Detailed Narrative
Loan and Deposit Growth Dynamics
First Horizon reported strong loan growth in Q2 FY26, with period-end balances increasing by $953 million quarter-over-quarter, primarily driven by $1 billion in commercial loan growth. This included $710 million in C&I growth and $175 million in commercial real estate. Period-end deposits also increased by $1.6 billion, mainly from brokered deposits. The competitive environment led to a 5 basis point increase in the average rate paid on interest-bearing deposits to 2.33%, though client interest-bearing deposit costs remained roughly flat.
Net Interest Income and Margin Performance
Net Interest Income (NII) grew by $9 million in Q2 FY26, reflecting the strong loan growth. However, Net Interest Margin (NIM) compressed by 3 basis points, settling into the high 3.40s, as anticipated due to the evolving rate environment. Management expects NIM to normalize in the mid-to-high 3.40s for the full year, emphasizing that NII growth, driven by loan expansion, remains positive despite NIM compression.
Credit Quality and Outlook
Credit performance remained strong, with the net charge-off ratio at 20 basis points, in line with expectations. The provision for credit losses was $15 million, and the Allowance for Credit Losses (ACL) loan ratio declined to 1.24% due to portfolio mix changes and credit resolutions. Non-performing loans (NPLs) decreased by 13 basis points to 81 basis points, reflecting effective credit management. Consumer-sensitive portfolios like trucking, auto, and restaurants continue to be monitored but have shown surprising resilience.
Capital Management and Basel III Impact
The company ended the quarter with a CET1 ratio of 10.5%, aligning with near-term targets. First Horizon executed $100 million in share buybacks, repurchasing 4 million shares during the quarter. Management anticipates an approximate 10% reduction in risk-weighted assets under the currently proposed Basel III standardized approach, which could provide additional capital flexibility for loan growth, dividends, and further buybacks.
Fee Income and Wealth Management Momentum
Fee income, excluding deferred compensation, saw a slight quarter-over-quarter decrease of $1 million but was up $14 million year-over-year. Fixed income revenues declined due to macroeconomic volatility🌐, with ADRs at $594,000. This was partially offset by increased brokerage, trust, and insurance income, driven by momentum in the wealth management business and the successful integration of the LPL platform in Q3 of the prior year.
Expense Discipline and Strategic Investments
Adjusted expenses, excluding deferred compensation, increased by $6 million quarter-over-quarter, primarily due to higher marketing expenses and increased salaries and benefits from strategic hiring. However, management expects expenses to remain flat for the remainder of the year, benefiting from the non-recurrence of prior-year one-time📎 project expenses. The company continues to invest strategically in talent, technology, and tools, including AI, to enhance efficiency and support growth.
$100 Million PPNR Opportunity
First Horizon is actively pursuing a previously identified $100 million-plus PPNR opportunity, which is a 2-3 year exercise. This initiative focuses on deepening client relationships, improving profitability across the balance sheet, and enhancing cross-selling of services like treasury management and wealth management. The company is seeing positive traction and is confident in achieving this goal, with progress already embedded in its 2026 expectations.