We're gonna get started here. Up next, we're pleased to have First Horizon joining us once again. FHN has successfully executed on its strategy to improve returns through tight cost discipline and returning additional capital, among other things. The company continues to have one of the most attractive footprints in banking and is working to improve overall returns on a sustainable basis. Here to tell us more about the story are Chairman and CEO Bryan Jordan, CFO Hope Dmuchowski. Sorry about that. Today's discussion is gonna be a fireside chat, so welcome, guys. Great to see you once again.
Thank you.
So Bryan, 2025 was a solid year for the bank. You made progress on your return targets, returned a lot of capital, held costs tight, had certain pockets, very strong revenue growth. As you reflect back on the past year, what went well? What are the areas for improvement? And how does this position the bank for 2026?
Yeah. Ryan, thanks for having us. It's great to be back here and I think you summarized. I think we had an outstanding year on a number of fronts and set aside the financial for a minute and focus on the progress that we made, getting technology put in place that we started two years ago. We have updated our technology stack. We have structured our data centers in such a way that we should have very good efficiency and effectiveness going forward and be able to maintain that technology stack. I feel very good about the progress we made in improving the profitability of the balance sheet, essentially taking less profitable relationships and rotating that out and focusing on our core customer base.
And then the final point that I would make is, Hope was a big part of it, but over the last year, we've taken our what usually is somewhere between a 55 and 100-page strategy document that we share with the board on a three-year basis. And we spent the last year really taking that strategy in a five or six-page document and putting that in front of everybody in the organization. And we put it in front of people in a number of different ways. I did quite a few presentations. Hope and others did as well. We put it in people's hands. We put together, essentially learning maps where people sat down and talked about it.
You say, "What's in that five to six pages?" It's very simply trying to define the part of the business where we think we can be very, very effective, outcompeting our broad peer set. That includes the type of customers and the type of relationships we want to build with those customers, all the way down to the investments that we need to make in technology and people to ensure that those things happen. I think that, as much as anything, has sorta served as a focal point and a reset for the organization, which allows us to drive future profitability. You talked about 2025 being a really good year. I think it will be a very good year. We've only reported three quarters so far.
So, being the accountant, I know there's a lot that can happen between now and the end of the year. But I feel very good about the financial progress as well. And I think we've made tremendous progress driving towards 15-plus% ROTCE.
Don't worry, we will get to how that fourth is progressing at some point in the next 31 minutes. But, Bryan, you know, I know that you're out in the markets often talking to clients. You listen to the sentiment at the conference. It's clear that people are feeling pretty upbeat. You know, maybe just talk about how, you know, recent macro developments have shaped your outlook for clients and the bank's momentum. You know, what shifts are you seeing in client sentiment? And, you know, how are you feeling about how pipelines are looking?
Yes. I was out in the market last week for two or three days visiting with customers. And really, over the course of the year, I would say customer confidence has continued to build. Whether that's a function of the tariff reality change is sorta settling in and people understanding that or how to work around it in terms of profitability, or whether that's lower interest rates or whether that's just pickup in the economy. So I think customers are more forward-leaning today than they were three months ago, more forward-leaning than they were six months ago. So I think it has continued to build. And we see that in our loan activity, our loan pipelines. I feel very, very good about what I see in terms of commercial lending. Our balance sheet is strong.
I think we're gonna have strong pipelines at the end of the year and I heard the statistic yesterday. We expect by the end of this year, we will originate something like 60% more loans this year than we originated last year. So that's evidence of customers being more forward-leaning and I'm optimistic about how we transition into 2026.
You know, I know that we'll get formal guidance when we get into 2026. I think we've talked about, you know, loan growth turning to more normal levels next year, maybe mid-single-digit or so growth. Maybe just talk about the areas you're expecting to pick up. You talked about C&I. I know that CRE, we're getting closer to inflection. Maybe just talk about areas you expect growth and what gives you confidence that we should see a return for this.
