FHN-PFFHN-PFNYSE
Loading
Lucy: Hello, everyone, and thank you for joining the First Horizon Fourth Quarter 2025 Earnings Conference Call. My name is Lucy, and I will be coordinating your call today. It is now my pleasure to hand over to your host, Tyler Craft, Head of Investor Relations, to begin. Please go ahead.
Tyler Craft: Thank you, Lucy. Good morning. Welcome to our fourth quarter 2025 results conference call. Thank you for joining us. Today, our Chairman, President, and CEO, D. 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 us 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 two of our presentation and in our SEC filings. Additionally, be aware that our comments will refer to adjusted results, which exclude the impact of notable items and other non-GAAP measures. Therefore, it is important for you to review the GAAP information in our earnings release, page three 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 will hand it over to Bryan.
D. Bryan Jordan: Thank you, Tyler. Good morning, everyone. Thank you for joining us. In 2025, we showed significant progress in delivering value for our clients, associates, and shareholders. We delivered increased pre-provision net revenue and return on tangible common equity, hitting 15% in 2025. Loan and deposit trends were solid, and we improved balance sheet profitability through a better loan mix, price-disciplined control of deposit costs, and tighter integration of deposits within our client relationships. One example driving improved profitability is the year-over-year improvement of yields on market-based commercial real estate lending for new 2025 originations, 534 basis points. In 2025, we also returned just under $900 million of capital in stock repurchases and just over $300 million in dividends. With more clarity around economic conditions and regulatory trends, we believe we can continue to return additional capital to our shareholders while continuing to invest in growth opportunities. As you will see in our slide presentation, we are optimistic about our ability to improve profitability and continue to grow earnings in 2026. I will now hand the call over to Hope to walk through the results of the fourth quarter in more detail and provide some closing comments at the end of the call.
Hope Dmuchowski: Thank you, Bryan. Good morning, everyone, and thank you for joining us today. We ended the year with a strong fourth quarter that includes earnings per share of $0.52, net interest margin of 3.512%, and loan growth. Starting on slide eight, we walk through some of the drivers of our approximately $2 million of net interest income growth as well as our net interest margin performance. Our margin compressed by four basis points, but excluding the impact of the Main Street Lending Program accretion discussed last quarter, NIM expanded by two basis points. Even with our slightly asset-sensitive balance sheet, the largest benefit to both NII and margin was deposit pricing, as our average interest-bearing cost declined by 25 basis points. Additionally, strong growth in loans to mortgage companies added to NII. On slide nine, we cover details around our deposit performance in the quarter. Period-end balances increased by $2 billion compared to the prior quarter. The average rate paid on interest-bearing deposits decreased to 2.53%, coming down from the third quarter average of 2.78%. We have maintained a cumulative deposit beta of 64% since rates started to fall in September 2024. Our interest-bearing spot rate ended the quarter at 2.34%. On slide 10, we cover our quarterly loan growth. Period-end loans increased $1.1 billion or 2% from the prior quarter. Our largest increase came from our loans to mortgage companies, which increased $767 million quarter over quarter. While the fourth quarter is not traditionally a high watermark for this business, we saw a pickup in the refinance market, which resulted in approximately one-third of activity from refinances, up from approximately 25% in recent quarters. We also saw excellent growth across our footprint in the rest of our C&I portfolio, with period-end balances increasing by $727 million from the prior quarter as origination volume increased quarter over quarter. Within the CRE portfolio, the pace of paydown slowed as the decline of period-end balances improved versus the prior quarters, with a $111 million reduction. Additionally, we saw a slight increase in commitments in our CRE portfolio during the quarter, providing momentum entering 2026. Commercial loan spreads remain consistent, generally mid-100s to upper 200 basis points. Turning to slide 11, we detail our fee income performance for the quarter, which increased $3 million from the prior quarter, excluding deferred compensation. The largest increase for fee income comes from our service charges and fee lines, which is largely driven by $4.4 million in income related to elevated activity in our equipment finance lease businesses. On slide 12, we cover adjusted expenses, which, excluding deferred compensation, increased $4 million from the prior quarter. Personnel expenses, excluding deferred compensation, increased by $12 million from last quarter, driven by $8 million in incentives and commissions, which primarily consisted of annual adjustments to bonuses impacted by hitting the high end of our revenue targets for the year. Outside services increased by $16 million, which includes project costs for some technology and product initiatives and increased advertising expenses in the quarter. Our non-interest expense declined primarily related to the foundation contribution discussed last quarter, as well as normal fluctuations in customer promotion costs and marketing campaigns earlier in the year. Turning to credit on slide 13, net charge-offs increased by $4 million to $30 million. Our net charge-off ratio of 19 basis points is in line with our expectation and recent performance. We recorded no provision for credit losses in the fourth quarter, and our ACL to loan ratio declined to 1.31% on broad improvement across our commercial portfolio and payoffs of non-pass credits. On slide 14, we ended the quarter with CET1 of 10.64% as buyback activity and strong loan growth, which included high loan to mortgage company growth, lowered our period-end CET1 levels. During the quarter, we bought back just under $335 million of common shares, bringing our full-year total to $894 million. We also announced a new repurchase program of $1.2 billion in October, and we currently have just under $1 billion of authorization remaining. On slide 15, we walk through the objectives and metrics within our current 2026 outlook. We once again expect year-over-year PPNR growth with mid-single-digit balance sheet growth and positive operating leverage. Our total revenue expectations range from 3% to 7% growth year over year, which accounts for a variety of interest rate and business mix scenarios. As we have mentioned previously, our expense outlook remains flattish, with the exception of incremental incentive expenses associated with higher countercyclical revenue. Continued improvements to market conditions for our fixed income, consumer mortgage, and loans to mortgage company lines of businesses could drive higher revenues and associated personnel expenses. We expect to achieve this while still making key investments in our businesses, including technology, personnel additions, and new branches. Our net charge-off expectation of 15 to 25 basis points reflects our continued confidence in our underwriting standards and credit processes. We expect taxes to be between 21% to 23%, similar to 2025. Lastly, our near-term CET1 target remains at 10.75%, with the level fluctuating approximately between 10.5% and 10.75% with loan growth throughout the year. We will continue to have conversations with our board about potential timing for lowering that target further in line with our intermediate-term expectations of 10% to 10.5%. I'll wrap up as we turn to slide 16. I am extremely pleased with the execution of our teams in the fourth quarter and throughout all of 2025. We once again operate at 15% adjusted ROSD this quarter, and our goal continues to be sustaining and exceeding this level. We are continually managing capital and credit to assure that we maximize returns for shareholders, as displayed this quarter with capital deployed into both loan growth and share buybacks. Our teams are focused on execution and delivering on our profitability objectives, including the more than $100 million revenue-driven incremental PPNR that we have discussed in the past. We made early progress on this in 2025 and expect the impact to continue to grow in 2026 and 2027. With that, I will give it back to Bryan.
