First Horizon Q1 2026 Margin and ROTCE Growth Unveiled

Key drivers of gross margin improvement in Q1 2026 (and how they map to margin)

First Horizon’s “gross margin” drivers in Q1 2026 are best evidenced in the transcript through net interest margin / net interest income (NII) margin performance and deposit cost discipline (i.e., the economics of funding and earned yields). Management explicitly ties Q1 margin expansion to deposit pricing behavior after the December 2025 rate cut and to offsetting dynamics on the asset side. ¹

1) Deposit cost management (funding economics) offsetting asset-side yield pressure

• Management reports that margin expanded 1 basis point in Q1 2026 on continued strong performance in managing deposit costs following the Fed’s last rate cut in December 2025. ¹
• They also state that while variable loan portfolio yield declines occurred in the quarter, deposit pricing discipline offset this impact. ¹
• This is reinforced by deposit pricing details: the average rate paid on interest-bearing deposits declined to 2.28% (from 2.53% in Q4). ¹

Implication for gross margin: Even if earned yields soften (variable loan yields), gross economics can still improve if the bank wins on funding costs; Q1 shows exactly that deposit-cost offset mechanism. ¹

2) Net interest income growth outpacing loan growth, supporting margin/mix

• Management says net interest income grew 6% year over year, outpacing loan portfolio growth of 3% over the same period (amid rate decreases). ¹

Implication for gross margin: When NII grows faster than earning-asset volume, it often reflects pricing/mix and/or better deposit funding—both consistent with the deposit-cost driver described above. ¹

3) Pre-provision revenue improvement (operating profitability feed-through)

• The quarter included an 8% improvement in adjusted pre-provision net revenue compared to 2025. ¹

Implication for gross margin: While “pre-provision net revenue” is broader than pure interest margin, it signals improving revenue generation before credit costs—typically a necessary ingredient for margin improvement. ¹

4) Fee income and expense timing/mix are not portrayed as the primary margin story

• Fee income decreased $12 million quarter over quarter (excluding deferred comp), while it was up $13 million year over year. ²
• Management attributes fee income declines to day count/seasonality and specific line-item fluctuations rather than a structural deterioration. ³

Implication: Margin improvement in Q1 is portrayed more as NII/funding-driven than fee-driven. ³²

---

Key drivers of ROTCE growth in Q1 2026

ROTCE growth is discussed in two complementary ways in the transcript:

1. ROTCE level and trajectory (“third straight quarter of 15%+,” “ROTCE up a couple hundred bps year over year”), and
2. The mechanics behind higher returns: improved profitability from the balance sheet, leverage of the balance sheet via capital return/growth, and regulatory capital path (CET1 reduction). ⁴⁵

1) Higher profitability / improved adjusted ROTCE level

• First Horizon delivered a 15.1% adjusted ROTCE, up over 200 basis points year over year. ¹
• They also indicate a third straight quarter of 15% or greater adjusted ROTCE, “fueled by strong C&I client growth and relationship-focused client activity.” ⁵

2) Revenue generation linked to client growth + relationship banking

• Management attributes momentum to strong C&I client growth and relationship-focused client activity across markets. ⁵
• They also describe disciplined execution: building true client relationships, staying disciplined on price and structure, and supporting clients with full franchise capabilities. ⁵

ROTCE mechanism: Relationship banking and disciplined pricing/structure can improve both revenue quality and risk-adjusted performance—supporting higher ROTCE. ⁵

3) Operating leverage through deposit cost discipline and expense control

• ROTCE performance coincides with margin improvement driven by deposit cost management. ¹
• On the expense side, management reports adjusted expenses decreased $32 million from the prior quarter (excluding deferred compensation), including personnel expenses down $10 million and outside services down $26 million tied to reduced technology and marketing expenses. ³

ROTCE mechanism: Lower costs relative to revenue generally boosts profitability, helping ROTCE. ³¹

4) Capital actions / CET1 management supporting returns on tangible/equity

ROTCE is a return metric that depends on both earnings and the capital base deployed. The transcript highlights multiple capital-related supports:

• Management states ROTCE is up due to:

  • improved profitability on the existing balance sheet,
  • the ability to leverage the balance sheet (through capital return or balance sheet growth),
  • and regulatory guidance of bringing CET1 ratios down. ⁴

• They also emphasize confidence building ROTCE “over time,” while explicitly noting 15%+ as a target rather than a destination. ⁴

5) Explicit capital management actions in the quarter (share repurchases, capital issuance)

• The company issued $400 million of Series H preferred stock, contributing to a 44 basis point increase to its Tier 1 capital ratio of 11.95%. ⁶
• CET1 ended at 10.53%, and the quarter included buybacks of ~$230 million of common shares. ³
• Management also notes $766 million in buybacks during the period covered by those remarks. ⁶

ROTCE mechanism: Buybacks can lift per-share return metrics and reinforce shareholder returns if earnings remain stable; preferred issuance can support capital ratios, enabling continued capital returns while maintaining regulatory comfort. ³⁶

---

Putting it together: the combined ROTCE “engine” in Q1 2026

In Q1 2026, ROTCE growth is depicted as the result of a three-part engine:

1. Profitability improvement: adjusted ROTCE reached 15.1% and was up 200+ bps YoY, with an 8% improvement in adjusted pre-provision net revenue. ¹
2. Balance-sheet margin/funding economics: margin expansion of 1 bp tied to deposit cost discipline, offsetting variable loan yield declines. ¹
3. Capital/capital-regime leverage: ROTCE supports from the ability to leverage the balance sheet and the path to lower CET1 ratios, alongside active capital actions (preferred issuance and common buybacks). ⁴⁶³

Together, this frames ROTCE improvement as not merely a one-off income event, but as management executing across pricing/client growth, funding economics, expense discipline, and capital deployment. ⁴⁵¹³⁶