look at the past few years, 4Q expense has been up sequentially. Thank you.

[Hope Dmuchowski, CFO at First Horizon]

Yeah. A few things in that. The timing of our cash incentives that were paid out for deposits was a high point. If you look at non-interest expense in Q2, Q3, and Q4, there is absolutely seasonality in that line. The other is really as we think about completing multiple technology and AI investments, we're starting to see the expense realization come in. The third part of that is we talked about we had a restructuring of our mortgage business as well as some other smaller restructurings in the quarter that reduced our go forward run rate for personnel and associated costs with that.

[Anthony Elian, Analyst at JPMorgan]

Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of Timur Braziler with UBS. Your line is open. Please go ahead.

[Timur Braziler, Analyst at UBS]

Hi, good morning. A little more on the restructuring. Good morning. Just the near term opportunity in terms of wholesale reduction versus securities purchase. I guess what portion of the proceeds are going towards reducing wholesale?

[Hope Dmuchowski, CFO at First Horizon]

Yeah. We don't have that exact number yet. I think we're looking through all the scenarios. As we mentioned in our prepared remarks, we just closed on this transaction last week, and we expect to close this month. So we're still in the early phases of putting that all back to work. I do think it's more a mix into securities and wholesale funding. As Bryan mentioned earlier, we did end the quarter with higher wholesale funding than we needed due to the way you ladder that out. You make a 30-day, 60-day commitment. We brought in more client deposits so that wholesale funding will come down beyond just the impact of the sale.

[Timur Braziler, Analyst at UBS]

Got it. Then maybe bigger picture, I guess what does this restructuring transaction say, if anything, about First Horizon's willingness to remain independent? Does this broadly change anything from a strategic optionality standpoint going forward?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

I think in broad terms, it increases our optionality. It creates a more profitable customer-centric balance sheet. We remain as flexible in terms of our capital repatriation. While I have said many, many times over the last couple of years, we are going to continue to operate the business with a long-term vision of creating value for our customers, our communities, our shareholders, and our associates. We are not changing or reducing, in our view, any optionality we have for the future.

[Hope Dmuchowski, CFO at First Horizon]

I just need to clean up my words per my legal advisement here. We finalized last week and we settle this month. Apparently, I got my legal terms backwards on the transaction, so just got a little note from our legal team. Just want to clean up my language there.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

We signed a sale agreement. We will close it.

[Hope Dmuchowski, CFO at First Horizon]

Correct. Want to make sure it is appropriately recognized in the transcript.

[Timur Braziler, Analyst at UBS]

Yep. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of David Chiaverini with Jefferies. Your line is open. Please go ahead.

[Brooks Dutton, Analyst at Jefferies]

Hey, guys. Good morning. This is Brooks Dutton on for David Chiaverini.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Morning.

[Brooks Dutton, Analyst at Jefferies]

Good morning. You mentioned that the sale adds about 100 basis points of near-term asset sensitivity and the proceeds going into floating rate securities. You guys still have some receive fixed swaps maturing in 2027. In the hiking cycle, would you restructure or unwind any of those hedges or let them run off and keep the extra asset sensitivity? Thank you.

[Hope Dmuchowski, CFO at First Horizon]

Great question, Brooks, and I'll say we're always evaluating what our options are. Bringing down the duration of the portfolio was a positive to this transaction. As Bryan mentioned earlier, we're not in the near term looking at any other transactions at this time. We're always reevaluating our balance sheet based on changing rates environments, whether it's increasing, decreasing, flat. That is part of our regular cadence to look at our asset sensitivity and make sure that we're hedged correctly on both sides of the balance sheet.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

I know this is somewhat repetitive, but as I mentioned earlier, we do think about the counter-cyclical businesses in terms of our aggregate sensitivity business. So we're never quite as asset sensitive in a rising or a falling rate environment. So when we look at balance sheet derivatives, we look at it in total and how the balance sheet will perform, in our view, through an earnings cycle. So we'll make those decisions as we get closer.

[Brooks Dutton, Analyst at Jefferies]

Great. Thank you for the question.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of Casey Haire with Autonomous Research. Your line is open. Please go ahead.

[Casey Haire, Analyst at Autonomous Research]

Great. Thanks. Good morning, guys.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Morning.

[Casey Haire, Analyst at Autonomous Research]

Just one for me. The 60% beta, I guess my question is why is that not lower through the cycle? That very much lines up with what you guys did in the last hike cycle. It sounds like you guys are, with the stronger liquidity profile, you are more willing to let loan growth pick up and deposit growth kind of lag. That would give you the opportunity, in theory, to do better than that 60% deposit beta. Just wondering why that is still the target and if whether or not that is conservative. Thanks.