D. Bryan Jordan: Thank you, Hope. I'm proud of the progress we made in 2025 across many fronts. During the year, we distilled our strategic plan into a five-page framework to provide clarity for all of our associates about how we differentiate in the marketplace and create broad, deep, long-lasting client relationships. I believe this alignment will continue to help drive consistent execution across our organization, resulting in exceptional experiences and outcomes for our clients and our shareholders. As we look into 2026, our priorities are clear: serve our clients well, grow profitable relationships, and deliver on our financial objectives. We will capitalize on growing client confidence about the economy with continued loan growth. We see positive signs for growth in our current pipelines, especially in our commercial lending areas. I'm confident that our diverse business model and robust footprint position us to meet our revenue growth targets through a variety of economic scenarios. As we stated in our 2026 outlook, we also remain focused on expense discipline and efficiency while continuing to invest in technology and tools that make our associates more effective and deliver greater value for our customers. We talked in 2025 about our $100 million-plus PPNR improvement opportunity. We made initial progress in 2025 by improving the profitability of the balance sheet. We still see $100 million in additional opportunity and expect to make significant progress on that in 2026 and 2027. This profitability will be driven by deepening client relationships and products like treasury management and wealth management, leveraging our banker expertise to ensure clients have the right products for their needs, ensuring our pricing reflects the value we could deliver to clients, and ensuring we maximize the value of our footprint with our talent and distribution models. First Horizon has a lot of momentum going into 2026, and I'm excited to see our associates capitalize on those opportunities ahead. Our team put forth a great deal of effort in 2025. Thank you to our associates for their work this past year and to our clients and our shareholders for their continued confidence in our company. Lucy, with that, we can now open it up for questions.
Lucy: Thank you. The first question comes from Casey Haire of Autonomous. Your line is now open. Please go ahead.
Casey Haire: Great. Thanks. Good morning, everyone. I wanted to start on the revenue outlook, the 3% to 7%. That's about $135 million of revenues. I know it's tricky, but if you could just take us through your base case and what are some of the big wildcards to think about so we can, you know, make our own assumptions on that revenue outlook.
Hope Dmuchowski: Happy New Year, Casey. Thank you for that question. You know, our base case, kind of middle of the range, is the current forward curve. So as you think about looking, you know, at the low and high end range, you know, we've got to think about where rates go, how quickly we might see rate drops versus the current forward curve, and then also loan growth. And so as we said, we have mid-single-digit loan growth in here. And so if we were able to exceed that, you'd be at the higher range. And of course, countercyclical. The Wall Street Journal reported this morning that December home buying was strong. I made a comment in my prepared remarks that we saw refinance pick up for the first time in multiple quarters. So as we start to see some of those countercyclical pick up and we hit our loan growth targets or higher, we end up on the higher end of that range.
Casey Haire: Very good. And then on the expense front, I know you guys are, you know, kind of reiterating your flat outlook for this year. But I guess trying to understand what the obviously, I don't think that would be sustainable going forward. I guess what would the expense growth be had you not had these past years of heavy, you know, tech investment and digital infrastructure investment? Like, I'm just trying to get a sense of what would be, you know, where does the expense growth normalize to going forward after this flat year in '26?
Hope Dmuchowski: When Bryan and I sit down and talk with our board about where we want to go in coming years, we always start with we want positive PPNR. And we really start with a base case of expenses being in line with inflation. You know, you have wage inflation, you have contract inflation. So we start with that, and then to your point, we did have some things that were kind of multiyear investments that are running down. But think about our normal growth in that inflationary area, which would be, you know, 2.5% to 3% currently.
Casey Haire: Great. Thank you.
Lucy: Thank you. The next question comes from Ryan Nash of Goldman Sachs. Your line is now open. Please go ahead.
Ryan Nash: Good morning, everyone.
Hope Dmuchowski: Morning.
Ryan Nash: So, you know, Hope, you mentioned embedded in your revenue growth expectations is mid-single-digit loan growth. Maybe just unpack that and talk about some of the key drivers across the products. How are you thinking about the inflection of commercial real estate? What's baked in for a loan to mortgage companies, and, obviously, any other areas of growth in the broader C&I area. Thank you.
Hope Dmuchowski: I'll take those one at a time, Ryan, and happy New Year. First, if we look to mortgage warehouse, we are expecting it to pick up. We had, you know, if you look at our trend page, you see it's the highest quarter we've had in five quarters. Seasonally, Q4 pays down, and we didn't see that. And with the pickup in refi, we think that we will, you know, our base case assumes that picks up in similar consecutive fashion. When we get to the higher side of our guidance, obviously, you know, looking at a double-digit mortgage warehouse growth in the lower end of our guidance would be, you know, flat or lower than this year. C&I, we have great momentum coming into the year. We talked on our last earnings call about being one of our highest quarters for new originations. Q4 had additional strong originations. So we think C&I has hit that inflection point. We're going to continue to see growth in 2026. CRE started to stabilize this quarter. We've seen good new production, but we do a lot of large construction increase. So it takes time for that to fund up. We've always had that spring-loaded balance sheet, Ryan. So I do think it'll, you know, stay stabilized with how quickly we can grow with how quickly our customers can get their projects running, get the supplies they need, and really start to hit that stride in the CRE market that's been slowed down the last couple of years.
