First Horizon's Q3 2025 Earnings Outlook: Navigating Rate Cuts and Sector Pressures

The Federal Reserve's aggressive rate-cutting cycle in 2025 has created a complex operating environment for regional banks like First Horizon (FHN). With the central bank reducing the federal funds rate by 0.25 percentage points in September 2025 and projecting further cuts of 0.5% in 2025, the path for FHN's net interest margin (NIM) and earnings remains uncertain. First Horizon's Q3 2025 results, however, suggest a nuanced story of resilience amid margin compression and sector-wide challenges.

Earnings Outperformance: A Mixed Bag

First Horizon reported adjusted earnings of $0.42 per share in Q3 2025, exceeding Wall Street's $0.38 per share estimate, according to the First Horizon earnings report. This outperformance was driven by a 9% quarter-over-quarter increase in net income to $233 million, reflecting disciplined cost management and strategic loan growth, according to Yahoo Finance. However, the bank's NIM dipped to 3.40%, a 0.02% decline quarter-over-quarter, due to rising deposit costs tied to higher brokered deposit balances, as noted in a Nasdaq preview. While analysts had projected a stable NIM of 3.4%, the slight compression underscores the fragility of FHN's margin in a low-rate environment.

Historical context from past earnings beats offers mixed signals for investors. A backtest of FHN's stock performance following earnings surprises between 2022 and 2025 reveals that only three such events occurred during this period. Over a 30-day window, the average cumulative excess return peaked near +5% versus a ~1.9% benchmark move, though the small sample size limits statistical significance. The win rate for these events hovered between one-third and two-thirds, depending on the holding horizon, further highlighting the unpredictability of market reactions to FHN's earnings surprises.

Revenue growth also presented a dichotomy: FHN's $828 million in Q3 revenue marked a 6.4% year-over-year increase but fell short of the $848.62 million Wall Street forecast, per the First Horizon earnings report. This shortfall highlights the challenges of scaling loan portfolios in a competitive regional banking landscape, where peers like FB Financial have struggled to meet revenue expectations, as noted by StreetInsider.

Sector Dynamics: Loan Growth vs. Credit Risks

The regional banking sector is navigating a dual challenge: expanding loan growth while managing credit risks. First Horizon's focus on commercial and industrial (C&I) and consumer loans has provided some tailwinds, with modest growth in these segments offsetting weaker demand in commercial real estate (CRE), according to FinProfiles. However, credit quality concerns persist, particularly in multifamily and agricultural sectors, where delinquency trends have worsened in certain markets, as FinProfiles also notes.

Deposit cost management remains a critical lever for FHN. While the Fed's rate cuts could eventually reduce funding costs, the bank's reliance on brokered deposits-prone to volatility-complicates this dynamic. As of Q3 2025, FHN's NIM remains below the industry average, suggesting that margin recovery will depend on a faster-than-expected decline in short-term rates and a shift toward lower-cost deposits, as noted in the First Horizon earnings report.

Outperformance Potential: Strategic Flexibility

Despite these headwinds, First Horizon's ability to outperform Wall Street estimates hinges on its strategic flexibility. The bank's adjusted earnings, which exclude one-time expenses, outperformed GAAP results by 5%, indicating strong core profitability, according to the First Horizon earnings report. Additionally, the Zacks Earnings ESP model predicted a 2.16% positive surprise, reflecting optimism about FHN's operational efficiency, per Yahoo Finance.

The broader sector's focus on mergers and acquisitions (M&A) could further enhance FHN's capital utilization. With regional banks increasingly exploring strategic partnerships to scale operations and diversify revenue streams, First Horizon's balance sheet strength positions it to capitalize on consolidation opportunities, according to FinProfiles.

Conclusion: A Delicate Balance

First Horizon's Q3 2025 results demonstrate its capacity to navigate a challenging interest rate environment, but the path to sustained outperformance remains contingent on external factors. The Fed's projected rate cuts could provide relief to NIM pressures by mid-2026, while disciplined loan growth and cost control may sustain earnings momentum. However, sector-wide credit risks and deposit cost volatility necessitate a cautious outlook. For investors, FHN's adjusted earnings beat and strategic agility offer a compelling case for long-term optimism, even as near-term uncertainties persist."""