I think loan demand will be reasonably broad. I've got a lot of confidence in our C&I pipelines and our C&I activity. Our volumes have continued to be very good and steady there. I think our mortgage warehouse business will continue to be strong into 2026 simply because you've got this pent-up higher mortgage rates starting to drift down some. We haven't hit the magical 6% on the 30-year mortgage. It is getting a little bit better and easier for people to finance mortgages. It looks like at this point commercial real estate is flattish in the fourth quarter, where it's been down a couple hundred-plus million dollars the last several quarters. I think that's starting to flatten out, and we're starting to see a little more activity on the commercial real estate side.
I think it will be broad-based across all of our commercial businesses. I would expect that given lower rates, that our residential mortgage portfolio will continue to drift down some. We'll use that capital and reinvest it in higher-yielding commercial activity. I expect, as we've said in the past, you know, mid-single digits in terms of loan growth next year.
That sounds great, so across your footprint, there's both lots of competition, but there's also lots of disruption. Maybe just talk about how you think this is impacting both your competitive position and your ability to attract and retain clients?
Yeah. I think I would describe it in two ways. One, anytime you have a lot of merger activity, that creates some sort of momentum in institutions. And all of the people that are engaged in M&A activity today have been good competitors, and they will be good competitors. But customers, bankers all go through change when you're integrating systems and processes and technologies and all of that. And we think that will create opportunity for us. And we have seen those opportunities emerging in the fall of this year. And as deals start to get consummated and get into the integration phases, I would expect that to pick up. And then second, I would go back to what I described about our focus in the organization on strategy.
People have been very, very clear about how we're approaching the market, that we're gonna compete as a really good commercial middle-market lender. We're gonna build on our specialty businesses. We're gonna focus on private client and wealth management. With those businesses, we can be very, very competitive with our product set. We can deliver true differentiation in terms of what the customer experiences in an otherwise commodity-based financial services world.
Yeah. That makes total sense. Let's spend a minute talking about deposits. So deposit balances have been flattish or so over the past year or two. But obviously, there's a lot of underlying pieces. As you think about the funding model for your growth objectives, what are your expectations for both deposit growth, deposit betas into 2026? Hope, feel free to get in this. And do you expect to resume growing deposits as we fund loan growth next year?
Yeah. I'll start, and I'll turn it over to Hope. I'll start by saying our team has done a really fantastic job in attracting customer relationships and deposit growth. I look at the balance sheet on a daily basis, as you might expect. We're seeing good customer activity on the deposit side. Commercial deposits, non-interest-bearing deposits have been good through, you know, what is essentially the eighth or ninth day of December. I would say that our bankers have done a very good job managing beta. Hope and her team have been very involved in that progress. They have done a very nice job working with our bankers to understand what interest rates are doing, broadly speaking, in the marketplace vis-à-vis competitors.
Working on policies and practices and procedures that give us the ability to manage our deposit base in a win-win situation where our customers are fairly compensated for the business they do with us. And at the same time, we deliver a nice return to our shareholders.
Yeah. To add to what Bryan said, I think we're seeing Q4 of this year look exactly like Q4 of last year, which is the competitiveness out in the market with successive rate cuts really come, you know, kind of comes back. We're not seeing competitor offers out there for high rates for long-term. Most of us are expecting a rate cut this month. And every CFO out there is trying to keep their deposit cost commitment short. We've seen a lot of success in walking back our deposit costs with current customers as well as our new customers. We continue to see DDAs stabilize and growing throughout the year. There is some seasonality to that. And Q4 tends to be a higher quarter for us. But deposits are doing well. I'm also encouraged that the Fed's no longer gonna be shrinking the balance sheet.
Mm-hmm.
You know, the end to that program will be very positive for our industry.
So I just wanted to spend a minute maybe talking about some of the specialty lending businesses, right? We obviously talked about traditional C&I loans and mortgage company obviously would be one of these. Maybe just talk about some of the key businesses. How does this business mix between regional banking and, you know, your countercyclical businesses deliver stability and performance across varied cycles? And where are you expecting the most attractive opportunities for 2026?
Yeah. I'll start with a little bit of Q4. We're seeing good movement on our countercyclicals. Mortgage Warehouse has had a stronger Q4 than we anticipate. Usually, we see a lot of paydowns. And we've seen that stay pretty flat deposits of this quarter. Talked with our head of Mortgage Warehouse the other day. And he just said that it's just steady. They're steady refinances. They're steady new purchases. And FHN Financial is having a good Q4, similar to Q3. And so we're already starting to see the rate cuts coming down, having a positive impact on our countercyclicals as we did at the end of Q3.