Ryan Nash: Got it. You know, maybe as a follow-up, given the expectation for mid-single-digit loan growth, I'm assuming you're expecting some decent deposit growth. Can you maybe just talk a little bit about deposit growth expectations, what you see as the key drivers? And in a better loan growth environment, do you think you could sustain this 64% beta for the remainder of the raising cycle? Thank you.
Hope Dmuchowski: Yeah. Loan growth is always higher in our targets than our loan growth is always lower than our deposit growth. So the target that we give to our businesses is, you know, for that not to be offset and create a higher loan-to-deposit ratio. With that, we have a lot of initiatives that we've done in the past twelve to eighteen months, primarily our new treasury management system, that an additional product that we have delivered in the second half of the year that allows us to deepen relationships with existing clients and also go to market with clients that we maybe didn't have everything they needed for their business previously. We've seen great momentum in treasury management in the back half of the year. Also, we've mentioned before, we've hired a new Head of Consumer. We had, you see our advertising costs were slightly up, and our cash payments and other non-interest expense were up, have been up in the second half of the year. We're seeing great momentum with our new-to-bank offers, sustaining and deepening relationships in that space. We're opening new branches this year, and I think there's a lot of upside opportunity in our consumer franchise. Your comments about deposit costs, you know, I would say the number one thing that concerns me there outside of competition, as we always talk about, is what happens with the Fed's balance sheet. Now there's some congressional testimony about shrinking the Fed's balance sheet further. And so I really think it's a macroeconomic question as to what is the liquidity in the system in the coming year that will drive deposit prices much more than competition right now where I'm sitting. I don't know what you'd add to that, but there's a lot of uncertainty right now.
D. Bryan Jordan: Well, I think you hit the key point. We do have opportunity in treasury management penetration. We have a very strong stable base there in our system. It is extraordinarily competitive, and we're making very good progress in terms of working with customers to increase that penetration. I think the opportunities across our footprint to continue to expand our retail consumer banking model, as Hope pointed out, are very positive. And deposit betas, you know, we're going to manage within the context of the market. We're going to be competitive. We think that, you know, the Fed's going to either contract or expand its balance sheet. Competitors are going to do this, that, or the other thing. We're going to pay attention at a very granular level and be competitive in the marketplace and grow the business and do it in a way that is thoughtful and built around long-term relationships and partnerships. I think we're well-positioned for that.
Ryan Nash: Thanks for all the color.
D. Bryan Jordan: Thank you.
Lucy: The next question comes from John Pancari of Evercore. Your line is now open. Please go ahead.
John Pancari: Morning. I wanted to see if, you know, within your revenue guide, if you could possibly help us unpack it across how you're thinking about net interest income trajectory and the fee side. I mean, on the net interest income side, I, you know, it looks like you grew net interest income about 4% in 2025. Looks like it may be a somewhat slower pace in '26, just maybe given less margin upside. But I want to see if you could maybe help us frame it. Is it low single digit? That's reasonable or mid-single for NII? And then as you look at fees, just give us a little bit more color on the ADR trends that you're seeing here and how that could play out in the cap market side? And how that influences your fee growth expectation.
Hope Dmuchowski: John, thanks for the question. On fee income, obviously, the largest variable is, as I mentioned earlier, mortgage refinance, where we don't put something on our balance sheet. We do originations that we sell so that we can get that gain on sale back up to what it was two, three years ago when we saw more normalized resale activity. FHN Financial had a very strong second half of the year. If you look at the deck and you look at the fourth quarter ADR, we had mentioned that we thought 3Q may be an inflection point in the beginning of Q4, we were starting to see that come back down, and it's pretty flat quarter over quarter. So I think as you think about fee income, think about the core line items growing consistently with this year, but the upside being both gain on sale for mortgage and a refinance opportunity as well as FHN Financial upside. On the NII, as Bryan mentioned earlier and I did as well, the deposits are hard to predict exactly where we're going to land on deposit betas this year. I think that could have a big swing on that. And then loan growth, we had really low loan growth in our industry for two or three years now, and there is a pent-up demand out there. So I believe we can get certainty on rates. We can get certainty on the economic environment. We're going to see that pick up for our industry. I can't handicap right now, John, is that earlier in the first half of the year or the second half of the year in those, you know, average balance matters for NII more than that quarter over quarter. But I feel really strongly that, you know, we are well within that range. You can run a set of scenarios, and we will be within that revenue guide regardless of what happens in the macroeconomic environment this year.
D. Bryan Jordan: Hey, John. This is Bryan. I'll add the coach comment. We're very intentional in not breaking apart the revenue projection into net kind of fee income. Simply because we have a very well-balanced business model. And that we have the countercyclical businesses. So we have businesses that will pick up if rates move down significantly. We have businesses that will do very well if rates move up, and the two balance each other out. And so when we build out a model looking at 2026 or 2027 and beyond, you know, we start with the premise that all models are wrong, some are useful. And so we look at it in the context of we feel good about the balance in our business, and that if you push down here, this will pop up. But at the end of the day, we feel confident in our ability to deliver revenue growth within the range that Hope has highlighted for you.
John Pancari: Got it. Alright. Thanks, Bryan. Thanks, Hope. I appreciate that. And then separately, Bryan, I guess, we could just go M&A, just want to see if you can get some of your updated thoughts around potential whole bank M&A, a lot of attention obviously to your shift in your comments last quarter. You know, how are you thinking about the decision to potentially step in here and consider an acquisition, given the potential that the regulatory window could ultimately close and does that influence you? And then the backdrop of deals accelerating, but most importantly, what it means for you in terms of if something compelling financially or strategically comes up. Thanks.
