First Horizon takes a $473 million loss to sell mortgages, and the payback takes years

A one-quarter loss to shed low-yield mortgages

First Horizon signed an agreement in October to sell about $4.5 billion of residential mortgages, with settlement expected early in the fourth quarter. The loans carry a low average coupon and come with few deposits attached, so they use up balance sheet without funding it or earning much. In the September 2026 quarter the bank booked a $473 million pre-tax loss on the pending sale.

After tax, total notable items, almost all the sale, came to $347 million, which is 1.4 times the quarter's adjusted net income to common shareholders, a ratio calculated from the reported figures.

The payback is measured in years

Management's case is that the bank swaps a loan that earns little for cash it can use better. It expects a lift to earnings per share and to return on tangible common equity, with part of the proceeds paying down wholesale funding. The chief financial officer said: "The 4% is really the immediate lift, which is a portion of it going to pay down wholesale funding".

The company's slides put the benefit at about 4%, or $45 million after tax, of 2027 earnings, and the chief executive treated it as incremental to the existing profit programme. Set against the $347 million, that is about 7.7 years of benefit if the cash only sits in securities, our calculation.

Lending is the shorter route: management's working assumption, dependent on the economy, is to put about half the proceeds into loans over two to three years. Bryan Jordan, the chief executive, said the securities-only case is "a longer earn-back" and that with about half the proceeds in loans it comes in "very favorable vis-a-vis a stock buyback". The chief financial officer said the figure in the company's slides is the immediate impact in the current rate scenario.

The quarter showed the costs before any payback

Adding the sold pool back, period-end loans are about 0.2% above the previous year-end, our calculation from the reported balances. Inside that, commercial and industrial loans other than lending to mortgage companies fell $96 million in the quarter, our calculation.

Revenue is a separate pressure, and on the call the CFO tied it to last year's fourth-quarter comparison and the rate environment. The company held a 3% to 7% range for full-year revenue growth in April and July, then in October narrowed it to the low end of that range, which the CFO said reflects the sale and the rate environment. Revenue excluding the loss is still up over nine months, calculated from the reported quarters, but it was 1% below a year ago last quarter, as adjusted noninterest income fell, with fixed-income trading and mortgage banking both lower. The filed adjusted total revenue, on a fully taxable equivalent basis, also fell. The chief financial officer said last year's fourth quarter was a high point for mortgage warehouse balances, with fixed-income trading she does not expect to repeat.

Margin should improve while funding gets dearer

The bank expects its net interest margin, the gap between what it earns on assets and what it pays for funding, to improve into the 3.50s in the fourth quarter, helped by the sale, from 3.48% last quarter. Last quarter the cost of interest-bearing deposits rose, with average time deposits 37% above a year ago.

For the coming cycle of rate increases the company targets a deposit beta of about 60%, meaning it would pass that share of higher policy rates on to depositors. The chief financial officer said the fourth-quarter deposit-cost path depends on how many rate increases come and when, while she still expects the margin to reach that range.