First Horizon Corporation (FHN) Earnings Call Transcript & Summary

Welcome to the First Horizon Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Tyler Craft, Head of Investor Relations.

Thank you, Rebecca. Good morning. Welcome to our second 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'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 on Page 2 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 3 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.

Thanks, Tyler. Good morning, everyone. Thank you for joining us this morning. I'm proud of the results we achieved in the second quarter. Comparing our year-over-year performance, adjusted earnings per share for the quarter are up $0.09 or 20%. We saw an 8% increase in adjusted PPNR and period-end loan balances grew by approximately $2 billion compared to the second quarter of 2025. These outcomes are the direct results of our clear objectives, disciplined execution and the value we demonstrate to clients day in and day out. We see continued growth momentum going into the second half of the year. Our entire organization is focused on delivering strong performance through the cycle through our core regional and specialty businesses and our countercyclical business model. Building long-term relationships with clients who benefit most from the value we provide remains at the center of our strategy. We continue to grow and invest in the people, products and services that meet client needs and drive continued performance. Hope will provide some additional comments on the second quarter and I'll return at the end of the call for some closing comments. Hope?

Thank you, Bryan. Good morning, everyone, and thank you for joining us today. Starting on Slide 6. We highlight our strong earnings momentum shown by our results for both the second quarter and the first half of 2026. In the quarter, we grew adjusted EPS by $0.01 to $0.64, adjusted PPNR by 1% to $364 million and average loan balances by $1.5 billion. Compared to the first half of 2025, our adjusted ROTCE increased by over 180 basis points. Adjusted PPNR increased 8% and adjusted earnings per share was up $0.21. As we move through the detailed slides, we will walk through the drivers of this performance in more detail. On Slide 8, we walk through our net interest income and margin performance in the second quarter. Our margin compressed by 3 basis points, which saw NIM settle into the high 3.40s as we expected, reflecting the rate environment evolution into a flat to up expectation. We grew NII by $9 million this quarter, reflecting our strong loan growth. On Slide 9, we cover details around our deposit performance in the quarter. Period-end balances increased by $1.6 billion compared to prior quarter, driven primarily by growth in brokered deposits. The average rate paid on interest-bearing deposits increased to 2.33%, which is a 5 basis point increase from the prior quarter. While deposit costs came up due to the competitive environment and portfolio, lend. Our cumulative deposit beta remains strong at 66% since rates started to fall in September 2024. The rate paid increase in the quarter are in line with the patterns we saw in 2025. While the environment remains competitive, we saw average cost of client interest-bearing deposits remain roughly flat in the quarter. As always, we remain focused on growing our core deposit base and prioritizing relationship growth to sustainably and profitably grow our balance sheet. On Slide 10, we cover our quarterly loan growth. Period-end loans increased by $953 million from the prior quarter, driven by $1 billion in commercial loan growth. This growth includes $710 million in C&I growth, excluding loans to mortgage companies and $175 million in commercial real estate growth which reflects the momentum we have seen in that portfolio over the last few quarters. Loans to mortgage companies grew $118 million in the quarter, which reflects normal home buying seasonality with some headwinds from the rate environment. We saw strong production in the quarter with new commitments up more than 50% year-over-year, driven by commercial real estate activity. This creates an opportunity for flat to slightly up [ rebalance ] this year as construction projects fund up over time. Additionally, our pipelines remain strong across our business lines and throughout our footprint. Our commercial loan spreads remain generally consistent with prior quarters amidst the competitive environment for loan growth. Turning to Slide 11. We detail our fee income performance for the quarter, which decreased $1 million from the prior quarter, excluding deferred compensation and is up $14 million year-over-year. We saw a quarter-over-quarter decline in fixed income revenues due to a decrease in ADRs to $594,000, though this is still an 8% increase year-over-year. Lower ADRs were driven by macroeconomic volatility amidst a changing geopolitical environment and uncertain rate environment. The decline in fixed income is partially offset by increased brokerage, trust and insurance income from continued momentum in our wealth management business and increased client activity. This is one of the revenue-driven profitability lines that we see driving $100 million plus PPNR opportunity. On Slide 12, we cover adjusted expenses that excluding deferred compensation, increased $6 million from prior quarter. Personnel expenses, excluding deferred comp, increased by $1 million from last quarter driven by a $4 million increase in salaries and benefits. This reflects hiring as well as higher day count. Outside services increased by $10 million which primarily reflects typical seasonality with higher marketing expenses that are partially offset in other noninterest expenses by reduced client cash incentive payouts from prior quarter's marketing programs. Turning to credit on Slide 13. Net charge-offs increased by $4 million to $33 million. Our net charge-off ratio of 20 basis points remains in line with our expectations for the year. Our provision for credit losses was $15 million in the quarter, and our ACL loan ratio declined to 1.24% driven by mix change in the portfolio and continued credit resolutions as NPLs declined 13 basis points to 81. Our teams continue to do an excellent job of working with our clients to resolve credit issues. As rates decreased over the last several quarters, we have been able to consistently find ways to resolve credit and maintain our strong credit performance. On Slide 14, we ended the quarter with CET1 of 10.5%, which is in line with our near-term targets. We had strong loan growth as well as buybacks of 4 million shares totaling $100 million this quarter. Our tangible book value per share ended the quarter at $14.53 and is up 7% year-over-year, which includes buybacks of $857 million and an increase to our dividend. We continue analyzing the potential impact of Basel III and currently expect an approximate 10% reduction in risk-weighted assets in the standardized approach as it is currently proposed. I'll wrap up on Slide 15 and 16. We continue to reiterate our full year expectations as outlined on Slide 15. While the macroeconomic environment and competition may change, our business model creates resilient earnings and our associates consistently deliver on expectations, including our $100 million PPNR opportunity. Now I will give it back to Bryan.