D. Bryan Jordan: Yeah. Thanks, John. One, I don't worry about the regulatory window first and foremost. I think that during the duration of the Trump administration, you're likely to see the regulatory window open. Your regulatory infrastructure is in place now, and they have multiyear appointments. So I don't worry about that. When it comes to thinking about our business and preparedness, I think as I highlighted in the third quarter call, we have the ability to integrate now, but our priorities are focused on the things that we've described in our prepared comments, which is penetrating our customer base, delivering on this strategic document that we have laid out for our organization, driving the $100 million of potential PPNR growth. And in that context, if we have the opportunity to fill in our branch franchise or deposit base by doing something small, we would consider it. I would tell you, like I did ninety days ago roughly, that's not a priority for us. Our priority is delivering higher returns, increased profitability, and leveraging the franchise and the footprint that we have.
John Pancari: Got it. Thanks, Bryan.
Lucy: The next question comes from Bernard Von Gazzicchi from Deutsche Bank. Your line is now open. Please go ahead.
Bernard Von Gazzicchi: Hi, guys. Good morning. So you have a 15% plus sustainable ROTCE target over the near term. You hit the 15% mark the past two quarters. Are we at that sustainable 15% now and moving to the plus part of that? Or is there a time frame, like the end of the year, you feel that you can declare you hit the 15% in a sustainable manner?
Hope Dmuchowski: Bernard, good morning. Welcome. I think we've hit that sustained number on a go-forward basis. It doesn't mean a single quarter could have dipped under that. I talked in my prepared remarks about how a could come down lower quarter to quarter as we look at loan growth. But on average, I do think we've hit that inflection point where we can deliver in the 15 plus percent, Rossi, target ongoing. But that's not an every quarter number. I would say it's an average in the near term. Longer term, that will be the minimum, but we've had a lot of uncertainty in the macroeconomic and a lot of things at play right now that could slightly dip us underneath that in 2026.
D. Bryan Jordan: Yeah. I would add that, you know, the accounting around AOCI and things like that can move it in into a quarter and a quarter or two. But we feel very good about the sustainable nature of the progress that we've made over 2024 and 2025 in terms of proving profitability. So I think we are at a sustainable level. It may fluctuate up a little bit or down a little bit, but at the end of the day, I think what we've delivered and improved profitability is sustainable. And as we have in the past several quarters, the opportunity to return capital and manage our capital levels in line with peers is an opportunity that would further enhance that. So we've made good progress, and I think we're in a good place to increase that profitability as we go forward.
Bernard Von Gazzicchi: Thank you for that. Maybe just on credit, so I know in the release, you noted the 11% sequential in criticized and classified during the quarter. You know, the resulting zero provision and the $30 million reserve release. You know, how are you thinking about your reserve build from here? Just given expectations on the path of criticized and classified, the expected 15 to 25 basis points of net charge-offs, as well as just expectations for mid-single-digit loan growth for the year.
Thomas Hung: Yeah. Hey. Good morning, Bernard. This is Tom. I'm happy to address that question for you. You know, overall, we've had very strong momentum throughout all of 2025 in terms of working through our non-pass book. And, you know, as you noted in the fourth quarter alone, we had over $700 million of our non-pass resolutions. And there's a good mix of both payoffs and upgrades. On the whole year, that number added up to $2.2 billion. And so with the strong momentum we've had in those non-pass resolutions, that's why we have been able to have the other reserve releases we've had in the last couple of quarters. In terms of looking ahead, you know, a lot of other factors will impact what ultimately our reserves are, including broader economic outlook, the amount of loan growth we have, and also the mix of the businesses. You know, what I'm happy about is the momentum that we have in terms of how we've continued to be able to work down our non-pass book while maintaining very strong net charge-off performance in terms of forward outlook on reserves. But like I said, there's a number of factors that could change that, so it's harder to say.
D. Bryan Jordan: Bernard, this is Bryan. I'll add to Tom. You know, the CECL model implies an awful lot of science, but there's a tremendous amount more art involved in it and the assumptions that are made about the economic scenarios. And if you step back from it and you look at our reserve levels today, we have something in the nature of six to seven years of reserves set aside at the current run rate. So we believe that we're conservatively positioned. We try to take a balanced view of the economy, and we don't look at it as all up or all down. But I think given the improvement that we've seen in CNC and the trends in the balance sheet, we think we're in a very good position for the reserve levels that we have. And then our credit trends, as highlighted in our outlook for 2026, are likely to be in the same area that we've seen over the last year or so.
Bernard Von Gazzicchi: Thanks for the color, thanks for taking my questions.
D. Bryan Jordan: Sure. Thank you.
Lucy: The next question is from Jared Shaw of Barclays Capital. Your line is now open. Please go ahead.
Jared Shaw: Maybe circling back on the capital discussion, when we look at that $1 billion or so of additional buyback authorization, what's the appetite for utilizing that over the course of '26 with the backdrop of growth? Should we expect that you stay active sort of at similar levels and see the capital ratios just continue to move lower?
D. Bryan Jordan: Yes, Jared. This is a topic we work with our board on. So I don't want to get in front of that. But they have given us a substantial authorization, and we have a fair amount remaining under it. And as we've said in the past and as Hope has highlighted here, we will continue to talk about where the economy is, where our balance sheet is, how do we look at capital levels in the context of the peer universe and what's going on in the regulatory environment. Then having said all of that, you know, I would say I'm comfortable reaffirming what we've said in the past, which is we believe long term that we can operate our balance sheet in that 10% to 10.5%. And while you might get a spike one quarter in mortgage warehouse or you might get it for a year, year and a half, we're comfortable bringing those capital levels down over the longer term. So that's a long way of saying, one, we want to deploy our capital in organic profitable growth with our customer base. And if we don't have those opportunities, we will be disciplined. And as we've highlighted a couple of different ways, we returned $1.2 billion of capital in 2025, and we'll look for opportunities to be opportunistic, but we will participate in buybacks when appropriate.