So I wasn't gonna ask you yet, but since we've mentioned the fourth quarter several times, given that we are two months into the quarter, talked about good deposit performance. You talked about good performance in some of the countercyclicals. Anything to update in terms of expectations? You know, Bryan mentioned loan and deposit growth. But loan growth, deposit costs, anything else that's relevant to share at this point in time in terms of 4Q?
Well, we feel good about the guidance that we laid out at the end of the third quarter. And we're confident that we'll be able to hit that guidance in the fourth quarter. I wanna circle back to your previous question for a second because I think it's important. You know, we manage these specialty businesses, commercial real estate and equipment leasing are two that I'll pick off the top of the head where our teams have done a very fabulous job, in my view, of integrating that product set into the customer calling across our broader product set. So we're seeing very good growth in our equipment leasing business across our footprint. And we're seeing that in our commercial real estate business.
Commercial real estate business, for example, we have what Market Investor CRE, which tend to be smaller transactions done in the marketplace. And those are largely served by our commercial teams that reside in our footprint. And then we have our Professional CRE business. Just by communicating across those two businesses, our market CRE business has improved yields by 50-plus basis points on a year-over-year basis. So we're seeing really good collaboration across these specialty businesses and particularly the breadth and depth and knowledge of the marketplace transition into how we serve our customers across the broader footprint. But as we look at the fourth quarter and momentum into 2026, we think we'll have very good momentum as we finish this year. Our fixed income business has continued to sort of follow the trends of the third quarter.
You're sitting here in December, which, you know, at some point, fixed income sorta shuts down because of the holidays and the year. But we feel good about fixed income. Hope mentioned our mortgage warehouse business. Balance sheet trends look good. So we feel pretty confident about our ability to deliver this quarter.
Maybe just to put a finer point on the countercyclical businesses into 2026, so I think about combining a couple of things you said, right? Mortgage activity should be up next year. That helps both the origination and loans to mortgage companies. Interest rates coming down, you know, shape of the curve should be good for fixed income business. Just maybe help us understand how you think about how these things could contribute to revenue growth for next year. And anything likely to stand out for you in terms of, you know, relationship deepening for fee-income growth in terms of the countercyclical businesses?
Yeah. We'll put out more formal guidance early next year, I expect, but I would expect, as we sit here today, that if we can grow the balance sheet mid-single digits, that we'll have revenue that or revenue growth that will be commensurate with that, and I've said in the past that we think we can maintain flattish expenses, and as we are budgeting or planning, we feel good about our ability to control costs next year. That's not to say that we don't have inflation in a few line items here and there.
Mm-hmm.
But we've got some offsets put on a net-net.
Yep.
2026 versus 2025, we'll have flattish expenses. So if you put all that together, we think we can deliver very nice returns next year and continue to make progress on driving shareholder value by increasing the ROE in the franchise.
I think I've asked this question to Hope five different times. But I guess I'll ask it again in the public forum. So you mentioned flattish expenses. Obviously impressive just given all the investments that need to be made in the business. But Hope, maybe just talk about how do you hold expenses flat while investing in talent, new branches, technology, things like AI? And are there any areas in particular where you're getting efficiency opportunities into 2026 and beyond?
You said you've asked this question before. Does that mean you don't like my answer before, Ryan, and you can answer it differently?
Some private calls.
you know, the first is two years ago or two and a half years ago now, we had an investor day. We announced a three-year, $100 million investment in technology. We announced a retail distribution strategy, and we were really coming off of the MOE, more important than other things that were happening, and getting the full benefit of scale for the First Horizon IBERIABANK conversion. We said at that time we needed two or three years to invest back in the company, and then that after that third year, we would start bringing costs back in line to efficiency ratio to more than peer average, so we're appreciative that we've been able to, you know, the investors have given us the ability to increase our expense base the last couple of years, but that was not a long-term intention.
