10-Q: First Horizon Reports Strong Q2 Earnings, Redeems Preferred Stock

First Horizon Corporation announced a significant increase in second-quarter net income available to common shareholders, alongside strategic capital management actions including a preferred stock redemption.

Summary

• Net income available to common shareholders for Q2 2025 was $233 million, or $0.45 per diluted share, a notable increase from $184 million, or $0.34 per diluted share, in Q2 2024.
• Net interest income (NII) for Q2 2025 reached $641 million, up $12 million from Q2 2024, primarily driven by lower interest-bearing deposit costs and the impact of the investment portfolio repositioning in Q4 2024.
• The provision for credit losses decreased to $30 million in Q2 2025, down from $55 million in Q2 2024.
• Net charge-offs were $34 million, or 22 basis points, in Q2 2025, consistent with Q2 2024.
• Noninterest income for Q2 2025 was $189 million, an increase of $3 million compared to Q2 2024.
• Noninterest expense decreased by $9 million, or 2%, to $491 million in Q2 2025 compared to Q2 2024, largely due to lower FDIC special assessment and contract employment/outsourcing expenses.
• Period-end loans and leases totaled $63.3 billion, increasing $695 million (1%) from December 31, 2024, with growth in commercial loans (especially to mortgage companies) and consumer real estate.
• Period-end deposits remained largely unchanged at $65.6 billion from December 31, 2024, though interest-bearing deposits increased by $125 million while noninterest-bearing deposits decreased by $129 million.
• The Common Equity Tier 1 ratio was 10.99% at June 30, 2025, a decrease from 11.20% at December 31, 2024, primarily due to common share repurchases.
• First Horizon redeemed all outstanding shares of its Series B Preferred Stock on August 1, 2025, which had a carrying value of $77 million.

Sentiment

Score: 7

Explanation: The company reported strong earnings growth, reduced credit loss provisions, and lower expenses, indicating solid operational performance. However, a slight net interest margin contraction quarter-over-quarter and ongoing macroeconomic uncertainties, including deposit competition and regulatory changes, temper the overall positive sentiment.

Positives

• Net income available to common shareholders increased significantly to $233 million in Q2 2025 from $184 million in Q2 2024, representing a 26.6% year-over-year growth.
• Net interest income grew by $12 million year-over-year in Q2 2025, driven by lower interest-bearing deposit costs and the positive impact of the Q4 2024 investment portfolio repositioning.
• Provision for credit losses decreased substantially to $30 million in Q2 2025 from $55 million in Q2 2024, indicating improved credit quality outlook or lower expected losses.
• Noninterest expense declined by $9 million (2%) in Q2 2025 compared to Q2 2024, primarily due to lower FDIC special assessment expense and reduced contract employment and outsourcing costs.
• Total loans and leases increased by $695 million (1%) from December 31, 2024, reflecting growth in commercial loans (particularly to mortgage companies) and consumer real estate.
• The company maintains a strong capital position, qualifying as a 'well-capitalized' institution with a Common Equity Tier 1 ratio of 10.99% at June 30, 2025.
• Accumulated other comprehensive loss improved to $(912) million at June 30, 2025, from $(1,128) million at December 31, 2024, indicating a recovery in the fair value of certain financial instruments.

Negatives

• Net interest margin slightly contracted by 2 basis points to 3.40% in Q2 2025 compared to Q1 2025, primarily due to higher deposit costs associated with increased brokered deposit balances.
• Noninterest-bearing deposits decreased by $129 million from December 31, 2024, while interest-bearing deposits increased by $125 million, indicating a shift towards more expensive funding sources.
• The Common Equity Tier 1 ratio decreased to 10.99% at June 30, 2025, from 11.20% at December 31, 2024, mainly due to common share repurchases.
• Nonperforming C&I loans increased, largely driven by loans in the finance and insurance industry, partially offset by reductions in CRE nonaccrual loans.
• Average daily revenue from fixed income declined by 6% in Q2 2025 compared to Q1 2025, attributed to less favorable market conditions.

