First Horizon (FHN) Q1 2025: $360M Buyback Signals Capital Confidence Amid Tariff Uncertainty

April 16, 2025 | By EarningsIQ Research

First Horizon’s disciplined deposit pricing and $360 million share repurchase anchor a quarter defined by margin expansion and conservative risk posture. While macro uncertainty and tariff volatility cloud the outlook, management’s focus on credit quality, expense control, and capital deployment provides a foundation for resilience. Investors should watch for how counter-cyclical businesses and deposit campaigns offset economic headwinds through 2025.

Summary

• Deposit Pricing Discipline: Aggressive rate management drove margin expansion and deposit retention despite sector-wide cost pressures.
• Capital Deployment Signal: Substantial buybacks highlight management’s confidence in the balance sheet and future earnings power.
• Macro Uncertainty Management: Elevated reserves and scenario planning reflect a proactive approach to rising economic and tariff risks.

Performance Analysis

First Horizon’s first quarter performance was marked by net interest margin (NIM) expansion and robust capital return, even as macroeconomic volatility and tariff-related uncertainty weighed on the sector. Net interest income (NII) edged up, driven by a 27 basis point reduction in average deposit costs, which more than offset a decline in loan yields. The bank’s ability to retain 95% of repricing deposits while lowering rates underscores strong client relationships and effective deposit management—a critical lever in a high-rate, competitive environment.

On the expense side, adjusted noninterest expenses fell by $20 million, with technology project costs rolling off and outside services declining. The provision for credit losses increased as the allowance for credit losses (ACL) was boosted to reflect a more cautious macro outlook. Meanwhile, loan balances declined modestly, mainly due to commercial real estate paydowns and seasonality in mortgage warehouse lending, while commercial and industrial (C&I) balances showed stability and some growth. The $360 million share buyback (51 basis points CET1 impact) demonstrated management’s willingness to return excess capital absent better organic growth opportunities.

• Margin Expansion Outpaces Loan Yield Pressure: Deposit repricing drove a nine basis point NIM increase, offsetting lower loan yields from rate resets.
• Credit Quality Holds Firm: Net charge-offs remained low at 19 basis points, with reserves increased for heightened uncertainty.
• Expense Flexibility Emerges: Technology project completions and marketing seasonality created room for further expense action if headwinds intensify.

Overall, First Horizon’s quarter balanced margin gains, disciplined cost management, and conservative risk moves, positioning the bank to weather ongoing volatility while maintaining investor returns through buybacks.

Executive Commentary

Strategic Positioning

1. Deposit Franchise and Pricing Power

First Horizon’s ability to reduce deposit costs and retain customer funds is a core competitive advantage. The bank achieved an 80% deposit beta (deposit rate sensitivity to Fed cuts) since the Fed began easing, and promotional deposit retention remained strong. Deposit campaigns and relationship banking are central to future deposit growth, especially as new-to-bank campaigns and non-interest-bearing account offers roll out this spring and summer.

2. Counter-Cyclical Revenue Streams

The business model’s counter-cyclical levers—including mortgage warehouse lending and FHN Financial—provide natural hedges against interest rate and economic swings. As rates fall, these segments are expected to offset NII compression, supporting earnings stability. The mortgage warehouse business, in particular, has broadened its client base, raising the floor for balances regardless of the rate environment.

3. Capital Allocation and Buybacks

With organic loan growth opportunities limited by borrower caution, management prioritized returning capital to shareholders. The $360 million buyback signals confidence in the bank’s valuation and earnings outlook. Management maintains a near-term CET1 target of 11%, with flexibility to adjust as macro conditions stabilize.

4. Credit Risk and Reserve Strategy

Reserves were increased via a heavier weighting on downside scenarios in the bank’s Moody’s-driven models, reflecting greater macro and tariff risk. The ACL now stands at over nine times average annualized net charge-offs, placing First Horizon among the most conservatively reserved in its peer group. Credit discipline and close client engagement remain central to risk management.

