First Horizon, a Memphis-based regional bank operating across 12 Southern states, has agreed to sell approximately $4.5 billion of lower-yielding residential mortgages while restructuring its mortgage operation to focus production more closely on core banking clients.
Management separately reaffirmed its commitment to warehouse lending, giving independent mortgage bankers an important distinction: the bank is repositioning its residential portfolio while continuing to finance other lenders.
The moves, discussed with the bank’s Oct. 15 earnings, show how different parts of mortgage lending compete for funding, staff, and balance-sheet capacity within the same institution.
A More Selective Origination Strategy
CFO Hope Dmuchowski told analysts the bank’s reorganization included reductions in its mortgage business “to align mortgage production more closely with core clients.” She also said mortgage and other smaller restructurings reduced ongoing personnel and associated costs.
First Horizon recorded $3 million in severance costs for business-line restructuring during the quarter.
CEO Bryan Jordan said the bank selected the sale portfolio by targeting loans with little relationship beyond the mortgage, while trying to exclude private-client and wealth relationships. The loans carried a weighted average coupon of 3.85% and approximately $200 million in associated deposits, management said.
Dmuchowski said the loans were seasoned mortgages whose borrowers had not developed broader relationships with the bank.
For LOs competing with banks, the relationship strategy adds another factor to the sales conversation. NMP’s recent reporting on Chase’s relationship-pricing expansion shows how a borrower’s deposits and investments can translate into rate discounts. Originators should establish early whether a competing offer depends on existing account balances or moving additional assets, so borrowers can compare the full requirements alongside the loan terms.
Warehouse Lending Remains In The Plan
Management separately reaffirmed its commitment to mortgage warehouse customers. Dmuchowski said funded notes typically remain on the bank’s balance sheet for 19 days.
Jordan said warehouse balances declined roughly $900 million during the quarter, but management believed First Horizon had gained market share and expanded customer relationships. He also anticipated further consolidation among mortgage companies and said the bank remained positioned to serve its customers.
That short holding period helps explain how financing other lenders can fit alongside a decision to sell longer-term residential assets.
Taking A Loss To Create Capacity
The sale carries an approximately 10% all-in discount, according to management.
First Horizon recognized a $473 million pretax loss related to the pending transaction, including valuation adjustments and transaction costs. It separately recorded a $45 million provision reversal associated with the mortgage portfolio’s reclassification to held for sale.
The bank reported a third-quarter loss available to common shareholders of $94 million, or 20 cents per share. Adjusted earnings, which excluded notable items, were $253 million, or 53 cents per share.
First Horizon projects approximately $45 million in incremental after-tax earnings in 2027, equivalent to roughly 4% earnings accretion against the consensus forecast used in its presentation. Those estimates exclude additional benefits from partially redeploying proceeds into higher-yielding loans.
Dmuchowski said the initial earnings benefit would come from using proceeds to repay some wholesale funding and invest in short-term floating-rate securities. That means the projected improvement does not depend on immediately replacing the sold mortgages with new loans.
The transaction is expected to improve the loan-to-deposit ratio by approximately seven percentage points to about 88%. Its projected capital effect moves in the other direction: an approximately 45-basis-point reduction in the common equity Tier 1 ratio to 10.3%.
The strategic trade-off is accepting an immediate earnings and capital cost to improve liquidity and create room for more profitable lending.
First Horizon’s approach leaves room for growth in warehouse lending even while it reduces its own origination operation — a reminder that a bank’s appetite for funding lenders can differ from its appetite for holding their product.