[Hope Dmuchowski, CFO at First Horizon]

I would say that target is a little bit lower than what we saw through the last rising rate cycle because we had the banking crisis in there. We actually topped out closer to 70%, so it is slightly down from that. I think it is an early guess, Casey. The question is how much liquid. As we have talked about every call, it is a competitive environment for deposits. How much loan growth is there in the environment impacts what the competitive nature of deposits is. Is the balance sheet going to shrink at any point in that cycle? I say use it as a proxy, but absolutely, we would love to beat it.

[Casey Haire, Analyst at Autonomous Research]

Great. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

Your next question comes from the line of Edward Najarian with Hovde Group. Your line is open. Please go ahead.

[Edward Najarian, Analyst at Hovde Group]

Good morning, Hope and Bryan. Most of my questions were answered. Just a quick question on capital deployment and stock buybacks. Bryan, you mentioned that you are going to resume the stock buybacks. You were buying back very rapidly, really through the first quarter, a little bit less in the second quarter, and then stopped in the third quarter. Now you are down to 10.3% on CET1. I guess two questions. First is, the moment this transaction closes, next week or whenever that is, to what extent does that enhance the 10.3% CET1? Do you step up when these things go off and then, to what extent is that? Bryan, could you give us any sense of how rapidly or what kind of focus you have on buying back stock in the near term?

[Edward Najarian, Analyst at Hovde Group]

Is there sort of a low threshold, whether it is 10.25 or whatever it is, that you do not want to drop below on CET1? Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. So it's been a long time, Edward. Good to talk to you.

[Edward Najarian, Analyst at Hovde Group]

Yeah, Bryan, it's been a long time. It's good to talk to you again. Yeah.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. Buyback is one of those things that we're opportunistic about. As we look at capital, we look at it relative to a number of risks in the balance sheet, everything from our stress testing to our bottoms-up analysis of capitalization. We think we're very comfortable in that 10.25% to 10.5% range post this transaction. We expect to continue to generate a fair amount of capital which will support growth. We expect that we have the ability to continue to repatriate capital to shareholders. So there's not a hard floor, there's not a hard ceiling. We continue to, as a board, to sit down every quarter as we go through our financial performance and the outlook on the economy to evaluate where we are.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Given this transaction, where we are post the sale of the loans and our outlook on the economy, credit, so on and so forth, we do think we have capacity to use a portion of this buyback and our capital base to repatriate some capital in the fourth quarter and going into the first. We have been opportunistic over the course of the last couple of years, and we have repurchased a significant amount of stock. Clearly when it's in our view on sale at prices like we see in the market over the last week or two as the industry has come down, we will continue to use that as an opportunity to buy.

[Edward Najarian, Analyst at Hovde Group]

Thanks. Hope, is there any kind of a projection or levels we should think about where CET1 would be the moment, the day that these loans actually leave the balance sheet?

[Hope Dmuchowski, CFO at First Horizon]

No, it's not a material impact because we've already marked them. That's how we used capital this quarter. I talked about in my opening remarks that average TCE was much higher than period-end TCE, because we marked these all at quarter-end when we entered into an agreement to sell these. That has already happened. What we did have to do is stop all share buybacks. When you're in a discussion of something like this, regardless of what your capital target is, you cannot be in share buybacks.

[Hope Dmuchowski, CFO at First Horizon]

We do not do an ASR. We stay active in the market throughout the quarter so that we have leverage to say, you mentioned the prior quarter, we had really significant loan growth in prior quarter, which we put that capital use in and then used the delta to figure out how we get within our CET1 target. We don't set a dollar amount at the beginning of each quarter or with our board for any quarter. We really look at how do we deploy capital to loans first and then shareholders second, targeting that CET1 as kind of our denominator on that calculation.

[Edward Najarian, Analyst at Hovde Group]

Okay. Okay, great. That's very helpful. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

All right. Thank you.

[Operator]

Your next question comes from the line of Christopher Marinac with Brean Capital. Your line is open. Please go ahead.

[Christopher Marinac, Analyst at Brean Capital]

Thanks. Good morning. I wanted to ask a question to Tom about C&I losses, and I know we've got the broader guide for losses for the year, but just curious at the C&I level that we've seen this quarter and last quarter, is that still a good number in the near term, or would you expect that to change either side?

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah. Good morning. C&I net charge-offs have been fairly consistent. Obviously quarter-to-quarter, there's some ups and downs, but it's remained relatively consistent. I don't have any reason to believe it would materially deviate one way or the other in the upcoming quarters. Probably not surprising where it's coming from is generally things that are more closely tied to discretionary consumer spending in the current environment. So, discretionary consumer, retail trade, some manufacturing, that's essentially kind of where we've been seeing it.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

This is Bryan. Chris, it's largely idiosyncratic. There's no huge patterns developing.

