First Horizon Corporation (FHN)

Executive Summary / Key Takeaways

• Regional Dominance with Countercyclical Armor: First Horizon has built an enviable deposit franchise across 12 high-growth Southern states, but unlike typical regional banks, its fixed income and mortgage banking businesses provide natural hedges against rate volatility, creating a diversified earnings engine that delivered 3.55% NIM and $410 million pre-tax income in the Commercial segment despite macro uncertainty.

• ROTCE Inflection Through Capital Deployment: Management's 15%+ sustainable ROTCE target is not aspirational marketing but a three-pronged operational plan: reducing CET1 from 10.96% to 10-10.5%, normalizing credit provisions after two years of conservative building, and extracting $100 million+ in pre-provision net revenue from existing client relationships through technology-enabled deepening.

• Credit Quality as Hidden Earnings Lever: The $5 million provision credit in Q3 2025—versus $35 million expense a year ago—reflects not just strong underwriting but a strategic shift: after building reserves for two years against charge-offs that never materialized (actual losses running at just 17bps), FHN can now release capital to fuel earnings growth, a dynamic competitors with weaker credit performance cannot replicate.

• Technology Investment Translating to Revenue: The $100 million, three-year technology overhaul (general ledger and treasury management conversions completed in 2024) is moving from expense burden to revenue driver, enabling the treasury management cross-sell initiatives that represent the majority of FHN's identified PPNR opportunities and supporting the 96% loan-to-deposit ratio that signals efficient capital use.

• M&A Optionality in Consolidating Markets: With regional bank M&A accelerating in 2025 and FHN's management expressing "increasing confidence" in its integration capabilities, the company's strong capital position and proven post-IBERIABANK merger execution create asymmetric upside: either FHN benefits from competitor disruption or it becomes a disciplined acquirer of choice in its footprint.

Setting the Scene: The Southern Banking Franchise Reinvented

First Horizon Corporation, founded in 1864 and headquartered in Memphis, Tennessee, represents far more than a 160-year-old regional bank. Its evolution from a traditional lender to a diversified financial services platform with specialized capital markets capabilities explains both its current positioning and future earnings power. The company operates across 12 states in the southern U.S., but its strategic footprint—cemented by the July 2020 IBERIABANK merger of equals—concentrates in high-growth markets where it commands top-10 deposit share in Tennessee, North Carolina, Florida, and Louisiana.

This geographic concentration matters because it creates a low-cost funding advantage that competitors cannot easily replicate. When interest rates surged from 0.20% in March 2022 to 5.33% by fall 2023, most banks faced deposit flight and margin compression. FHN's deep regional roots and customer loyalty enabled it to maintain deposit stability while selectively repricing, a dynamic that supported NIM expansion to 3.55% in Q3 2025 even as the Fed began cutting rates. The implication is clear: FHN's deposit franchise is not just a funding source but a strategic moat that insulates earnings from rate volatility.

The company's business model spans commercial banking, consumer wealth management, and a distinctive Wholesale segment that includes mortgage warehouse lending and FHN Financial—a fixed income division serving institutional clients globally. This structure creates countercyclical revenue streams that hedge the balance sheet's natural asset sensitivity. When rates rise, lending margins expand; when rates fall, mortgage banking and fixed income activity typically accelerate. This diversification proved critical during the prolonged yield curve inversion from summer 2022 to September 2024, allowing FHN to navigate headwinds that pressured less-diversified peers.

Industry structure favors FHN's positioning. The Southeast continues experiencing above-average population and economic growth, driving loan demand and deposit formation. However, this growth attracts intense competition. Regional rivals like Regions Financial (RF) and Synovus (SNV) compete directly for commercial relationships, while Pinnacle Financial Partners (PNFP) challenges FHN's Tennessee stronghold. The 2023 banking crisis fundamentally altered deposit dynamics, making clients more rate-sensitive and increasing competition for core funding. FHN's response—investing in digital capabilities while leveraging its branch network for relationship banking—has preserved its 96% loan-to-deposit ratio, indicating efficient capital deployment without excessive wholesale funding dependence.

Technology, Products, and Strategic Differentiation: Beyond Traditional Banking

First Horizon's $100 million technology investment program, now roughly halfway complete, represents more than back-office modernization—it is the infrastructure for its next phase of growth. The 2024 completion of a new general ledger and treasury management system conversion, while invisible to end customers, eliminates legacy system constraints that previously limited product development speed and cross-sell effectiveness. CFO Hope Dmuchowski's candid admission that the new general ledger "will not make our clients' ability to do business with us any better or generate any revenue" actually underscores the strategic point: these investments create operational leverage, reducing the cost per transaction and enabling bankers to focus on revenue-generating activities rather than manual workarounds.