Jared Shaw: Okay. Thanks. And then maybe just shifting over to the loan growth side. C&I loans, as you pointed out, had a really good quarter. But utilization rates have been pretty much flat over the last year. How are you from your conversations with customers, what's sort of the appetite for bringing that utilization rate up over time? And is there any expectation in your guidance that utilization rates move higher? Or could that just be potential upside if you see increased optimism from existing lines?
D. Bryan Jordan: Yeah. I'll start, and then Tom can help me. I think customers are generally still pretty optimistic. We see it in our pipelines, and the momentum in the economy appears to be very, very good today. I think, you know, as uncertainty emerges, whether it be, you know, Venezuela or Iran or oil prices or whatever the uncertainty could possibly be, then people will take stock. But I think people are generally biased for growth. And so I expect generally speaking, that C&I utilization will improve. I think the other dynamic I've talked a little bit earlier about loan growth and loan growth opportunities. In '24 and '25, we did a fair amount of work rebalancing. I mentioned improving the mix and profitability of the balance sheet. We also rebalanced where we were participating, and we got out of a number of what we viewed as unprofitable long-term participations and things of that nature. I think our balance sheet mix is set to be more profitable and to grow in a more sustainable and consistent level. Tom, anything you want to add?
Thomas Hung: Yeah. I'll I would just add, starting with your question on utilization rate. We certainly watch that closely, but I think the drivers behind changes in that utilization rate are really kind of more telling because there can be positive and negative reasons for us. There that, you know, utilization rate going up and down. You know, if people are optimistic and looking to develop, we see that go up. It can also go up in periods of uncertainty, and so that's why I'm really more focused on the drivers underneath that number and what's driving it. I would also add, though, just overall, you know, what we're seeing across the board is increased momentum in our pipeline. Hope and Bryan have both mentioned C&I as an example. You know, what I would point to there is what I'm encouraged by is the increase in pipeline is coming from a pretty diverse set of businesses. We've seen it across our regional bank. We've also seen it to varying degrees in our specialty business units as well, and so this isn't concentrated in any one area, but it's more of a broad increase in pipeline that we've seen.
Jared Shaw: Great. Thank you.
D. Bryan Jordan: Thank you.
Lucy: The next question comes from David Chiaverini of Jefferies. Your line is now open. Please go ahead.
David Chiaverini: Hi, thanks for taking the question. I wanted to ask about the net interest margin outlook. Last quarter, you had guided to the high 330s, low 340s. Clearly, you outperformed that. It sounds like pricing trends are good on both sides of the balance sheet. How would you frame the outlook from here?
Hope Dmuchowski: Yeah. I would say our outlook is still similar in that 340 range. There's a lot of timing and art on, you know, getting it exactly right in a quarter and an outlook. Specifically, this quarter, we had in my prepared remarks, I just discussed the uptick of growth in mortgage warehouse and the increase of NII there really helped our margin sustain quarter over quarter. Deposit costs, we're really proud of how we were able to work those down. I think we exceeded our expectations when we were on this call last quarter. So I don't see 350 as the go-forward. I really think we're in the mid-340s, kind of going, you know, some variation quarter to quarter.
David Chiaverini: Great. Thanks for that. And then on the $100 million of incremental PPNR, you've been talking about that for a few quarters now. Curious as to how much of that has been achieved thus far and then perhaps the split between 2026 and 2027 of achieving that 100 million?
D. Bryan Jordan: Yeah. We have been talking about it since roughly the middle of the year, and we talked about it in the context of 100 million plus. And we said the last couple of quarters that we continue to make progress. And we look at the opportunities across the business. It is clear to us that there are opportunities for greater penetration of treasury and wealth that I mentioned earlier in the call, greater opportunities for ensuring that we introduce broader relationships. So there are a huge number of opportunities. It will build over '26 and '27. So if you look at it mathematically, there's going to be more in '27 than there will be in '26. But we think we made significant progress in '25. I mentioned the improvement in market investor CRE lending and spreads there. By connecting our professional CRE business with the structure and pricing that we're doing in market investor CRE. And things like that build over time. So I'd expect you'll see some in 2026. You'll also see some in 2027. I would tell you as it relates to 2026, we have it built into the outlook that Hope has laid out to you. So it is embedded in that outlook.
Hope Dmuchowski: I'll add to what Bryan said. And, you know, repeat. You know, our goal is sustainable momentum, and you're going to see that build quarter after quarter. You're not all going to suddenly see a spike. And so as you continue to see our earnings momentum, you continue to see our revenue growth really in line or outpacing our loan growth, you can attribute that to continuing to deepen these relationships. But it will build quarter after quarter, and as Bryan said, build '27 or build on '26.
David Chiaverini: Very helpful. Thank you.
Lucy: The next question comes from Peter Winter of D.A. Davidson. Your line is now open. Please go ahead.
Peter Winter: The outlook for expenses flattish for '26, and it does imply expenses will be down quite a bit from the fourth quarter level. Just what are some of the levers for lower expenses versus 4Q? And do you think is a good starting point for the first quarter expense?
Hope Dmuchowski: We have elevated expenses in Q4 due to the higher revenue. If you look on the increased commissions quarter over quarter, that is another strong quarter, but also at year-end, there's a series of true-ups that every company does. And so I would look at that run rate and say, what is it consistently going to be in Q1? Marketing and advertising is seasonal. And so it does tend to be slightly down in Q1 and then higher in Q3 and Q4 at times. So I'm not going to give you an exact, but I think when you look at the range and look at a glide path, take out the one-time items that we've commented on in our presentation. We also had a lot of technology projects that completed in the back half of this year, and that is part of what we're using now that run rate starting to come back in line to reinvest in branches and hiring.