Risks

• Global, national, and local economic and business conditions, including economic recession or depression, can significantly impact financial results.
• The stability or volatility of values and activity in the residential housing and commercial real estate markets poses a risk to loan portfolios.
• Expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, can significantly impact net interest income.
• Market and monetary fluctuations, including those in mortgage markets, affect various business segments.
• The financial condition of borrowers and other counterparties can lead to credit losses.
• Competition within and outside the financial services industry can impact loan and deposit pricing and market share.
• The occurrence of natural or man-made disasters, pandemics, conflicts, or terrorist attacks, or other adverse external events, can disrupt operations and financial performance.
• Fraud, theft, or other incursions through conventional, electronic, or other means directly or indirectly affecting FHN or its clients, business counterparties, or competitors.
• Changes in the regulation of the U.S. financial services industry, laws, regulations, and administrative actions, including executive orders, can increase compliance costs and operational burdens.
• Potential claims alleging mortgage servicing failures, individually, on a class basis, or as master servicer of securitized loans.
• Potential claims relating to participation in government programs, especially lending or other financial services programs.
• Potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages.
• Changes in accounting policies, standards, and interpretations can affect reported financial results.
• Evolving capital and liquidity standards under applicable regulatory rules may require adjustments to capital management strategies.
• Reputational risk and potential adverse reactions or changes to business or associate relationships.
• Uncertainty regarding the actual timing of the implementation of the SEC's Climate Disclosures Rules, if sustained through the judicial process, and the potential effects on financial statements.
• Legal challenges and pending motions for preliminary injunctions against California's GHG reporting regimes create uncertainty regarding their implementation and potential competitive disadvantages.
• Increased casualty risks and costs in southern and southeastern U.S. markets due to hurricanes and other severe weather events, leading to property insurance instability and potential loan losses.
• The timing, scope, and duration of new U.S. government tariffs and retaliatory responses, and their impact on economic growth, inflation rates, and employment rates, are uncertain.
• Increased competition for client deposits is expected to continue, potentially leading to higher funding costs and net interest margin compression.

Future Outlook

Management anticipates that capital ratios will remain above well-capitalized standards plus the required capital conservation buffer during 2025. The market consensus expects two additional Federal Reserve rate reductions over the remainder of 2025, contingent on inflation and economic conditions. The recently enacted 'One Big Beautiful Bill Act' federal legislation may significantly impact general economic and business conditions. The timing, scope, and duration of new U.S. government tariffs and any retaliatory measures by foreign governments remain uncertain, as does their impact on economic growth, inflation rates, and employment rates. Increased competition for client deposits is expected to continue throughout 2025 and in 2026.

Management Comments

• Management does not currently anticipate that FHN will make a contribution to the qualified pension plan in 2025.
• FHN continues to closely monitor economic developments and assess potential exposures.
• While management believes the assumptions used and scenarios selected in its simulations are reasonable, simulation modeling provides only an estimate, not a precise calculation, of exposure to any given change in interest rates.

Industry Context

The banking industry continues to navigate a challenging environment characterized by intense competition for deposits, influenced by elevated interest rates and the aftermath of 2023 bank failures. Federal Reserve monetary policy, including recent rate cuts and the expectation of further reductions, significantly impacts net interest margins and bond trading revenues. Yield curve dynamics, such as the prolonged inversion and subsequent steepening, directly affect lending profitability. New fiscal policies, like the 'One Big Beautiful Bill Act,' and evolving trade policies, including tariffs, introduce economic uncertainty. Regulatory proposals, particularly for larger banks, could increase compliance costs and operational constraints. Furthermore, climate-related disclosure requirements from the SEC and California pose new reporting burdens and potential competitive disadvantages for publicly traded financial institutions. Rising casualty risks and property insurance instability in high-growth southern and southeastern U.S. markets are also impacting business decisions and increasing loan loss exposures.