The treasury management system conversion is particularly consequential. Treasury services represent sticky, low-cost deposits and fee income that deepen client relationships. By modernizing this platform, FHN can now compete for sophisticated commercial cash management business that previously required larger competitors' technology stacks. This directly supports the identified $100 million PPNR opportunity, which management emphasizes is "deepening our relationships with our clients" rather than acquiring new ones. The implication is a higher return on existing capital—cross-selling to current customers costs less and generates more sustainable revenue than new client acquisition.

FHN Financial, the fixed income division within the Wholesale segment, functions as a built-in interest rate hedge. When the yield curve inverted and traditional lending margins compressed, FHN Financial's institutional trading and underwriting activities provided countercyclical revenue. In Q3 2025, fixed income fee revenues reached $57 million with average daily revenue (ADR) increasing to $771,000, reflecting improved conditions and increased customer activity. This matters because it transforms rate volatility from a pure risk factor into a potential revenue driver, a capability that pure-play commercial banks like Pinnacle Financial Partners lack. The segment's pre-tax income jumped $22 million quarter-over-quarter, demonstrating how this diversification can offset NIM pressure in a falling rate environment.

Mortgage warehouse lending, another Wholesale specialty, showcases FHN's ability to gain share through commitment. While competitors retreated from mortgage finance during rate volatility, FHN expanded lines by $1.4 billion in 2024, with over half from new-to-bank clients. This countercyclical investment positions FHN to capture refinancing activity as rates decline, while the business model itself—short-duration, collateralized lending to mortgage originators—carries lower credit risk than traditional CRE exposure. The Q3 2025 gain on mortgage servicing rights sale ($5 million pre-tax) further demonstrates management's tactical agility in optimizing this business.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

First Horizon's Q3 2025 results provide compelling evidence that its strategy is working. Net income available to common shareholders of $254 million ($0.50 per diluted share) increased 9% quarter-over-quarter and 19% year-over-year, but the composition of this growth reveals the underlying earnings power. Net interest income rose $33 million sequentially to $674 million, driven by average balance growth in higher-yielding assets and the $12 million Main Street Lending Program accretion. More importantly, the NIM expanded 15 basis points to 3.55% despite the Fed's rate cuts, with loan yields increasing 14 basis points while deposit costs rose only 2 basis points. This spread expansion demonstrates pricing power rooted in deposit franchise strength—FHN can reprice loans faster than it must reprice deposits, a dynamic that directly supports ROTCE expansion.

The segment performance tells a nuanced story. Commercial, Consumer Wealth generated $410 million pre-tax income, up $51 million year-over-year, driven by a $24 million revenue increase and a significant decrease in provision expense. This provision dynamic is crucial: after building reserves for two years against anticipated CRE losses that have not materialized, FHN is now releasing reserves as credit quality remains pristine. The ACL to total loans ratio decreased 5 basis points to 1.38%, reflecting both improved economic scenarios and lower specific reserves. For investors, this means earnings are benefiting from both core business growth and reserve normalization—a temporary but meaningful tailwind that competitors with weaker credit cannot replicate.

Wholesale segment pre-tax income of $51 million increased $22 million quarter-over-quarter, with fixed income revenues up $15 million and mortgage banking up $7 million. This countercyclical surge offset modest loan growth challenges in the Commercial segment, validating the diversified model. The $689 million increase in period-end loans in Q2 2025, driven by mortgage warehouse seasonal peaks, shows how the segment can quickly deploy capital when opportunities arise, then normalize as seen in Q3's $132 million decrease. This flexibility prevents capital from being trapped in low-yielding assets during uncertain periods.

The Corporate segment's $117 million pre-tax loss, while seemingly a drag, actually reflects strategic capital management. The $20 million contribution to the First Horizon Foundation and $10 million Visa derivative valuation expense are one-time or non-operating items that obscure the segment's true function: centralized capital and funding management. The segment includes run-off mortgage businesses from pre-2009, meaning these losses represent the final costs of legacy issues that no longer impact forward earnings power. As these run-off portfolios wind down, the drag on ROTCE will naturally diminish, providing another lever for improvement.