Peter Winter: Got it. Then if I can ask, I realize it's still early, but are you starting to see any disruption in your markets from the recent M&A deals? Any opportunities to hire bankers or bring in new customers or those conversations starting?
D. Bryan Jordan: It is still early, and best I can tell, there's no real work going on right now in terms of systems conversions and things of that nature. But we have seen opportunities to recruit. We're recruiting as we always do across all of our footprint. And so we do believe that over time, we will have an opportunity to continue to bring talented bankers and support folks all across the organization onto the platform. And whether the disruption drives that or otherwise, I think our business model, our focus, our culture has been an advantage and will continue to be so.
Peter Winter: Got it. Thank you.
Lucy: The next question comes from Michael Rose of Raymond James. Your line is now open. Please go ahead.
Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Just two quick ones for you. Just talk to me about the commercial real estate expectations, obviously, down Q on Q, down year over year. You got to have, in theory, a couple more rate cuts. You know, paydown activity, you know, probably still pretty healthy. Do you expect that business to inflect this year? And is that an area of potential growth as we move later into the year? Or do the headwinds from payoffs, paydowns from lower rates just kind of persist through the year?
Thomas Hung: Yes. This is Tom Hung here. I think we can reasonably expect to see an inflection in our CRE this year. As Hope alluded to, what we do in CRE does skew a lot towards construction, and hence, we have more of a spring-loaded balance sheet there. Given the lower amount of construction in the last couple of years, that's why we have seen a decline in balances in that business. However, that has started to pick up. You know, I mentioned that pipeline momentum in the C&I business. I should also mention there's good pipeline activity in our CRE business as well. If I look at our CRE pipeline compared to even last quarter, it's up pretty meaningfully. And you mentioned especially with the rate decreases that have been happening, and there's expectations for further rate cuts, that really affects construction starts. And with more construction starts, that's why we're starting to see a very healthy build in our CRE pipeline. The final step I'll point to here is in our prepared opening remarks, one of the things we did mention as well is this quarter, for the first time in about two years, we had a net increase in our total CRE commitments. So I think that's a good early indicator of where we expect CRE balances to go.
Michael Rose: Very helpful. Appreciate the color. And then maybe just last one for me. I know you guys have a small credit card book. There's obviously been some interest rate cap discussion out there. Just wanted to see if that might have any impact for you guys. Again, I know it's small.
D. Bryan Jordan: Yeah. It is a small book, and if you apply the cap across our outstanding today, it'd be, you know, roughly a million dollars a quarter. So it's insignificant.
Michael Rose: Great. I'll step back. Thanks for taking my questions.
D. Bryan Jordan: Alright. Thank you.
Lucy: The next question comes from Jon Arfstrom of RBC. Your line is now open.
Jon Arfstrom: Morning. Good morning. Most of my questions have been asked and answered, but just hope a follow-up on Peter's question on the first quarter. Anything else you would flag in the first quarter in terms of the balance sheet and P&L, just so we can set up the year properly, the slope of the year.
Hope Dmuchowski: Tom, that's a really general large question. I think we've hit the highlights. I'm really proud of where Q4 ended up, and it gives us tremendous momentum and excitement with our bankers and our clients going into Q1. I think when you look at mortgage warehouse especially, this tends to be a quarter where we always see our loans decline, and then we kind of dig out of it in January, February, and then March starts to stabilize in that business. We've continued to see strong momentum there in January. I do think that will be an upside for us. We won't have the normal quarter over quarter significant volatility we have. Fee income, it's really too hard on ADR to say where the quarter's going to come in as well as refinance. As you know, rates may be heading down, and that could pick up. John, I think we expect another strong quarter to look similar to this one across the board. On the expense side, we are adding bankers. So see in the deck, we've added over 100 employees, you know, 100 FTEs since midyear. Most of that is in client-facing, client-supporting technology positions that enhance the franchise and our ability to deliver revenue growth. I think, as I've said before, marketing and advertising really fluctuates quarter to quarter. Q1 comes down and then builds back up. If you look at our last two years of Q1 Q4 and Q1 expenses, John, pulling out that one-time commission, I think you're going to see it look very similar to normal seasonality.
D. Bryan Jordan: Okay. That's very helpful. Mortgage company was another follow-up I had. So thank you on that. And then, you know, Thomas, Bryan, I don't know. Just one of the other questions is on the provision, and I guess we kind of danced around it before. But you've had two really good quarters. You're talking about positive trends in credit and mid-single-digit growth. But how do you want us to think about the provision from here given the strong numbers over the last couple of quarters?
Thomas Hung: Yeah. I would start with, I think, the most important measure of our overall credit performance is really in our net charge-off numbers, and then I'm proud of how consistently strong we've been in that. Provision has a little more noise than it just because of the number of factors that go into it. Most notably, as we're calculating our reserves, obviously, our economic outlook as far as and loan growth can go into that number as well. So if provision is higher in quarters than we've had in the last two quarters, you know, that can certainly actually very much be a positive if it can be driven by the amount of loan growth that we're expecting and the momentum that we're seeing. And so just given kind of the number of factors that go into the provision number, I think, overall, I'm personally more focused on net charge-off as the best reflection of our credit quality.
Hope Dmuchowski: John, I made this comment last quarter, I'll reiterate all the time. I do believe with all the facts we know today, we're done in that building phase. We spent two-plus years constantly increasing our provision, increasing our coverage. Not knowing what was, you know, what was going to happen, whether it was the pre-wave. There were just so many uncertainties. There's just as many uncertainties today, but I don't think we'll have to build. I think we're at the right reserve level. So you can really think about it, you know, more normalized as to would we have a release quarter, but it should trend with loan growth, which it has not been the last two years.
Jon Arfstrom: Yep. That's what I'm looking for. Thank you very much. I appreciate it.
Lucy: Thank you. The next question comes from Chris McGratty from KBW. Your line is now open. Please go ahead.