So it's $100 million for three years, you know, combined back into technology. A lot of those technology investments we've talked about before are either driving new revenue in some of the items Bryan just talked about or creating efficiencies. There's also the ability to scale, the change to your cost basis when you go into a cloud. If you're able to, we moved our data center off-prem. You get out of the building. You get out of the people there. So all of those investments that we've been doing the last two or three years are bringing that savings back down into the company. We are still reinvesting. We still have investments in a flattish budget for next year. We're continuing that trend. But we do want to have top quartile returns through the cycle.
That requires us to make sure that we're being disciplined in where we spend our money and how we invest.
Maybe let's talk about the issue that you highlighted. You know, I know that commissioned businesses were. I don't wanna say not included, but I'm sure there was a certain level of activity. Just help us understand just what was baked in for the commissioned businesses, the countercyclical businesses, which I know, as you've noted, are not part of your flattish expenses.
You know, as we think about it, we think flat if the commissioned businesses were the same next year. So as mortgage, refinance will really be the big one, which is.
Yep.
You know, you have the ability to refinance mortgages. They're not going onto your balance sheets. You're not picking up that NII. But you have a commissioned business there, as well as FHN Financial. So if you think about it, whatever you expect that to grow next year, our countercyclicals expect about a 60% expense offset to that.
Gotcha. Okay. No, that's super helpful. So I think it was two years ago at this conference, you told me that you expected mid-teens returns in the next 24 months. You got to mid-teens faster than that. So congrats. You updated your target to 15-plus. We had-ish. We got-plus. A lot of different things going on. And now, you hit 15% last quarter. Now, what is the path to achieving the sustained 15%, ROTCE, as you highlighted? And what are the main drivers to getting there? You know, obviously capital credit, PP&R. Maybe help us think about how you get that on a sustained basis and the key drivers.
I'll go first.
Yeah.
The one question you haven't asked yet is about capital, and I know I get asked that a lot this quarter as we did announce in the end of October.
Well, good.
A reauthorization. We have repurchased approximately $300 million so far this quarter. We're still in the market. So.
Mm-hmm.
Actively bringing down our CET1 to more peer-ish levels and where we think we should run the company as part of that. Credit normalization, we've seen two quarters in a row, we've been able to bring down our coverage as we start to see better performance in the market. So as we start to grow our balance sheet to be able to rationalize that provision build to really go with the loans we're originating versus a model outlook, and the third is what Bryan has consistently talked about and really ties back to the five- or six-page initiative he was talking about. It's how do we get the $100 million-plus? I know you don't like-ish and plus, Ryan. So we've gotta come up with different words for your conference next year.
Mm-hmm.
But we have $100 million-plus of PP&R in our existing portfolio that we are already getting this year. When you look at us having a flat balance sheet but yet NII has gone up, we've been able to increase year- over- year our PP&R. We're continuing to do that with items like Bryan talked about, which is the partnership between our specialty businesses and our in-market bankers, the technology that we've rolled out. We talk a lot about our treasury management platform. That was one of our big projects coming out of the MOE that we had to get through. We are continuing to add more products onto our treasury management platform that we can offer our customers, which comes with a fee.
Continuing to use everything we have today with our clients and our investments to deepen those relationships and generate more profitability in addition to the mid-single digits loan growth.
You talked about the $100 million-plus PP&R opportunity. Maybe just talk about how those are progressing and how does that factor into, you know, the type of revenue growth you're talking about next year? And where are you seeing the best opportunities there?
I'll start. And I wanna add just a second to what Hope just said. When you look back across this year, we'll have purchased just under $900 million worth of stock back this year. So that's significant relative to our market cap and really a good job managing the capital base in the organization. You ask about the 15-plus, and I won't take you up on the-ish comment. But when you look at where we were in the third quarter and where we're likely to be in fourth quarter in 2026, I think we're at that 15-plus or minus area. And I think that momentum will continue to build as we capitalize on what Hope just described and the $100 million of 100 million-plus of additional opportunities.
And if you think back about what we have said, we originally announced that in the middle of the year, call it June. And we're still saying $100 million-plus. And you can infer from what I'm saying that we've made progress on that.
Yep.