Credit quality remains the foundation of FHN's earnings resilience. Net charge-offs of 17 basis points in Q3 2025 sit at the low end of management's 15-25 basis point guidance, while nonperforming assets increased modestly to $621 million, driven by finance and insurance industry loans rather than systemic deterioration. Thomas Hung's detailed breakdown of the NDFI (non-depository financial institutions) book reveals a disciplined approach: the consumer financing portion represents "only about 2% of C&I or about 1% of total" loans, with elevated but "well-controlled" NPLs managed by a team of field examiners averaging 18 years of experience. This granular risk management explains why FHN avoided the CRE pitfalls plaguing some peers, with multifamily absorption issues driving NPLs rather than construction or office exposure.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames a clear path to 15%+ sustainable ROTCE, but the achievability depends on executing three distinct levers. First, capital deployment: the near-term CET1 target of 10.75% implies $200-300 million of excess capital can be returned to shareholders or deployed into loan growth. The redemption of all Series B Preferred Stock in August 2025 and $583 million in share repurchases year-to-date demonstrate commitment to this path. However, the pace of CET1 reduction depends on economic stability and regulatory clarity—any deterioration in credit conditions would force FHN to maintain higher capital buffers, delaying ROTCE improvement.

Second, credit normalization: Hope Dmuchowski's commentary that "we've been building provision for two plus years now for charge-offs that haven't materialized" directly addresses the earnings opportunity. If charge-offs remain at the low end of the 15-25 basis point range, FHN can release reserves, boosting earnings without requiring additional revenue growth. This is not a one-time gain but a normalization of credit costs to historical levels. The risk is that recession fears materialize, particularly given management's concern that tariff impacts could "knock out" the consumer and trigger a broader credit cycle. Thomas Hung's monitoring of retail trade, consumer finance, manufacturing, and construction sectors reflects proactive risk management, but the uncertainty itself creates execution risk.

Third, PPNR growth: the $100 million opportunity identified is "deepening our relationships with our clients" through treasury management, loan growth, and deposit gathering. The Q3 2025 results show progress—deposit transactions, cash management, and trust services drove noninterest income higher—but the pace matters. Achieving this target requires the technology investments to translate into measurable revenue gains, which may take longer than the 2+ year timeline management suggests. The competitive environment for deposits "continues to heat up," with D. Bryan Jordan noting that digital tools make money "easier to transfer across multiple platforms," pressuring deposit costs upward over time. This could offset some PPNR gains if FHN must pay higher rates to retain core deposits.

Loan growth expectations remain modest but realistic. Management maintains mid-single digit growth targets for 2026, acknowledging that commercial real estate paydowns will temper overall balances. The mortgage warehouse business provides flexibility—seasonal peaks in Q2 followed by normalization in Q3 show capital can be redeployed quickly. More importantly, the pipeline momentum Jordan references suggests client confidence is returning as tariff uncertainties moderate. If this translates to C&I loan growth in 2026, it would support both NII and ROTCE expansion.

The M&A landscape presents asymmetric opportunity. Jordan's comment that "bank M&A activity clearly accelerated in the third quarter" and his expressed confidence in FHN's integration capabilities signal that the company is prepared to act as a consolidator. With a 10.96% CET1 ratio and proven post-merger systems integration, FHN could acquire smaller competitors at attractive prices, accelerating market share gains in its footprint. Conversely, if FHN remains independent, the consolidation among peers like Regions Financial or SouthState (SSB) could reduce competitive pressure, allowing FHN to maintain pricing discipline and NIM expansion. The stock's 12% decline when Jordan mentioned M&A possibilities reflects investor fear of dilution, but the long-term strategic value of consolidation in FHN's footprint is positive.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to FHN's ROTCE inflection is a credit cycle turn driven by consumer weakness. Jordan's warning that tariff impacts could "quickly spread" if "the consumer gets knocked out" is not idle speculation. The bank's C&I portfolio includes exposure to retail trade and consumer finance sectors that would be directly impacted by tariff-driven price increases. While the NDFI book is "only about 2% of C&I," a broad consumer slowdown would affect the entire loan portfolio, increasing charge-offs beyond the 15-25 basis point guidance and forcing provision builds that would reverse the earnings tailwind. The 18-year average experience of FHN's field examiners provides comfort, but it cannot prevent macro-driven losses.

Commercial real estate remains a watch item. The increase in CRE NPLs due to "slower absorption in multifamily properties" is manageable at current levels, but if this spreads to office or retail properties, it could require material reserve builds. FHN's CRE exposure is not disproportionate relative to peers, but the regional concentration means a local economic slowdown could have outsized impact. The fact that nonaccrual C&I loans increased in finance and insurance while decreasing in construction suggests the credit stress is rotating rather than receding, requiring constant vigilance.

Deposit competition represents a structural margin headwind. Jordan's observation that digital tools enable easy money movement across platforms implies that the low-cost deposit advantage FHN has enjoyed may erode over time. If competitors offer higher rates or innovative products, FHN must either match—compressing NIM—or accept deposit outflows, constraining loan growth. The 96% loan-to-deposit ratio provides little cushion; any significant deposit flight would force reliance on higher-cost wholesale funding, directly impairing ROTCE.