Thank you, Hope. The second quarter of 2026 was very similar to what we saw in the second quarter of 2025 regarding deposit competition and increases in deposit costs, macro volatility impacting fixed income revenue and various other seasonal patterns like home buying and marketing campaigns. Ultimately, we create value for our shareholders by prioritizing full relationships with clients who value the services we provide. The work we've done over the last 18 months to create a clear common understanding of the ways we win in the market and how we prioritize profitability and our objectives strengthens our ability to deliver results to our investors. On the whole, we feel very good about where we are and how we're executing. Our job is to stack 1 good quarter on top of the next by serving clients well and staying disciplined rather than reacting to economic volatility and market changes. Expense discipline remains a priority as we continue to strategically invest in talent, technologies and tools that make our associates more effective for clients. Capital is a strength for us. Near term, we are managing CET1 ratio around 10.5% while we continue to support organic growth. We'll stay thoughtful on capital deployment and be opportunistic with share repurchases. We believe we can operate a lower CET1 ratio over time as conditions allow. Our footprint and operating model continue to serve as competitive advantages. By pairing big bank capabilities with a community bank touch, we are well positioned to attract full client relationships and grow with the markets and lines of business we serve. Thank you to our associates for their hard work and to our clients and shareholders for their continued confidence in First Horizon. Rebecca, with that, we will open it up for questions.

[Operator Instructions] Your first question comes from Jon Arfstrom with RBC Markets.

Just wanted to ask a couple of questions about the revenue environment. Hope, can you touch a little bit on the deposit cost outlook and Help us understand what you're seeing. I know you said the average client interest-bearing deposits were roughly flat sequentially, but what can we expect from here on deposit costs and funding costs in general?

Jon, thanks for the question. As we look out as to where deposit costs will go in Q3 and the rest of the year, I expect it to look very similar to last year. As you looked at what happened in 2025, following the successive rate cuts at the end of the year, rates came back up, the competition increased. And if we continue to see this trajectory. I do think that our beta will continue to shrink slightly. But I want to make the point in that we said at the end of last year, both Q3 and Q4, we were maximizing the decrease in our deposit cost, knowing that we give some back once rates stop cutting. So this is as expected, Jon. Also, Q2 and Q3 is the most competitive time for offers. You see in our expenses every year in Q2, we talked about the increased marketing cost that goes with those acquisition offers. I think really, the trajectory for the back half of the year, we start looking at Q3 and Q4, it does depend on which way rates go. I mentioned in my prepared remarks, as did Bryan, the uncertain outlook is the next rate move this year and is an increase or decrease will drive that. But I do expect it to continue to increase, consistent with what we saw last year asset of rate cuts.