[Christopher Marinac, Analyst at Brean Capital]

Okay, great. Thank you both for that. And then just a related question, the balances we've seen on the unfunded C&I, we could still interpret that as a kind of net growth of customers, both new and existing, on the platform?

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah. In terms of putting unfunded commitments onto the balance sheet is net growth in customer broadening and deepening the customer relationships and new customers. Yeah.

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah, that's right.

[Christopher Marinac, Analyst at Brean Capital]

Very well. Thanks for taking all of our questions this morning.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

No, thank you.

[Operator]

Your next question comes from the line of Ben Gerlinger with Citi. Your line is open. Please go ahead.

[Ben Gerlinger, Analyst at Citi]

Hi. Good morning. I just actually want to follow up a little bit on Casey's question about deposit betas. The loan sale here gives you liquidity or reduces your loan to deposit ratio. Isn't that kind of the positive here is that your overall beta shouldn't be as pressured to kind of in theory, hot money-esque type clients looking for more yields? Or is it potentially like you might have continued loan or deposit balance growth? I'm just kind of curious on why the beta wouldn't be a step lower over this next hike cycle.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Well, Hope can give you a mechanical answer to that. I'll give you my 40,000 ft view, and it is we're forecasting out a cycle and the competitive landscape and what happens is a little bit unknown to us like it is to everybody else. We're placing a forecast out there that's in line with what we've seen in past cycles. We are going to optimize our deposit pricing capability as best we can. But it is important, as I've said in the past, to note we're not playing solitaire in the marketplace, and that we're going out there competing to broaden and deepen customer relationships. We're looking to acquire new customers. We think in a context ±60%, that we can operate in that area, and that is our outlook.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

I would not try to read too much into or flyspeck whether that's 58 or 62 at this point because there are too many unknowns in the operating environment. But we are at every single day looking for how we strike that balance with providing real value to customers and prospective customers and do it in a way that drives profitability.

[Hope Dmuchowski, CFO at First Horizon]

What I would add to that, Ben, is you asked the question about hot money. We don't chase hot money. We do not have a large CD portfolio. We don't have a national deposit franchise where we market higher rates across our footprint. But we do have clients that want to be treated fairly and get a fair value. If they see the rates moving up, they're going to call their banker here and say, "Hey, I've seen this," or, "I've been called from other bankers." A lot of it is protecting your back book and protecting your client relationship. We do run an asset-sensitive balance sheet, and so a lot of our clients, as was asked in a lot of credit questions, their cost of funding is going to go up with each rate hike.

[Hope Dmuchowski, CFO at First Horizon]

To the extent that they have interest-bearing deposits with us, they are going to try to offset that as an earning asset. Do not think about it as chasing hot money. We continue to put in our earnings deck that we retain 90+% of clients each quarter in the depository space. That requires us to pay them fairly once they are in, not just reward a new customer with top of market. That is how we retain those relationships.

[Ben Gerlinger, Analyst at Citi]

Got it. Thank you.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

No, thank you.

[Operator]

Your next question comes from the line of Chris McGratty with KBW. Your line is open. Please go ahead.

[Chris McGratty, Analyst at KBW]

Oh, great. Thanks for squeezing me in. Bryan or Hope, you obviously have the capital to do this trade. I am interested in the discussion about earn backs with this. Obviously, there is earnings initially and earnings over time, but relative to buying back the stock, and the answer might be you could do both. But the earn back on paper looks long, but just any color behind that decision would be great. Thanks.

[Hope Dmuchowski, CFO at First Horizon]

Yeah, I would say the earn back on paper is the minimum. That is your immediate return if we just put this all in securities and you do not see a significant rising rate environment. So when we think about the payback, we are assuming that, as Bryan said earlier, approximately half of this is redeployed into loans in the coming years, and that payback comes significantly in line. So I am not sure what assumptions you were using, Chris, in your question there. But I do want to reiterate what we put in the deck is the immediate impact in the current rate scenario.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Yeah, the earn back, if you just assume we invested in floating rates, short-term securities, that is a longer earn back. If you assume, like we believe we can, that we can invest in incremental customer relationships over the next couple of years at, call it, half of the proceeds, the earn back comes in very favorable vis-a-vis a stock buyback.

[Chris McGratty, Analyst at KBW]

Got it. Thank you.

