First Horizon Q4 Call Flags Profits, Manageable Risks

First Horizon National ((FHN)) has held its Q4 earnings call. Read on for the main highlights of the call.

First Horizon National’s Earnings Call Signals Solid Profitability Amid Manageable Risks

First Horizon National’s latest earnings call struck a generally upbeat tone, with management emphasizing durable profitability, healthy loan and deposit growth, and robust capital returns, all underpinned by a constructive 2026 outlook. While some pressure points emerged—such as modest capital ratio compression, slight margin and expense volatility, and rising criticized loans—the overarching message was that core earnings power and balance sheet momentum remain intact, with risks seen as monitorable rather than threatening.

Sustained Profitability and Return on Capital

Management underscored that adjusted return on tangible common equity and return on shareholder deposits reached roughly 15% in 2025, a level they aspire not only to maintain but to exceed. They highlighted more than $100 million in incremental pre-provision net revenue (PPNR) opportunity, pointing to ongoing initiatives in lending, fee businesses, and operating efficiency. This focus on sustaining double‑digit returns signals confidence in the bank’s business model and earnings engine, even as the interest-rate and credit environments become more challenging.

Earnings and Net Interest Margin Performance

Fourth-quarter earnings per share came in at $0.52, supported by a reported net interest margin (NIM) of 3.512%. NIM compressed modestly by 4 basis points quarter over quarter; however, excluding accretion from the Main Street Lending Program, NIM actually expanded by 2 basis points. Management framed this as evidence that, beneath the noise of one‑off items, core margin dynamics remain resilient. Still, they acknowledged that NIM will remain sensitive to funding costs, loan mix, and future rate moves.

Deposit Growth and Funding Cost Relief

Deposits were a clear bright spot. Period‑end deposits grew by $2.0 billion quarter over quarter, while the average rate on interest‑bearing deposits fell to 2.53% from 2.78% in the prior quarter. The interest‑bearing spot rate ended the quarter at 2.34%, and cumulative deposit beta since September 2024 was 64%. This combination of deposit inflows and declining funding costs helped offset broader rate pressures and signals that First Horizon is managing its funding base competitively without overpaying for liquidity—for now.

Loan Growth, Mix Shift, and Business Momentum

On the asset side, period‑end loans rose by $1.1 billion, or 2% sequentially, showing that demand remains healthy. Loans to mortgage companies increased by $767 million, while commercial and industrial (C&I) balances were up $727 million. Management guided to mid‑single‑digit loan growth in 2026, reflecting confidence in client activity and pipeline health. Fee-based businesses also contributed: fee income (excluding deferred comp) grew by $3 million sequentially, supported by $4.4 million of equipment finance lease income, improving mortgage refinance volumes, and momentum in treasury management and consumer initiatives. Together, these trends point to a balanced growth profile across spread and fee income.

Improved Yields in Commercial Real Estate

In commercial real estate (CRE), new 2025 originations showed sharply higher yields, with market-based CRE lending yields improving by roughly 534 basis points year over year. Despite this pricing strength, overall CRE balances declined by $111 million at period end, as multi‑year paydowns and construction‑funding lags continue to weigh on portfolio growth. Management noted that commitments and pipeline heading into 2026 have improved, suggesting that CRE revenue and earnings contribution could strengthen even if balance growth remains muted in the near term.

Capital Returns and Buyback Firepower

First Horizon leaned heavily into capital return in 2025, repurchasing roughly $894 million of stock, including just under $335 million in the fourth quarter alone, and paying out just over $300 million in dividends. The board has approved a $1.2 billion repurchase program, with about $1.0 billion of authorization still available. Management positioned these actions as a vote of confidence in the bank’s earnings prospects and valuation, though they also acknowledged that buybacks have weighed on regulatory capital ratios and must be balanced against growth and risk considerations.

Credit Performance and Reserve Releases

Credit results remained broadly favorable, though not without some movement. Net charge‑offs were $30 million, up $4 million sequentially, translating to a 19‑basis‑point net charge‑off ratio. The allowance for credit losses fell to 1.31% of loans, reflecting broad commercial portfolio improvement and contributing to reserve releases, and there was no provision expense recorded in the fourth quarter. Non‑pass loan resolutions were sizable at about $700 million in the quarter and $2.2 billion for the year, underscoring active risk management. Still, investors will likely watch closely whether reserve levels remain adequate if asset quality softens.

Regulatory Capital Compression and Targets

The bank’s Common Equity Tier 1 (CET1) ratio ended the quarter at 10.64%, a step down driven primarily by aggressive share buybacks and loan growth. Management views the near‑term CET1 target as 10.75%, with an intermediate‑term range of 10.0%–10.5%, implying some room to continue capital return while supporting growth. Nonetheless, the current level sits slightly below the near‑term target, creating short‑term pressure on capital management and adding importance to earnings retention and disciplined risk‑weighted asset growth.