Okay. And then I guess loan competition and yields, you see a little bit of compression this quarter. But do you feel like it's still rational, Bryan, anything you'd like to flag in terms of yields and anything that's more competitive than other areas?

Yes. I would describe the loan mark is, Jon, is maybe a little surprisingly optimistic. Pipelines have continued to be very strong, whether it's in customer requests for lending or just an anecdotal conversations with customers. People are still very optimistic about the economy and very forward leaning. So I'm surprised at how optimistic things feel, given some of the uncertainty around oil, in particular, and the conflict in the Middle East. London pricing and structure, I can always give you anecdotes where it seems irrational. It is very competitive, and it's very competitive for larger transactions in particular. But at the end of the day, I think you will see over the course of this year, the demand for deposits and lending continue to probably put a little bit of pressure on relative spreads on both sides of the balance sheet as this economy continues to churn forward in a very positive fashion.

Yes. Okay. So a little pressure on spreads, but feeling good about volumes is the summary?

Yes. Yes. Yes. Very accurate.

Your next question comes from Michael Rose with Raymond James.

Maybe we can just start on the ADR side. I mean, obviously, you guys kind of gave the update intra-quarter just based on where the curve is now, what the expectations for rates are? I know it's hard to forecast, but can you just talk about the puts and takes in that business, just given where we are.

Yes. Well, I'll start. It's hard to put a beat on it. ADRs last week were very strong. So rates are moving. They're very volatile with what's going on in the marketplace. Given the [ VPI ] today, the market is taking some of the certainty for the expected certainty around increases in rates over the back half of this year out is diminishing some. I think we're in a channel where the volatility is going to have a real -- repeat real. It's a real-time effect on what's happening in the fixed income business as rates move higher and investors see it as opportunistic. We'll see ADRs pick up and as rates are trending down, I think you'll see less volume. On the whole, it feels like the back half of this year is not going to be as strong as the back half of last year. But I just don't know how rates are going to move given the uncertainty around what's happening in the Middle East in oil and what's happening with the Fed and rate cuts and inflation, we'll know more 30, 60, 90 days from today. But there is very positive signs like a week last week that was very strong.

Perfect. And maybe just a follow-up there. When we do get capital reform, that's obviously going to benefit the system as a whole, would you expect to see more volume from that because not all of it can be returned through buybacks and dividends. I would assume that some of it will be putting in securities and that could benefit the business. Just wanted to see if you guys have thought about the potential uptick from higher capital levels and reg reform.

I think it's possible. I agree. I don't think that buyback will return at all. I do think that the relative effect on risk weightings will impact where people feel like they can lend. And I think you might see some lending activity also come back from the secondary markets. But on the whole, I think it's generally a positive thing for the fixed income business. But I wouldn't today speculate on how great that's going to be.

All right. Great. Maybe just one follow-up just as it relates to credit. Last quarter, we spent a lot of time talking about NDFI and things like that. doesn't seem to be a real topic this quarter. Obviously, the improvement was good. But I guess, how much better can it really get in your eyes? And if volatility does persist, could we start to see things maybe trend the other way?

Michael, I think the short answer on NDFIs there's been no real change since the last quarter. It continues to be a relatively steady performing portfolio for us with no major concerns. And so no part isn't necessarily looking for it to get better. I think just a consistent steady performance that we've already had it would be -- that's what I'm expecting and that's what we're managing towards.

Your next question comes from Jared Shaw with Barclays.

Maybe going back to the deposit discussion. Were there any unique drivers of some of the non-time interest-bearing runoff? And how should we look at sort of the outlook for broker deposits from here?

Yes. There, there was no main themes. I will say, it was pretty broad-based when we started looking at where we saw changes in balances. It's not loss of clients quarter-over-quarter. It's the average balance in their accounts. The one trend we did see is money moving from traditional money markets or CDs back into the equities market in our wealth business. We've seen a little bit of a churn there. But no real main theme. I think just -- as we know, the consumer has less cash flowing through their checking accounts and their spending down their savings and our commercial clients are funding up project and putting that cash to work.

Okay. All right. And then looking at the securities side, you continue to run that down and use that to fund other growth how low should we expect the securities as a percentage of assets to go? And are you doing anything differently in that right now in terms of purchases compared to what we see for average yields in the second quarter?

