First Horizon's Q2 Earnings Signal Strategic Resilience Amid Banking Sector Challenges

First Horizon (FHN) delivered a robust Q2 2025 earnings report, showcasing resilience in a competitive banking landscape. Despite mixed signals from its Zacks Rank #3 (Hold) rating, the company's disciplined strategy, improving pre-provision net revenue (PPNR), and strategic capital deployment suggest it is positioned to outperform peers. Let's dissect the key metrics and risks to determine whether FHN's undemanding valuation and stable dividend yield make it a compelling hold or buy.

Net Interest Margin Stability Amid Deposit Pricing Pressures

First Horizon's net interest margin (NIM) edged down 2 basis points (bps) to 3.4% in Q2, driven by a 4-bp rise in deposit costs. This reflects the industry-wide challenge of managing funding costs as loan growth outpaces deposit growth. However, the company offset this pressure through strong loan growth, particularly in its high-yielding mortgage warehouse business. Total loan yields rose 3 bps, and net interest income increased by $10 million sequentially.

The key takeaway: FHN's focus on optimizing loan portfolios and mitigating deposit cost inflation—via $1.6 billion in brokered CDs—demonstrates operational discipline. While NIM compression is a sector-wide concern, the company's ability to grow loans without excessive margin erosion is a positive sign.

PPNR Growth and Cost Efficiency Highlight Operational Strength

Pre-provision net revenue (PPNR) rose $4 million sequentially to an adjusted EPS of $0.45, driven by higher net interest income and tight expense controls. Total non-interest expenses grew only $4 million quarter-over-quarter, excluding deferred compensation, despite investments in technology and marketing. Management reiterated a long-term goal to boost PPNR by $100 million+ over the next few years through operational efficiencies.

This aligns with First Horizon's strategy of prioritizing capital-light growth:
- Loan Growth: Period-end loans rose 2%, fueled by a $689 million increase in mortgage warehouse loans and $316 million in commercial and industrial (C&I) lending.
- Deposit Management: While brokered CDs added liquidity, non-interest-bearing deposits grew $57 million due to marketing promotions, signaling customer retention strength.

The result? A 2.76% dividend yield (vs. a 3-year average of 3.59%) and a dividend cover ratio of 2.0, indicating financial flexibility.

Credit Quality Remains a Bright Spot

First Horizon's credit metrics are stellar, with a net charge-off ratio of 22 bps and a reduction in non-performing loans (NPLs). The allowance for credit losses (ACL) to loans ratio dipped to 1.42%, reflecting minimal risk in its low-loss mortgage warehouse portfolio. This stability contrasts with broader sector concerns about rising NPAs, further bolstering FHN's risk profile.

Valuation: Undemanding Metrics vs. Neutral Zacks Rank

Despite the Zacks Rank #3 (Hold), FHN's valuation appears attractive:
- P/E Ratio: 14.1x (vs. a 5-year average of 14.7x), below peers like Washington Federal (P/E 15.2x) and Citizens Financial (P/E 13.8x).
- P/B Ratio: 3.5x, reflecting investor confidence in its asset quality.
- Enterprise Value: $14.44 billion, up 20% year-over-year but still below KeyCorp ($32.5B) and Fifth Third ($45.8B).

The Zacks Hold rating likely factors in near-term deposit cost pressures and industry-wide macro risks. However, FHN's consistent EPS beats (four straight quarters) and PPNR trajectory suggest it could outperform if margin stability improves.

Risks to Consider

1. Deposit Cost Inflation: Rising rates or competition for deposits could squeeze margins further.
2. Loan Portfolio Concentration: Over-reliance on mortgage warehouse lending, while profitable, may expose FHN to housing market volatility.
3. Peer Competition: Larger regional banks (e.g., Regions Financial, Comerica) have scale advantages in technology and cross-selling.

Investment Thesis: Hold/Buy Despite Neutral Rating

First Horizon's Q2 results underscore its ability to navigate challenges through disciplined capital deployment and cost control. Key positives include:
- Stable credit metrics and low NPLs.
- Loan growth in high-margin segments.
- Undemanding valuation with a dividend yield above the 10-year Treasury rate.

While the Zacks Rank #3 reflects near-term uncertainty, the stock's 5.4% YTD gain (vs. the S&P 500's 6.2%) suggests it's undervalued relative to its fundamentals. For income-focused investors, the 2.76% dividend yield offers a solid return, especially if the company resumes dividend hikes (CADI of 0 is a red flag but not a dealbreaker).

Final Take

First Horizon's strategic focus on loan growth, expense discipline, and credit quality positions it to outperform peers in a challenging environment. Despite the Zacks Hold rating, its valuation and dividend yield make it a compelling hold for investors seeking stability in regional banking. A buy rating could emerge if margin pressures ease or loan growth accelerates further.

Investors should monitor FHN's NIM trajectory and deposit cost trends in Q3. For now, this stock offers a balanced risk-reward profile, warranting a place in conservative growth portfolios.