Comparison to Industry Standards

• First Horizon Corporation and its banking subsidiary, First Horizon Bank, both maintain capital levels sufficient to qualify as 'well-capitalized' institutions and meet the capital conservation buffer requirement, demonstrating strong adherence to regulatory benchmarks.
• The consumer real estate portfolio's weighted average FICO score of 759 at origination and 756 (refreshed) indicates a relatively high-quality borrower base, suggesting better credit risk profiles compared to general market averages for consumer loans.

Corporate Governance

Legal Proceedings

• Various litigation matters are threatened or pending against FHN and its subsidiaries in the ordinary course of business.
• FHN receives requests for information, subpoenas, or other inquiries from federal, state, and local regulators and other government authorities.
• The aggregate amount of liabilities established for all loss contingency matters was $3 million as of June 30, 2025.
• Estimable reasonably possible losses in future periods in excess of currently established liabilities for all material loss contingency matters could aggregate in a range from zero to less than $1 million.
• The repurchase and foreclosure liability, primarily related to pre-2009 mortgage origination, sale, securitization, and servicing businesses, was $15 million as of both June 30, 2025, and December 31, 2024.

Stakeholder Impact

• Shareholders benefit from increased net income, continued common stock dividends, and common share repurchases which can enhance earnings per share and shareholder value.
• Preferred shareholders are impacted by the redemption of Series B Preferred Stock, receiving the redemption price and accrued dividends.
• Employees are affected by the company's retirement plans, with no contributions anticipated for the qualified pension plan in 2025, but expected benefit payments for non-qualified plans.
• Customers may experience higher interest rates on deposits due to increased competition for funding, while mortgage customers are influenced by prevailing mortgage rates.
• Creditors are impacted by the company's debt management activities, including the retirement of senior notes and issuance of new ones, with strong capital ratios providing assurance.
• Regulatory bodies are engaged through compliance with capital requirements and ongoing assessment of new regulatory proposals, such as climate disclosures and capital rules.

Next Steps

• FHN will provide a full retrospective presentation of its income tax disclosures in accordance with ASU 2023-09 within its annual Form 10-K filing.
• FHN is currently assessing the effects of adopting ASU 2024-03 on its financial statement disclosures.
• FHN is assessing the potential effects of the Climate Disclosures Rules on its financial statements.
• FHN expects to fund accrued contractual funding commitments for low income housing partnerships by the end of 2026.
• FHN anticipates making benefit payments under non-qualified retirement plans of $5 million in 2025.
• FHN's Board approved cash dividends for common stock ($0.15 per share payable October 1, 2025) and preferred stock (Series C, E, F payable November 3, 2025 and October 10, 2025, respectively).

Key Dates

Recommendation

First Horizon reported strong Q2 earnings with a significant increase in net income and reduced credit loss provisions, indicating solid operational performance. The company is actively managing its capital through share repurchases and preferred stock redemption, maintaining a well-capitalized position. However, the net interest margin experienced a slight quarter-over-quarter contraction due to higher deposit costs, and the Common Equity Tier 1 ratio decreased due to share repurchases. Ongoing macroeconomic uncertainties, including potential future rate cuts, intense deposit competition, and the uncertain impact of new fiscal and trade policies, present headwinds. Given the mixed signals of strong performance against a backdrop of persistent market uncertainties, a 'hold' recommendation is appropriate for a seasoned investor, suggesting continued monitoring of these evolving factors.

Keywords

First Horizon, FHN, Banking, Financial Services, Quarterly Report, Earnings, Net Interest Income, Credit Losses, Deposits, Capital Ratios, Share Repurchase, Preferred Stock Redemption, Mortgage Banking, Risk Management, Interest Rate Risk, Climate Disclosure, ESG, Economic Outlook, Commercial Lending, Consumer Lending, Wealth Management