Yes. We have not been running that off. It varies a percentage or 2 quarter-over-quarter just as you look how the total balance sheet is compromised. But we continue to reinvest. We have $1.2 billion rolling off at approximately 2.8%, and we're replacing that at 4-plus percent right now. I'd say now because as we just talked about earlier, the rate outlook continues to change. But yes, there's positive momentum for earnings there, but we do not expect a shift in mix on to our balance sheet.

In the securities portfolio today, Jared is about 11% of total assets or thereabouts we try to run that portfolio as small as we can because we don't believe that we create any economic value for our shareholders or for our customers for that matter there. There is a floor to it. we maintain the securities portfolio for liquidity, balancing on our asset liability situation or sensitivity and at the same time, providing collateral for public funds and things of that nature. So there is a floor to it. But if given the opportunity, we allow that to migrate down.

Your next question comes from Bernard Von Gizycki with Deutsche Bank.

Just the first question on the brokerage, trust and insurance fees. They've been growing nicely versus the year ago period as well as versus the first quarter. Could you just provide some color on what's driving results? Is it a combination of the macro micro factors? Just talk on how you expect revenues to trend in the second half of the year? I believe you mentioned increased wealth management penetration across the footprint with $5 million recognized in 1 half '26 as part of the growth.

Yes. Thank you for the question. In Q3 of last year, we completed our conversion onto the LPL platform. And so it's allowed us to deepen our product penetration with our existing clients as well as bring new clients onto the platform. We have been hiring wealth advisers. We've been building out the deepening initiative that you spoke about, which is where do we have commercial clients that we can also cross-sell well to. And I think that momentum or expect that momentum to continue as we continue to get the benefit of growing our franchise through the LPL partnership and new wealth advisers.

Great. And just maybe a follow-up on the hirings like you mentioned in wealth. I know you added a head count of 53 during the quarter. Just any color on the mix of front versus like, say, mid-back office during the quarter or year-to-date? And just any expectations on hiring in the second half of the year?

Yes. We are continuing to hire bankers across our footprint as we did last year is pretty broad-based in some key growth areas as well as some key businesses. We just talked about wealth. We're not investing back into support areas right now. One of the things that AI we talk about a lot is it can create efficiency, so you can scale your front office without having to add to support partners. The one exception to that in head count growth is fraud. We're continuing to invest people into our fraud business as it gets more and more difficult to fraud for our consumer and our commercial clients.

Ben, I'm really proud of the hiring that we have done in the organization over the last 12 to 18 months. we have attracted very strong talent, and we're seeing positive results from that. And I'm optimistic that over the next 2 to 3 years, you will continue to see that momentum build. So we feel very good about are hiring in the marketplace.

Your next question comes from Janet Lee with TD Cowen.

Just following up on deposits. Is there room for a broker deposit balance to unwind versus the $2 billion increase in the quarter and interest-bearing deposit costs in the third quarter could potentially come in below the [ 243 ] spot rate given the CECL strength in core deposits?

Janet, absolutely, that is a possibility, and we do not -- we have not tried to fund loan growth as a priority with deposits. We have seen 2 successive quarters of strong loan growth and the seasonality of deposit campaigns when clients move deposits as well as the balances that there are to go after. It does tend to tick up in Q2 and Q3, and we would trade that and paying down brokerage. However, is it going to come in lower than where we ended the quarter, it's really hard to know this early in the quarter. It's really hard to know with the changing macroeconomic outlook and the rate outlook, what we will see. But it is our goal to continue to grow customer deposits to fund loans.

Got it. And on 2026 revenue growth guide, if we as to current mid-single-digit loan growth, perhaps relatively stable cyclical or countercyclical fee businesses and NIM likely coming down if deposit costs are rising, that implies revenue growth coming in at the low end of the 3% to 7%. Is that a fair baseline expectation or assumption that we could assume? Or if not, what are the levers to do better than the low end?