5. Technology and Efficiency Investments

Having completed major projects like the general ledger and treasury management system upgrades, First Horizon is shifting technology spend toward cloud migration and self-developed digital banking tools. This transition aims to boost long-term efficiency and customer experience, while near-term expense flexibility remains if macro conditions deteriorate.

Key Considerations

First Horizon’s Q1 demonstrates the interplay of margin management, capital return, and risk discipline as the bank navigates a volatile macro landscape. The following considerations are top of mind for investors tracking the bank’s evolving playbook:

• Deposit Growth Levers: Success of new-to-bank and non-interest-bearing campaigns will determine funding cost trajectory and margin sustainability.
• Counter-Cyclical Hedge Effectiveness: Mortgage warehouse and FHN Financial need to deliver as interest rates and loan demand fluctuate.
• Expense Management Flexibility: Ability to dial back costs in response to revenue pressure is a key lever for maintaining profitability.
• Reserve Adequacy Under Stress: Elevated ACL and scenario planning provide a buffer, but continued macro and tariff uncertainty require vigilant monitoring.
• Capital Deployment Balance: Ongoing buybacks are contingent on organic growth opportunities and CET1 targets amid a shifting environment.

Risks

Persistent macro uncertainty, tariff volatility, and the risk of a consumer-led downturn remain material headwinds. Prolonged economic ambiguity could trigger higher credit costs, drag on loan growth, and pressure fee income. Competitive dynamics in deposits may reemerge if loan demand rebounds, while sector-wide regulatory and rate risks persist. The bank’s scenario-driven reserve build is prudent, but investors should remain alert for shifts in credit quality or funding costs.

Forward Outlook

For Q2 2025, First Horizon expects:

• Deposit growth driven by seasonal campaigns and mortgage warehouse pickup
• Stable to slightly improving margin, contingent on rate environment and deposit cost trends

For full-year 2025, management maintained guidance:

• Low single-digit loan growth, with margin supported by deposit pricing discipline
• Net charge-offs in the 15–25 basis point range, reflecting a cautious macro view
• Adjusted expense growth of 2–4%, with flexibility to respond to revenue mix

Management highlighted the resilience of its business model, the ability to pull expense levers if needed, and confidence in achieving positive PPNR (pre-provision net revenue) growth even as macro uncertainty persists.

• Counter-cyclical businesses expected to offset NII pressure if rates fall
• Capital return via buybacks to continue if organic growth remains limited

Takeaways

First Horizon’s Q1 underscores the importance of margin discipline, capital flexibility, and risk management in the current banking environment.

• Deposit and Margin Resilience: Aggressive deposit repricing and retention support NIM in a challenging funding landscape, providing a critical earnings foundation.
• Scenario-Driven Risk Posture: Elevated reserves and proactive scenario planning reflect a conservative stance amid tariff and macro threats.
• Capital Return as Valuation Signal: Large-scale buybacks signal management’s confidence and provide downside support while organic growth is muted.

Conclusion

First Horizon’s Q1 2025 results reflect a bank leaning into its core strengths—margin management, capital discipline, and risk-aware lending—while preparing for a range of macro outcomes. Investors should track the interplay between deposit growth, counter-cyclical revenue, and credit costs as the year unfolds.

Industry Read-Through

First Horizon’s quarter offers a template for regional banks facing macro and policy-driven volatility. The success of deposit repricing and promotional campaigns highlights the necessity of granular client management in a high-rate world. The shift toward counter-cyclical and fee-based businesses as natural hedges is likely to be echoed across peers, especially as rate and loan demand scenarios diverge. Elevated reserves and scenario-based risk management are becoming standard, as is the prioritization of capital return where organic growth is constrained. For the sector, the balance between funding cost control, credit vigilance, and capital deployment will remain the defining challenge through 2025.

FHN Financials Regional banks Deposits Buybacks Credit risk Margin management Tariffs