Net Interest Margin Sensitivity to Rates and Liquidity

While NIM dynamics were relatively stable this quarter, management flagged the margin’s sensitivity to broader rate and liquidity conditions. They expect NIM to track in the mid‑3.40% range going forward, but with quarter‑to‑quarter fluctuations tied to deposit beta behavior, Federal Reserve balance sheet changes, and overall market liquidity. Investors should interpret this as a reminder that even modest shifts in deposit pricing or rate expectations could influence reported margin and earnings trajectories.

Expense Inflation and One‑Time Cost Upticks

Non‑interest expenses ticked up, highlighting a key watch item. Adjusted expenses excluding deferred compensation rose by $4 million quarter over quarter. Personnel costs increased by $12 million, largely due to $8 million in incentive and commission payouts, while outside services costs were up $16 million, driven by project work and advertising. Management framed these as partly one‑time or project‑related, but they still introduce near‑term volatility and underscore the need to execute well on efficiency to meet the bank’s positive operating leverage goals.

Asset Quality Watch Items and Reserve Dynamics

Beyond headline credit metrics, some underlying indicators moved less favorably. Criticized and classified loans increased by roughly 11% sequentially, even as the allowance ratio declined to 1.31% and net charge‑offs moved higher. With no provision booked in the quarter, the call leaves some open questions about how reserve levels might evolve if macro conditions deteriorate or if criticized loans migrate to non‑accrual. Management’s confidence in the portfolio is evident, but this area will likely remain under scrutiny from risk‑focused investors.

CRE Balance Headwinds Despite Strong Pricing

CRE remains a mixed story: new business is being written at significantly better spreads, yet overall balances continue to drift lower. Period‑end CRE balances fell $111 million in the quarter, constrained by ongoing paydowns and timing lags in construction funding. Better commitments and pipeline heading into 2026 could help stabilize or eventually grow the book, but near‑term CRE balance growth appears limited, tempering the otherwise strong yield story in this segment.

Fixed Income Fee Volatility

The bank’s fixed income segment saw softer results in the quarter, with average daily revenue and total revenue flat to lower. Management attributed this to a slowdown around the government shutdown concerns and seasonal factors, highlighting the inherent volatility of this business line. The lack of fixed income growth limited overall fee upside in the quarter, though the segment remains an important contributor when markets are more active.

Concentration Risks in Mortgage Warehouse Lending

A notable risk factor discussed was concentration in non‑depository financial institutions, particularly mortgage warehouse lending, which makes up roughly two‑thirds of the NDFI exposure. Management emphasized strong controls, including possession of underlying notes and use of field examiners, to mitigate risk. Even so, this concentration could become a pressure point if the mortgage warehouse market weakens materially, making this a key exposure for investors to watch in a softer housing or rate environment.

Macro Uncertainty and Deposit Beta

Finally, management highlighted macro uncertainty and the Federal Reserve’s balance sheet trajectory as critical drivers of deposit pricing and beta. While recent quarters have seen deposit costs decline and betas stabilize, competitive dynamics and shifts in market liquidity could reverse some of that progress. The team was candid that deposit betas remain a swing factor for NIM and earnings, particularly if rate paths or liquidity conditions diverge from current expectations.

Forward-Looking Guidance and 2026 Outlook

Looking ahead, First Horizon laid out a relatively constructive 2026 roadmap. Management guided to total revenue growth of 3%–7% year over year, equating to roughly $135 million of incremental revenue, underpinned by mid‑single‑digit balance sheet growth and continued PPNR expansion. They target positive operating leverage with essentially flat adjusted expenses, allowing for higher incentive payouts if countercyclical fee revenue picks up. Net charge‑offs are expected to run between 15 and 25 basis points, with an effective tax rate of 21%–23% and NIM anchored in the mid‑3.40% range despite some quarterly variability. Capital-wise, the bank aims to keep CET1 around 10.75% in the near term, fluctuating between 10.5% and 10.75% with loan growth, and settling into a 10.0%–10.5% range over the intermediate term. Management reiterated a 15%‑plus adjusted ROSD target, a more than $100 million incremental PPNR opportunity, and a continued commitment to capital returns, supported by roughly $1 billion of remaining share repurchase authorization.

In summary, First Horizon’s earnings call portrayed a bank with a solid earnings base, improving funding profile, and a firm grip on credit risk, all while returning significant capital to shareholders. Margin and expense volatility, rising criticized loans, and capital ratio compression are valid concerns, but management’s guidance and strategic posture suggest they view these as manageable within a framework of mid‑single‑digit growth and sustained mid‑teens returns. For investors focused on regional banking names, First Horizon emerges from this call as a profitable, capital‑return‑oriented franchise with clearly defined targets—and a few key risk levers worth watching as 2026 unfolds.