Yes. I think that is one assumption that you can run. We run a series of different scenarios and a changing rate environment and economic outlook One of the comments you meant is you said is compressing NIM. If NII is growing and NIM is compressing, that's still positive to revenue growth over the year. We are for the first half of the year at the average for revenue growth. When I look at the back half of the year, it really depends on what happens with the rate outlook and how our countercyclical perform. Our FHN Financial, as Bryan mentioned earlier, had a great second half of last year. So to get to the higher end of that range, you would have to be equal or outperforming that. But a rate increase, we have an asset-sensitive balance sheet. So early rate increases and other scenarios can run, and we would pick up more NII than that on the exact same balance sheet without growth. And so I think you've got to play all those factors out, not knowing if we'll have a great decrease or increase this year. And we brought all of those scenarios for the back half of this year, and we feel confident that we will be well within that range.

The other lever that Hope mentioned earlier in our prepared comments was we're really focused on how we improve the profitability of the balance sheet. And if you look at loan growth over the last year an improvement in PPNR, we're outpacing the growth in the balance sheet with improvement in profitability. And there is a real positive effort, and we're getting very good traction to really improve every dollar of capital we have allocated in the business. And I think the combination of all of those gives us confidence in what essentially is the framework for 2026 that we laid out in the early part of this year, even in the context of all the uncertainty that has occurred in the last 90 days, 180 days around interest rates and oil in the Middle East. We still feel very good about our outlook for this year.

Your next question comes from Casey Haire with Autonomous Research.

I wanted to touch on expenses. So the expense cap which you reiterated it assumes that expenses kind of hold flat with this second quarter run rate. The outside services was up quarter-to-quarter, and it kind of ramps last year. So just wondering what -- do I have that right, that expenses kind of hold flat with the second quarter run rate? And what's the outlook on the outside services?

Casey, you said it perfectly. You answered the question for me. We are expecting expenses to be flat from here on out, and we did have in the back half of last year, onetime expenses related to finishing up some projects and some initiatives and will not repeat in the back half of this year. So we do expect it to be flattish year. We will see some moving -- movement between outside services and other, and that's really related to the marketing campaigns. Right now, we're in the acquisition phase, so it hits above. And then we pay the cash incentives, you'll see our DDAs are up this quarter. We're seeing positive momentum with our DDA cash offer, and those will pay out in future quarters. You'll see it switch a little bit in the P&L but we do expect flat expenses in the next 2 quarters from here.

Great. And then, Tom, question for you, 2 parter on credit. So the ACL down 18 bps over the last year, you did have a very nice NPL reduct this quarter. I guess first question is how low can that ACL ratio go? And then separately, that the NPL ratio can this momentum continue? Is there an outlook that you can drive that lower from 81 basis points.

Yes. Sure. Casey, I'll answer that in a few different parts. I'll start with the 18 basis point reduction that you mentioned. That is [indiscernible] factors. We have been very diligent in how we manage our portfolio. So what you've seen is a continual decrease in our special mention and substandard assets, we've been very diligent on underwriting and how we resolve those credits. And so it's that 18 basis points is a combination of improving portfolio credit quality. It's also got all the positive resolutions you've mentioned, especially in NPLs in the last quarter. It also reflects just economic outlook as well. There are internal factors we control. There are also external factors around economic factors, but you add all that together and actually, I missed a major one, which is obviously a very consistent and low net charge-off performance. All of that put together is why we've had the decrease in ACL. I would point to the [ 124 ] that we ended this quarter at is still over 6x our average net charge-offs over the last year and more than 7x over the last 2 years. So I would characterize that as well reserved relative to our performance. As I look out ahead, where does they see a go, I think that's something that I would not speculate on because as I mentioned, there are internal things that we absolutely can control, and I continue our whole team, our whole bank continues to prioritize minimizing losses and maximizing recoveries as opposed to say, timely resolutions and -- but I think we control the things we can control, but there are external factors such as unemployment, interest rates, economic outlook, consumer spending by our inflation geopolitical risk. There's so many things that can influence ACL going forward that I wouldn't speculate on kind of where that can go. The last piece you mentioned, NPLs, I think that's a real highlight for credit this quarter, down 13 basis points. Once again, that's a combination of a lot of different things. We've been working on very diligently on focusing on our NPLs. And we had a number of positive resolutions this quarter. What you're seeing there is a combination of upgrades, payoffs restructurings. And as I mentioned, our focus continues to be on minimizing losses and maximizing recoveries as opposed to timeliness. So we will absolutely focus on continuing to reduce that number. That -- but like I said, I take a long-term view on all of this rather than trying to get quick resolutions.

Your next question comes from Ebrahim Poonawala with Bank of America.