Andrew Leishner: Hey. How's it going? This is Andrew Leishner on for Chris McGratty.
Hope Dmuchowski: Hey. Good morning.
Andrew Leishner: I know near term, you said you want to stay closer to 10.75% CET1. And you mentioned earlier on Jared's, I believe, longer term you can operate your balance sheet in the 10% to 10.5% CET1 range. But I guess what do you and the board need to see maybe from a market or regulatory perspective to get comfortable dropping down to that range?
D. Bryan Jordan: Yeah. So it's really two levers, and the first is most important, and that is just sort of the economic data payout. If you were sitting here in 2025, everybody had concerns about how tariffs were going to impact in the short run. We've now seen nine months of evidence, and through a number of different means, it's had very little or minimal negative impact at this point. And so as those kind of economic factors play out, the outlook for the economy in '26 and '27 factor into our thinking. So as we look at the economy, we get more and more comfortable with the ability to bring those levels down. The second is there is a regulatory backdrop around capital and excess capital. And clearly, we pay attention to where we stack up in terms of peer comparisons. And you've heard some discussion and calls earlier this week that people are generally migrating capital levels down. So the combination of those things, I think, over time, gives us as a board more and more confidence that we can manage our capital levels down. Our approach has been to take it in fairly small steps, take it from a to ten seven five, and then we talk about 10 and a half. Then we talk about 10 and a quarter, and just do it in a way that we can manage through the distributing the excess capital or deploying it in the business. And so I think it's an evolving conversation. We'll do it in a measured and thoughtful way, but it's principally the economic drivers we're looking at.
Andrew Leishner: Great. Thank you. And then just another follow-up on the C&I loan growth, and sorry if I missed this earlier. So outside the mortgage warehouse growth, and I know there was another $700 million of seeing, like, C&I growth excluding the mortgage warehouse. Can you just talk about where that source of growth came from? And going forward, how we should think about C&I growth and where it's coming from outside of Words Warehouse? Thanks.
Thomas Hung: Yeah. Happy to address that one. C&I was obviously the largest number. But outside of that, across our C&I platform, I think what I'm very encouraged by is it came from actually a very diverse mix across all of our businesses. You know, our regional footprint had very strong productions across all of our regions. In our specialty lines, I guess I'll single out equipment finance as one business that had outside growth relative to some of the other businesses. But I think the most important takeaway here is it was pretty broad-based. And we saw it across most of our businesses and regions.
Andrew Leishner: Okay. Great. Thank you.
D. Bryan Jordan: Thank you.
Lucy: The next question comes from Christopher Marinac of Janney Montgomery Scott.
Christopher Marinac: Hey, thanks. Good morning. I wanted to follow-up on the regulatory disclosures last quarter on the NDFI loans. Think about 60% was related to mortgage warehouse. And, obviously, 40% is the rest. And I'm curious if the mortgage warehouse hope grows and gets to the upper end of the growth range this year, does that mean that the lower percentage on other NDFI loans would occur? Or would you still be seeing growth in some of this other business and other lines outside of mortgage?
Thomas Hung: Sure. I'm happy to address that. I'll break that up into a few parts. I'll first off with the growth that we've had in mortgage warehouse that actually accounts for a larger percentage. It's more closer to two-thirds of our NDFI exposure is in mortgage warehouse. And from a safety and soundness perspective, I remain very, very confident in the way we have expertly managed that business for a lot of years now, most notably in that business, we take physical possession of the notes. So you can imagine the amount of paper coming in and out of our mortgage warehouse group each and every day. In terms of other NDFI, given the noise that's been in the market, you know, we certainly continue to look at that very closely, but I would point to, once again, the years of experience we have in that sector. Consistently strong performance. And I think there's some differentiation for us as well in terms of, you know, we have a full-time team of field examiners. That's seven full-time staff with nearly twenty years of average experience. And through that team who are on the road probably fifty weeks a year, we do our own field examinations out generally one to three per customer every year. We do supplement that with some third parties as well. And in addition to that, you know, once again, given kind of the recent noise, we have also completed a, recently, a comprehensive review of our non-mortgage warehouse NDFI book. We've segmented all of that into seven different segments, which have very different risk profiles, and we've done deep dive analysis into each of those segments with unique scorecards we developed based on the unique risk of each sector. So we continue to look at it very closely. You know, we and we originate, we continue to originate in those segments as well. You know, we do it in a prudent manner as we always have. And I think the results have been pretty good.
Hope Dmuchowski: Following on Tom's comments about mortgage warehouse, I really do want to reiterate what I said. I said it's at November with Tammy Locascio, the head of that business at a conference. We do mortgage warehouse, and it looks exactly like a mortgage loan. We pick the closing attorney. We take physical ownership of the actual loan docket. It sits in the same vault as the mortgages that are on our balance sheet. So for us, when we do NDFI, we have that underlying collateral with us. And we get to sit at the table with the lawyer that we choose at the closing. So there always can be fraud, but we do do it some of our other peers. I want to point to that when you think about NDFI exposure. For us, if we had an issue with a borrower, we can we have the notes. We can sell them into the secondary market and get our money back, which is not traditionally how the NDFI is thought about.
D. Bryan Jordan: To your mechanical part of your question, if the NDFI number goes up in the first quarter or quarter beyond, it's likely to be driven by fast growth in the mortgage warehouse lending business than any of the other NDFI lending business.
Christopher Marinac: Great. Bryan, Tom, and Hope, thank you for that. That's all color. And, you know, I know the data is now a quarter stale, but it seemed that you had no losses in that business and that the problems in terms of just non-accruals were very small. So I suspect that's still the case today.
Thomas Hung: Yeah. That's absolutely the case in our mortgage warehouse book. I mean, I think to be expected in our non-mortgage warehouse NBFI book, you know, there are slightly higher levels of classified assets and NPLs, and there's some charge-off in that business that I wouldn't call any of it a big outlier relative to the overall book.