And that's showing up in our existing profitability. And we think that there's at least $100 million of progress out there. And it is. It's easy for me to sit here and describe it as easy. And it's not easy. It's hundreds of customer interactions on a monthly basis. It is making sure that we're cross-selling our products on an effective basis. It's meaning that we're introducing our wealth management and private client folks to our corporate CFOs and treasurers and owner-managers. It is collecting the fees that we actually earn and make sure that we've got effective pricing. It's introducing our debt capital markets folks. It's lots of little activities that are done very, very effectively. And we're seeing the progress in that. And we continue to have confidence that that is gonna really enhance our profitability.
Mm-hmm.
As we think about what we need to be focused on in 2026, that is our primary focus. It is delivering on controlling our cost and capitalizing on the value that we can create for our customers and by extension, the value that we create for our shareholders.
Maybe as a follow-up to the buyback question. So $300 million quarter to date, that means you have around $900 million-ish still on your authorization. And I guess in the world of improving loan growth, how do you think about utilization of the remaining authorization given the toggle between loan growth using that for, you know, to buy back shares?
It's never really a close call. If we have the opportunity to support quality customer activity, we're always interested in doing that.
Mm-hmm.
We will do that day in and day out. When we say we're gonna be mid-single digits in loan growth, we all ought to recognize we can make loan growth anything we want it to be.
Yeah.
But the qualifier that I just used in terms of the trade-off is we really wanna make sure that we have deep, broad quality relationships that we're using our capital to support with our customers. And that is really what drives the how we manage the balance sheet. So we think if you very simply, if you do very simple math and you say you're gonna have a 15-plus or minus % return in 2026, and you're gonna return roughly a third of it in dividends and roughly a third of it to support loan growth, it still gives you capacity under your authorization to buy back some more stock.
I guess the other piece that you could have factored into that is that you've been in an environment where you've been bringing down capital ratios, right? So.
Yep.
Your allocation probably would've kept it consistent. But if I think about it, you have a near-term target of 10.75. And, you know, I guess long-term goal, you know, 10 to 10 and a half. You know, how do you think about, you know, balancing all of these things? Like you obviously talked about the third and third, but also then bringing capital down. And what would drive you towards the lower end of that capital target?
I think it's really two factors. I think the progress that we have made. I think we'll make substantial progress this quarter getting towards 10.75. I think we'll reassess in early 2026 and continue what do we move to 10.5, you know, and be measured in the steps we take. I think what dictates the sort of drivers are one, you know, what's happening in the broader context of the industry. And it sort of feels like some of the over-capitalization in the industry is what you might go next door and get more precise answer. But I think you're gonna have the industry sort of migrate capital levels and not be as over-capitalized as we have. And then the other is how do we feel about the economy?
And while we're optimistic about the economy and credit quality continues to be good in 2025 and we have every expectation to be in 2026, I do think that there's probably a disproportionate more downside risk in the near term than there is upside opportunity until we get more stability in the employment picture and things of that nature. So all of that said, you know, we think we'll make very measured and thoughtful steps in how we bring those capital ratios down. But I think the overall bias is we could operate the organization somewhere between 10 and 10 and a half over the long term in a CET1.
I'm guessing you're not gonna be surprised by this next question, Bryan. But I think the big story at 3Q earnings, at least from the market's perspective, was your commentary on M&A where you said in 2026 or beyond that you were increasingly confident in your ability to integrate a well-structured merger. Well, you noted that this wasn't a change in message. Obviously the shares were sent down in a meaningful fashion. You know, now that a few months have passed, you know, what conditions would drive you to pursue a fill-in or a tuck-in acquisition in your footprint? You know, is there increased flexibility or urgency versus, you know, prior years to, to look at doing something like this?
No, I'll go back to what I said four or five minutes ago, which is driving the $100 million-plus of incremental profitability is job number one. And M&A by definition is to some degree gonna change what you focus on as an organization. And if it's a small fill-in tuck-in even, it still takes time and our technology teams, etc. So while I am increasingly confident that we can do that given the right opportunity, it's not something that we have prioritized as a significant 2026 event. And as I think about our business, I think we have a great footprint. We have great momentum if we can get better branch distribution through the organic branches that we will build in 2025, excuse me, 2026, 2027, etc. With a tuck-in, yeah, we will consider it.