[Hope Dmuchowski, CFO at First Horizon]

To put that in line with my earlier comments, we talked about securities being SOFR plus 50 basis points currently. We talk about our loan deployment being in the SOFR plus mid-100s to mid-200s. So for every dollar that you redeploy, you pick up much more, 100+ basis points more on average than what it will be in the securities day one. So what we try to do is tell you what the immediate impact is, and then it is upside from there as to how quickly redeploy it at 100, 150, or 200 basis points higher than what it will be in securities day one.

[Chris McGratty, Analyst at KBW]

Great. Thanks.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

The last question comes from the line of Russ Anderson with Evercore. Your line is open. Please go ahead.

[Russ Anderson, Analyst at Evercore]

Good morning. This is Russ Anderson on for John Pancari. Thanks for taking my question. Just on time, you touched on the credit performance of CRE and the multifamily supply picture. Could you just talk a little more about what you're seeing in updated property valuations and refinancing? Are borrowers having to bring more equity to the table, or are cash flows generally supporting renewals on existing terms? Thank you.

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah. We actually continue to see a very robust market for refinancing CRE development deals. Some of this is commercial banks, and some of it is private credit. There's a lot of deals on that market. That's what contributed to actually very fast refinancing. Hasn't slowed down [audio distortion]. The decrease was about 20. What I would say is we are very consistent through all cycles, are [audio distortion], and so we consistently were in the 60% cost, lower than that. We have significant yield dips. In environments years ago, the current environment going forward, a lot of confidence as to why we've been able to consistently lower.

[Tyler Craft, Head of Investor Relations at First Horizon]

Sorry, could you guys hear us on that last answer? I've got some feedback that we maybe have some audio issues in that last answer.

[Russ Anderson, Analyst at Evercore]

Yeah, it was a little choppy, but.

[Hope Dmuchowski, CFO at First Horizon]

Still live on the line? I know we've gone over.

[Tyler Craft, Head of Investor Relations at First Horizon]

Okay. All right. Tom, you want to repeat that? That'd be great.

[Thomas Hung, Chief Credit Officer at First Horizon]

Yeah. I'm happy to repeat that. What I was saying is overall, the refinance market has actually remained pretty solid. We've seen a number of our deals taken out by commercial banks, but also by private credit, and much more often than not, without any additional equity coming in.

[Thomas Hung, Chief Credit Officer at First Horizon]

That's because overall property values have held up, I think, relatively well relative to expectations, even in markets with the greatest oversupply, like the markets in Texas, where we've seen updated appraisals. Generally speaking, where we have seen decreases, even the higher cases of those, it's been about a negative 20%. Considering we've been very consistent in always underwriting to about 40% equity coming into deals, and so 60% LTV, we've been able to absorb any of those decreases and still maintain a healthy amount of equity in our deals. I was pointing to, I think that's a big contributor, this discipline we've kept, and not chasing the market.

[Thomas Hung, Chief Credit Officer at First Horizon]

That's why even in peak interest rates, we have continued to perform very well in our CRE portfolio.

[Russ Anderson, Analyst at Evercore]

Great. That's it for me. Thanks for taking my question.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you.

[Operator]

There are no further questions at this time. I will now turn the call back to Bryan Jordan, Chairman, President, and CEO, for closing remarks.

[Bryan Jordan, Chairman, President, and CEO at First Horizon]

Thank you, Erica. Thank you all for joining us this morning. I appreciate your interest and patience as we try to work through some of the complexity of this quarter. We think we are very well positioned for the fourth quarter and into 2027. Please reach out if there is anything at all we can do to give you additional information. Hope everyone has a wonderful day.

[Operator]

This concludes today's call. Thank you for attending. You may now disconnect.

Participants

Executives

• Tyler Craft, Head of Investor Relations
• Bryan Jordan, Chairman, President, and CEO
• Hope Dmuchowski, CFO
• Thomas Hung, Chief Credit Officer

Analysts

• Jon Arfstrom, Analyst at RBC Capital Markets
• Ryan Nash, Analyst at Goldman Sachs
• Ebrahim Poonawala, Analyst at Bank of America
• Michael Rose, Analyst at Raymond James
• Bernard von Gizycki, Analyst at Deutsche Bank
• Ryan Kenny, Analyst at Morgan Stanley
• Janet Lee, Analyst at TD Cowen
• Jared Shaw, Analyst at Barclays
• Anthony Elian, Analyst at JPMorgan
• Timur Braziler, Analyst at UBS
• Brooks Dutton, Analyst at Jefferies
• Casey Haire, Analyst at Autonomous Research
• Edward Najarian, Analyst at Hovde Group
• Christopher Marinac, Analyst at Brean Capital
• Ben Gerlinger, Analyst at Citi
• Chris McGratty, Analyst at KBW
• Russ Anderson, Analyst at Evercore