Regulatory and compliance costs create another asymmetry. The uncertain status of SEC climate disclosure rules and California's GHG reporting regimes could impose significant compliance costs. More concerning is the potential requirement for FHN to obtain GHG information from customers for Scope 3 reporting, which would "impose costs/inconveniences on customers" and give "other banks not subject to these requirements" a competitive advantage. While these rules remain stayed pending judicial review, their mere existence creates uncertainty that could impact FHN's ability to compete for certain commercial relationships.

The ongoing federal government shutdown, which began October 1, 2025, presents near-term risk. If prolonged, it could impact SBA lending, delay loan approvals, and reduce economic activity in FHN's markets. While management has not quantified the impact, the exposure to government-dependent sectors creates earnings volatility that the countercyclical businesses may not fully offset.

Valuation Context: Pricing the ROTCE Inflection

At $22.34 per share, First Horizon trades at 13.46 times trailing earnings and 1.30 times book value, a modest valuation that appears to discount the ROTCE improvement story. The price-to-free-cash-flow ratio of 29.85 reflects the quarterly volatility in operating cash flow (-$200 million in Q3 2025) rather than the annual trend ($1.27 billion TTM), suggesting the market may be mispricing the underlying cash generation capacity.

Relative to peers, FHN's valuation appears conservative. Regions Financial trades at 11.21 times earnings with a 1.27 price-to-book ratio and higher ROE (11.40% vs FHN's 9.72%), but lacks FHN's countercyclical revenue diversification. Synovus trades at just 9.03 times earnings with superior ROE (14.23%) but faces greater CRE concentration risk. Pinnacle Financial Partners, at 11.69 times earnings, has lower ROE (9.44%) and less geographic diversification. SouthState's 12.28 P/E and 1.00 P/B reflect acquisition-driven growth that may face integration headwinds.

The key valuation metric for FHN's thesis is price-to-tangible book, given the ROTCE target. At 1.30 times book, the market assigns minimal premium to the franchise, implying skepticism about management's ability to achieve 15%+ ROTCE. If FHN executes its capital deployment, credit normalization, and PPNR growth levers, a re-rating to 1.5-1.7 times book would be justified, implying 15-30% upside before considering earnings growth. The 2.69% dividend yield, with a conservative 36.14% payout ratio, provides downside protection while investors await the ROTCE inflection.

The valuation asymmetry lies in the M&A optionality. Regional banks typically trade at 1.5-2.0 times book in acquisition scenarios. If FHN becomes a target, the current valuation offers little downside. If FHN becomes an acquirer, its currency is reasonably priced for accretive deals. The market's 12% decline on M&A comments reflects short-term dilution fears, but the long-term strategic value of consolidation in FHN's footprint is positive.

Conclusion: The Convergence of Moat and Efficiency

First Horizon's investment thesis centers on the convergence of two powerful forces: a durable regional deposit moat that supports NIM expansion even in volatile rate environments, and a capital efficiency program that can drive ROTCE above 15% through disciplined deployment, credit normalization, and technology-enabled revenue extraction. The Q3 2025 results provide early validation—NIM expanded to 3.55%, credit costs normalized to a provision credit, and countercyclical businesses offset traditional lending headwinds.

What makes this story attractive is the combination of defensive characteristics and earnings leverage. The Southern footprint provides low-cost funding and pricing power, while the diversified business model hedges rate risk. The $100 million PPNR opportunity and $200-300 million of excess capital create visible earnings drivers that do not depend on perfect macro conditions. Management's proven execution through COVID, supply chain disruptions, and the IBERIABANK integration suggests the ROTCE target is achievable.

The critical variables to monitor are credit quality in the C&I portfolio, particularly consumer-exposed sectors vulnerable to tariff impacts, and deposit beta behavior as rate expectations evolve. If charge-offs remain below 20 basis points and deposit costs rise modestly, the provision release and NIM expansion will drive ROTCE toward the 15% target by 2026. If credit deteriorates or deposit competition intensifies, the thesis slows but does not break, given the countercyclical revenue streams and strong capital position.

For investors, FHN offers a rare combination: a reasonably valued regional bank with visible earnings catalysts and downside protection from its diversified model. The market's focus on near-term M&A speculation obscures the more fundamental story of capital efficiency and franchise deepening. As technology investments mature and credit costs normalize, the ROTCE inflection should drive meaningful multiple expansion, rewarding patient investors who recognize that First Horizon's 160-year history is not a liability but the foundation of an enduring competitive advantage.