First Horizon Sees 4% Earnings Boost From $4.5 Billion Mortgage Sale

Key Points

• First Horizon’s $4.5 billion mortgage sale is expected to lift 2027 earnings per share by about 4% ($45 million) and return on tangible common equity by 150 basis points. The bank expects to use proceeds to reduce wholesale funding, invest in securities and gradually expand client lending.
• The sale is part of a strategy to focus on broader customer relationships and higher-yielding lending; the mortgages were largely held by borrowers with few other bank relationships. CFO Hope Dmuchowski described the transaction as a one-time restructuring, with no further mortgage sales planned.
• After the transaction, the bank’s loan-to-deposit ratio was 88% and its CET1 capital ratio was 10.3%, within its target range. First Horizon had repurchased about $100 million of shares so far in the quarter and plans to prioritize loan growth before further buybacks.

First Horizon NYSE: FHN expects its $4.5 billion mortgage portfolio sale to boost earnings and profitability in 2027, while giving the regional bank more flexibility to fund commercial and specialty lending, Chief Financial Officer Hope Dmuchowski said at an investor event.

The transaction, which closed at the end of October, is expected to increase earnings per share by 4%, or about $45 million, and add 150 basis points to return on tangible common equity next year under the bank’s base case, Dmuchowski said. That assumption largely reflects paying down some wholesale funding and reinvesting proceeds in securities, along with some cost savings.

Dmuchowski said the bank expects to redeploy about half of the proceeds into client lending relationships over time, creating the potential for additional returns. The sold mortgages carried a 3.85% coupon, while the bank could deploy funds into loans priced at approximately the secured overnight financing rate, or SOFR, plus 150 to 250 basis points, she said.

Mortgage Sale Supports Relationship Strategy

The mortgages sold were largely tied to customers with few other relationships with the bank, Dmuchowski said. Those borrowers had about $200 million in deposits at First Horizon, which the bank retained.

First Horizon has been seeking to deepen existing customer relationships by offering products such as wealth advice and treasury management alongside loans. It has also exited some loan-only relationships and lower-yielding assets, she said.

The bank has reduced mortgage offices and staffing and shifted its mortgage model toward existing customers and broader private-client relationships. Dmuchowski said First Horizon still holds some mortgages with rates in the 2% to 3% range where borrowers have other relationships with the bank.

“We do not have any intent to do any more,” she said when asked about additional mortgage sales, describing the transaction as a one-time restructuring.

Margin and Deposit Outlook

Dmuchowski said the mortgage sale, lower wholesale funding and the bank’s asset-sensitive balance sheet support its net interest margin. First Horizon had guided for a fourth-quarter margin in the 3.50% range, according to the event moderator.

About 56% to 57% of the balance sheet is asset sensitive, Dmuchowski said, meaning higher rates can lift asset yields. The bank also expects to reduce wholesale funding as mortgage warehouse balances decline seasonally and sale proceeds are redeployed.

First Horizon’s post-transaction loan-to-deposit ratio was 88%, giving it capacity to add loans without funding the next dollar of growth through wholesale deposits, she said. The sale does not materially change the bank’s deposit-pricing approach, however. Dmuchowski said First Horizon expects a deposit beta of about 60% through the rate cycle, meaning it would pass through roughly that share of rate increases to deposit customers.

She attributed recent deposit-cost increases partly to greater use of brokered funding for the mortgage warehouse business and seasonal consumer promotions, rather than solely to competition for deposits.

Growth, Expenses and Capital

Dmuchowski said commercial borrowers generally have been comfortable with a 25-basis-point rate increase, but some construction clients are contending with fuel surcharges and difficulty finding skilled workers. She said the bank aims for loan growth around the peer average, or roughly economic growth to somewhat above it, while maintaining credit discipline. First Horizon plans to provide its 2027 loan-growth guidance in January.

After holding expenses flat as a one-year adjustment following technology investments, the bank expects costs to grow in line with inflation, she said. Savings from the smaller mortgage operation are being redirected toward bankers and new branches.

First Horizon’s common equity Tier 1 capital ratio stood at 10.3% after the mortgage-related actions, within its current target range of 10.25% to 10.5%. Dmuchowski said the bank allocates capital first to loan growth and uses the remainder for share repurchases. It had bought back approximately $100 million of shares so far in the current quarter, she said.

About First Horizon (NYSE:FHN)

First Horizon Corporation is a financial services company headquartered in Memphis, Tennessee, and the parent company of First Horizon Bank. The company provides banking and financial services to individuals, businesses, institutions and government entities through a network serving communities primarily across the southeastern United States.

Its offerings include consumer and commercial deposit accounts, residential and commercial lending, treasury management, payment services, personal and business banking, and wealth management.

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