First Horizon: Rate Shift and Loan Momentum Define the Quarter

Deposit costs rise but NII grows; management sees 'surprisingly optimistic' lending environment.

FHN · Earnings Call · 2026-07-15

A Change in the Rate Narrative

First Horizon’s Q2 2026 call signaled a notable pivot in the macro backdrop that shapes the bank’s earnings. After several quarters of positioning for potential Fed rate rate environment cuts, management now acknowledges a rate increase as a real possibility. CFO Hope Dmuchowski noted that deposit costs will likely follow a similar pattern to 2025, where rates came back up after cuts stopped:

I expect it to look very similar to last year. As you looked at what happened in 2025, following the this cuts at the end of the year, rates came back up. The competition increased.
Hope Dmuchowski, Chief Financial Officer · 2026-07-15

This shift is reflected in the Deposit cost trajectory — the average rate paid on interest-bearing deposits rose 5 basis points to 2.33%, and the cumulative deposit beta is now 66%.

In the prior quarter’s call (April 2026), the tone was more balanced, with guidance built on a stable-to-slightly-lower rate path: “The mid-3.40s comment was about stabilization when we saw a flat rate environment and more consistent spreads. Near term, we do expect to be in the high 3.40s.” — Hope Dmuchowski, Chief Financial Officer · 2026-04-15 That view has evolved — now the team openly discusses the possibility of hikes and the positive NII impact from an asset-sensitive balance sheet if they materialize.

Loan Growth Momentum

The most striking change is the exuberance around lending. CEO Bryan Jordan described the market as “surprisingly optimistic”:

I would describe the loan markets, John, as maybe a little surprisingly optimistic. Pipelines have continued be very strong. Whether it is in customer request for lending or just in anecdotal conversations with customers people are still very optimistic about the economy and very forward leaning.
D. Bryan Jordan, Chairman, President and CEO · 2026-07-15

This is a clear step-up from the cautious tone of the January call, where Hope noted the guidance had “multiple ranges” partly because of the “decreasing rate environment” — Hope Dmuchowski, Chief Financial Officer · 2026-04-15 and the trade-off between NII and fee income. Now, the bank is seeing Strong loan growth — period-end loans grew $953 million, with $1 billion in commercial growth, and new commitments were up more than 50% year-over-year, driven by commercial real estate.

Capital and Basel III

Management provided a quantified update on Basel III, expecting an approximate 10% reduction in risk-weighted assets under the standardized approach. This is a new level of specificity and suggests potential capital relief that could support either more loan growth or buybacks. The bank is running CET1 at 10.5%, near its target, and remains open to operating lower over time. The securities portfolio offers an earnings tailwind: “We have $1.2 billion rolling off at approximately 2.8%, and we are replacing that at 4 plus percent.” — Hope Dmuchowski, Chief Financial Officer · 2026-07-15 This reinvestment should prop up NII even as margin compresses.

Expense and Efficiency

The expense outlook remains flat, a commitment that continues to hold. The bank is investing in front-line hires and technology, with AI specifically cited as a lever to scale without adding support headcount. Bryan Jordan emphasized the “big bank muscle and small-bank hustle” positioning, a community bank ethos that differentiates the franchise. This is part of the longer-term PPNR opportunity, which management reiterates as a $100 million-plus goal built on deeper client penetration.

The fundamentals support the narrative: Net Interest Income reached $667M in Q2 2026, up 6% year-over-year, with net income up 20% to $266M. The operating margin improved to 28.5%, a 4.7pp year-over-year gain. While the stock has been flat over the past 90 days, the underlying earnings momentum is clear.

Why It Matters

First Horizon is not simply riding a sector wave; it is converting an improving rate outlook and organic investments into tangible growth. The combination of a strong lending pipeline, disciplined expenses, and potential Basel III tailwinds positions the bank to continue delivering positive operating leverage. The shift in rate expectations is the key catalyst — if hikes occur, NII and ADR revenue could surprise to the upside, reinforcing the “countercyclical” business model that management highlights.