First Horizon Q1 2026 Financial Drivers: Margin and ROTCE Growth Insights

Key drivers of gross margin improvement and ROTCE growth for First Horizon in Q1 2026

1) Gross margin improvement (net interest margin / profitability of the balance sheet)

First Horizon’s “gross margin” improvement in Q1 2026 is primarily reflected in net interest income (NII) and margin improvements, driven by deposit-cost discipline and profitable growth in earning assets.

• Net interest income grew despite a rate-decrease environment. Management noted that amidst rate decreases over the last year, net interest income rose 6% year over year, outpacing loan portfolio growth of 3%—a direct indicator of improved earning-asset productivity and margin outcomes. ¹
• Margin expansion was achieved through deposit pricing discipline. The company stated that adjusted net interest margin expanded by 1 basis point, and attributed this to strong performance managing deposit costs following the Fed’s last rate cut in December 2025, with deposit pricing offsetting variable loan yield declines. ¹
• Lower average deposit rates supported margin. The average rate paid on interest-bearing deposits decreased to 2.28% (from 2.53% in the fourth quarter), consistent with a favorable cost of funds trend that supports gross margin through spread maintenance. ¹
• Seasonal and structural factors were managed alongside NII stability. Management said Q1 results showed NII consistent with Q4 absent day-count impact, and walked through margin performance starting on slide seven—indicating management believed underlying margin held up rather than deteriorating due to timing effects. ¹
• Deposit mix pressure (brokered deposit reductions) helped the cost profile. Period-end balances decreased by $1 billion, driven primarily by reductions in brokered deposits, which typically helps reduce expensive funding and therefore supports margin. ¹

In short: the dominant gross-margin driver in Q1 2026 was deposit cost management (pricing discipline plus mix toward less expensive deposits), which offset loan yield pressure and helped keep NII/margin resilient. ¹

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2) ROTCE growth (return on tangible common equity)

First Horizon’s ROTCE strength in Q1 2026 was supported by both operating profitability and capital/efficiency levers, with management explicitly linking ROTCE trajectory to a combination of profitability, balance-sheet leverage, and regulatory capital path.

A. Higher adjusted ROTCE led by improved profitability and revenue

• ROTCE acceleration vs. last year. The company reported adjusted ROTCE of 15.1%, up more than 200 basis points year over year, reflecting improved profitability. ¹
• Operating profitability improvements in pre-provision revenue. There was an 8% improvement in adjusted pre-provision net revenue versus 2025, supporting higher ROTCE via stronger earnings power before credit costs. ¹
• Fee and NII dynamics both influenced earnings. While fee income decreased quarter over quarter by $12 million (excluding deferred compensation), fee income was still up $13 million year over year, indicating some stabilizing contribution to overall revenue. ²

B. Momentum in core commercial lending supported income generation

• Strong C&I client growth and relationship activity. Management said Q1 delivered its third straight quarter of 15% or greater adjusted ROTCE, fueled by strong C&I client growth and relationship-focused client activity across markets. ³
• Core C&I loan growth contributed to the earning base. The company reported C&I loan balance growth of $624 million in the quarter (excluding mortgage-company seasonality), supported by strong pipelines. ¹²

C. Capital and balance-sheet leverage effects that convert profitability into ROTCE

• Management’s explicit ROTCE “stack.” In prepared remarks, management stated they are building ROTCE by combining:
  1. improved profitability on the existing balance sheet,
  2. ability to leverage the balance sheet via capital return or growth, and
  3. regulatory guidance of bringing CET1 ratios down,
     concluding they believe they can push ROTCE higher over time. ⁴
• CET1 ratio progress enables capital return/leverage. The firm reported CET1 of 10.53% at quarter end, and referenced buyback activity contributing to that level. ⁵
• Share repurchases increased shareholder capital efficiency. They reported buybacks of approximately $230 million in the quarter (and also noted $766 million in buybacks during the period in earlier remarks). ⁵⁶
• Preferred issuance strengthened capital ratios (supporting capacity to return capital and/or grow). During the quarter, the company issued $400 million of Series H preferred stock, which drove a 44 basis point increase to its Tier 1 capital ratio of 11.95%—a capital support lever consistent with maintaining return-focused strategies. ⁶

D. Expense discipline and credit stability supported the earnings engine behind ROTCE

• Expense discipline reduced adjusted costs. Adjusted expenses (excluding deferred compensation) decreased $32 million from the prior quarter, including $10 million lower personnel expenses and $26 million lower outside services (including lower technology and marketing spend). ⁵
• Credit remained within expectations. Net charge-offs decreased to $29 million, and the net charge-off ratio was 18 basis points, described as in line with expectations; provision for credit losses was $15 million and the ACL-to-loans ratio declined slightly to 1.28% driven by mix change. ⁵

In short: ROTCE growth in Q1 2026 was driven by higher profitability (notably improved pre-provision net revenue and strong ROTCE-to-date performance), supported by C&I-driven revenue/earning base growth, and reinforced by expense discipline and stable credit, while capital actions (buybacks, preferred issuance, and the regulatory CET1 trajectory) helped convert earnings into higher ROTCE. ³¹⁵⁴

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Consolidated view: the “chain of causality” from margin to ROTCE in Q1 2026

1. Deposit pricing discipline reduced the cost of funds (average rate paid 2.28% vs. 2.53% in Q4), enabling NII resilience and 1 bp margin expansion even as some loan yields declined. ¹
2. That helped produce improved adjusted pre-provision net revenue (+8% vs. 2025) and adjusted ROTCE of 15.1% (+200 bps+ YoY). ¹
3. Client/relationship execution delivered strong C&I loan growth ($624 million) and contributed to sustained 15%+ adjusted ROTCE performance. ³¹
4. Expense controls and in-line credit outcomes supported conversion of revenue into earnings. ⁵
5. Finally, management’s stated ROTCE framework (profitability + balance-sheet leverage + CET1 trajectory) plus capital actions (buybacks and preferred issuance) helped sustain and build ROTCE through capital efficiency. ⁴⁵⁶

This is the specific set of drivers management emphasized in Q1 2026 for both margin/profitability improvement and ROTCE growth. ⁴¹³