First Horizon Corporation: Navigating Rate Volatility with Disciplined Growth and Capital Strength

In a landscape where regional banks face headwinds from fluctuating interest rates and deposit cost pressures, First Horizon Corporation (FHN) has emerged as a strategic outlier. By prioritizing disciplined balance sheet management, expanding into underpenetrated lending segments, and maintaining robust capital ratios, the bank is well-positioned to capitalize on stabilization in the rate environment. Let's dissect how FHN's organic growth initiatives and operational rigor could drive ROTCE (Return on Tangible Common Equity) improvements and justify higher valuation multiples in the coming quarters.

Loan Portfolio Expansion: High-Yield Segments Drive Momentum

First Horizon's Q2 2025 results underscore a deliberate shift toward high-margin lending categories. The 2% sequential loan growth to period-end reflects significant contributions from mortgage warehouse lending (+$689 million) and Commercial & Industrial (C&I) lending (+$316 million). These segments, characterized by short-term maturities and relationship-driven revenue, are critical to countering the drag of declining long-term deposit costs.

Notably, First Horizon is leveraging its mortgage warehouse lending platform—a niche area where it competes with fewer national banks—to secure recurring revenue. As mortgage originators seek liquidity to fund pre-sale mortgages, First Horizon's $10 million sequential increase in net interest income (NII) from this segment highlights its scalability. Meanwhile, Asset-Based Lending (ABL) and equipment finance are fueling C&I growth, with management citing “good pipelines” and market share gains. These areas, less exposed to macroeconomic volatility, offer steady cash flows and low credit risk, as evidenced by the mortgage warehouse portfolio's minimal allowance for credit losses (ACL).

Deposit Cost Discipline: Balancing Growth and Margin Protection

While deposit costs remain a sector-wide challenge, First Horizon's 72% deposit beta—its responsiveness to Fed rate cuts—reflects a measured approach to pricing. Despite a 4 basis point sequential rise in interest-bearing deposit costs, the bank maintained a 3.40% net interest margin (NIM) by strategically deploying $1.6 billion in brokered CDs to fund loan growth. Management's emphasis on non-interest-bearing deposits (up $57 million) and customer retention via tailored promotions further insulates margins.

The path forward hinges on the Fed's rate trajectory. If the September 2025 cut materializes as management expects, First Horizon's disciplined approach could yield asymmetric benefits. Competitors with higher deposit betas may face steeper margin compression, while FHN's flexibility to adjust pricing could preserve NIM stability.

Capital Efficiency: Prioritizing Growth Over Buybacks

First Horizon's CET1 capital ratio at 11% sits comfortably above peer averages, reflecting a deliberate choice to prioritize organic loan growth over share repurchases. While only $9 million was repurchased in Q2, the remaining $500 million+ under the $1 billion authorization offers flexibility to accelerate buybacks if ROTCE targets (15%+) are met.

The $100 million+ PPNR (Pre-Provision Net Revenue) opportunity cited by management stems from cross-selling within existing client relationships and operational synergies. For instance, deepening ties with mortgage originators and commercial clients could unlock fee-based income and reduce ACL requirements, further boosting ROTCE.

Credit Quality: A Conservative Foundation

First Horizon's credit metrics reinforce its risk discipline. The 22-basis-point net charge-off ratio and 1.42% ACL reflect minimal exposure to deteriorating CRE portfolios—a common pain point for regional banks. CRE balances declined by $250 million in Q2 due to payoffs of stabilized projects, with management labeling the sector's challenges as “transitory.” This contrasts with peers still grappling with legacy CRE exposures, positioning FHN to avoid costly write-downs as rates normalize.

Catalysts for Near-Term ROTCE Improvement

1. Loan Pipeline Execution: The “good momentum” in regional banking, mortgage warehouse, and ABL suggests Q3 2025 loan growth could exceed 2%, boosting NII.
2. Expense Controls: Lowered 2025 expense guidance (flat to +2%) reflects reduced commissions and tech-driven efficiency gains.
3. Regulatory Flexibility: Management's confidence in adjusting capital requirements could free up capital for high-return loans.

Investment Thesis: A Case for Multiple Expansion

First Horizon's valuation—currently trading at 1.2x tangible book value, below its five-year average of 1.5x—does not yet reflect its improving fundamentals. If ROTCE reaches 15% by 2026 (as targeted), the stock could approach 1.8x tangible book, implying a 40% upside.

Conclusion: A Structured Play on Rate Stability

First Horizon's strategy is a masterclass in balancing growth and prudence. Its focus on relationship-driven lending in underpenetrated segments, coupled with deposit discipline and capital efficiency, creates a durable moat against peers. As the Fed's rate cycle stabilizes, FHN's ability to grow NII without overextending on deposits or capital positions it to outperform in risk-on environments. Investors seeking a regional bank with a clear path to margin resilience and ROTCE expansion should consider FHN a core holding.

Note: Always conduct your own due diligence. This analysis does not constitute investment advice.