Christopher Marinac: Great. Thank you again for the detail here.
D. Bryan Jordan: Thanks, Chris.
Lucy: Thank you. The next question comes from Janet Leigh of TD Cowen. Your line is now open. Please go ahead.
Janet Leigh: Good morning. Just to clarify on your expense guidance, so the flattish expense guidance, does that still hold if you achieve the higher end of your revenue guide of 3% to 7%? If you achieve 7%, is it still flat?
Hope Dmuchowski: Janet, yes. It does. What I'll say is if we achieve the higher end of the range with more countercyclical commission businesses than we had this year, that's what brings it up above the 0%.
Janet Leigh: Got it. Thank you. And just a quick follow-up. If I look at your fourth quarter loan growth results, period at 7% annualized, looks like a lot of the narrative around C&I potential mortgage warehouse, and CRE inflection, those all sound positive. And it feels like there's a level of conservatism baked into your mid-single-digit loan growth. Is this a fair assessment, or am I missing anything? Thanks.
Hope Dmuchowski: Janet, we are traditionally a very disciplined lender. So if you look back at how First Horizon has lent for the last five or ten years, we tend to be pure average-ish. And so when we think about what we think the outlook is for the market, we're not trying to overperform. We want to make sure that we get great clients that we can work with, that they have the right underwriting standards. They're going, you know, the way we keep our net charge-offs so low through a cycle is through disciplined lending. And so absolutely, we could do more. Bryan's great quote that he always uses is, it's easy to lend money, it's harder to get it back. And so I think, you know, as I sit here today, I don't see an economy that's going to be above mid-single-digit loan growth unless there's some stimulus put in the system.
D. Bryan Jordan: There's some mixed things going on in the loan growth percentages. We're not likely to grow our consumer mortgage portfolio at a very rapid rate this year. Just expect that most of what we will originate goes into the secondary market. But to your point, we feel very, very good about the business that you enumerated, and we think we have great opportunities to grow there.
Janet Leigh: Thank you.
D. Bryan Jordan: Thank you.
Lucy: The next question from Anthony Elion of JPMorgan. Your line is now open. Please go ahead.
Anthony Elion: Hi, everyone. Hope, on fixed income, I'm curious why ADR and fixed income revenue didn't grow in 4Q. It seems like the tailwinds were all there, including a lower rate outlook, volatility was moderate, and the yield curve remained steep.
Hope Dmuchowski: Tiffany, we saw a significant slowdown in that business as it related to the government shutdown. And so we mentioned on our call last quarter that early October was starting out really slow. So it was really kind of a tale of two quarters where the first half of the quarter was pretty low ADRs and the back half came up. So it averaged to a good number, but there was a lot of volatility and really low ADR during the government shutdown.
D. Bryan Jordan: Then the last half of December tends to be very slow as well.
Anthony Elion: Thank you. And then one more on expenses. So could you put a finer point on the degree to which any incremental commissions from the fixed income business could impact the expense outlook? I only ask because I remember last year, your expense outlook quarter after quarter included increases in commissions. Helped give us more visibility into where total expense could come in for the year. Thank you.
Hope Dmuchowski: As we think about the countercyclical, the rule of thumb is to assume 60% commission as revenue increases year over year.
D. Bryan Jordan: I'll look at the commission-based nature of expense growth in 2026. If we get commission-based expense growth in 2026, it will be a high-class problem. That is profitable business for us. It is broadening and deepening relationships. And so while we don't anticipate that that's going to drive the expense number, if we get that and we end up with higher than flattish or flat expenses, that will be a high-class problem in my view.
Anthony Elion: Thank you.
D. Bryan Jordan: Thank you.
Lucy: Our final question today comes from Timur Braziler from Wells Fargo. Your line is now open. Please go ahead.
Timur Braziler: Good morning. Bryan, I just want to make sure I heard your last statement correctly. So is it implying the flattish expenses imply flattish countercyclical revenues in '26? To the extent that you get growth there, then you'll get growth in the expense base?
D. Bryan Jordan: Well, back to my earlier point about all models are wrong. Some are useful. We have to make assumptions about what our countercyclical business is and our commission-oriented business is. So that includes our wealth management business. That includes our fixed income business. That includes incentives we play around, mortgage warehouse lending. So we've got a series of assumptions in there. I wouldn't overread that we don't expect that that balance will change, but we have incentive programs in our straight C&I lending and our commercial real estate lending. And as we look at the course of the year, we think all of it balances out given our expectations of where revenue is likely to come from. It'll largely be in a flattish area.
Timur Braziler: Got it. And then just following up on the loans to mortgage companies, just wondering what portion of the growth is coming from new client acquisition, if any? Or has that ramp that you've been focused on over the course of the past year or so, has that largely concluded, and that business is now more or less stable, or is there still some level of benefit coming from new client acquisition there?
Thomas Hung: Yeah. I'm happy to address that one. I don't have the exact split with me, but I can say that we continue to pick up new customers at a pretty good clip. As you may recall, there was some disruption to that industry earlier this year and also last year in terms of a few major players either exiting the space by decision or being acquired. And as a result, they became a good number of strong customers that were potentially looking for new homes. And so our team has done a great job through the execution and expertise we have in the space of picking up new clients, but we certainly also upsized with existing clients as mortgage volumes are picked up. And so the increase you're seeing is really a combination of a mix of the two.
D. Bryan Jordan: And we get a larger share of originations as a result of all of that as well.
Timur Braziler: Great. Thank you.
Thomas Hung: Thank you.
Lucy: We have no further questions at this time. So I'd like to hand back to Bryan for closing remarks.
D. Bryan Jordan: Thank you, Lucy. Thank you all for joining us this morning. We appreciate your time and your interest. Please feel free to reach out if you have further questions or if there's anything that we can do to help fill in the blanks. Hope you all have a great day.
Lucy: This concludes today's call. Thank you all for joining. You may now disconnect your line.