But number one is we're gonna drive the business like we have to create value for our shareholders. And the best way to do that is improve our profitability.
Sure. No, that makes total sense. I guess obviously a couple of years ago you guys made the decision to pursue a transaction with TD. And obviously we all know how that ended. But you know, maybe just talk about, you know, given the changing environment and changing regulatory environment, how do you evaluate the optionality between remaining independent, considering strategic combinations, or even pursuing expansion via mergers or branch deals just given, you know, the regulatory climate that we're seeing right now?
Yeah. It would be fair to say that I'm less than objective. But I think our board is an extraordinarily capable board. It's a thoughtful board. And if you go back to 2022 and what you described as the opportunity with TD, our board was then focused on what creates the most value for our shareholders. And they're focused today on what creates the most value for our shareholders. And they, when we lay out our plans and our strategy, challenge us on all the alternatives. So back to your comments about the earnings call in the third quarter, it was never my intent to take any of our optionality off the table.
Sure.
It always exists. And we're gonna pursue the path that creates the most value for our shareholders. And if that increases, if that's, you know, growing the business organically or if that's being part of a merger in some way, shape, or form, all of those things are on the table.
Gotcha. No, super helpful. We really haven't spent any time with you talking about credit. Obviously, credit has been, you know, a big bright spot for FHN this year. Loss is tracking towards the low end of your 15-25 guide. Maybe just talk a little bit about anything that you're closely monitoring in the credit book or client portfolios in 2026 and anything in particular that you're spending more time thinking about in terms of areas of charge-off or provision over time.
I'll start and then Hope can help me. We feel good about what we're seeing from a credit quality perspective. And that's everything from our non-depository lending, which is primarily mortgage warehouse lending, all the way across commercial real estate, commercial lending, and even consumer lending. And as we sit here today, we're optimistic that those trends will continue in 2026 given that we are basically leaning in and optimistic about the economic environment that we operate under. And falling rates will help improve credit quality even further.
The one comment I'll make on NDFI in addition to Bryan to credit in addition to Bryan is the NDFI comment. You know, the call reports in June had, you know, changes to them. So as Q3 became a question about NDFI due to the losses, we screen higher than most, but we pick mortgage warehouse up on that. And I wanna note how we do mortgage warehouse different at First Horizon. We're not lending to a party for them to lend to somebody else, and we don't have any collateral. We do have collateral. The way we do mortgage warehouse is at closing, we pick the lawyer and we take the loan documents and we retain the loan documents. So should a, you know, company that we're doing business with in mortgage warehouse not be able to continue in business, we have that collateral.
We can proceed with, you know, pledging it with Fannie Freddie or selling it into the securitized market, and so I do wanna comment that I know poor Tyler's had a lot of questions on that, post-Q3 earnings. But Mortgage Warehouse does count in the call report for us as NDFI and shows up as the biggest part of it. But it is not, you know, that third-party lending where you don't have any collateral on the other side or you don't know who they're lending to.
So we're getting towards the end here. We covered a lot of ground, particularly how you're thinking about, you know, the next year capital allocation, you know, strategic activity, PP&R uplift. So a lot in there. And I guess the answer could kinda speak for itself, Bryan. But, you know, when you think about First Horizon, you know, talk maybe about what you think distinguishes the story into next year. What do you think is still, you know, misunderstood? And what do you see as the biggest opportunity as we, you know, turn the calendar in the next, you know, 22 or so days?
Yeah. I think people are very keenly aware that we have a fantastic footprint. I think that we are still a transition story. We spent the better part of three and a half years focused on M&A, whether it's integrating an MOE or then moving into the TD scenario. I think the momentum building that you're seeing in 2023, 2024, 2025, it is really a building story. And I feel very, very good about our ability to deliver in a very focused way for our customers and our communities that will create a tremendous amount of value for our shareholders. And at the end of the day, it is gonna be something that is a more and more increasingly valuable firm and a great southern footprint. Anything you'd add to that?
Think you covered it well.
Awesome. Well, we are out of time. So please join me in thanking Bryan and Hope.
Thanks, Bryan.
Thanks, Bryan.