First Horizon (FHN) Q3 2025: Net Interest Margin Expands 15bps, Deposit Retention Remains Critical

October 15, 2025 | By EarningsIQ Research

First Horizon delivered a quarter marked by a 15 basis point net interest margin expansion, a feat driven by strong loan yields and a one-time Main Street lending program benefit. Management’s tone signaled a confident but measured stance on M&A, capital deployment, and deposit gathering, as the bank navigates a shifting rate environment and intensifying competition. With a clear focus on sustainable ROTCE and operational discipline, FHN’s forward path hinges on balancing organic growth, expense control, and selective capital actions.

Summary

• Margin Expansion Surges: Net interest margin widened sharply on higher loan yields and a one-off Main Street lending boost.
• Deposit Retention and Pricing in Focus: Franchise stability relies on high retention and careful repricing amid industry-wide deposit outflows.
• M&A Optionality Clarified: Leadership signals readiness for targeted, in-footprint deals, but emphasizes organic growth and disciplined capital return.

Performance Analysis

First Horizon’s third quarter results were characterized by a notable 15 basis point increase in net interest margin (NIM), reaching 3.55%. This was driven by average loan balance growth, especially in the high-yielding mortgage warehouse business, and a one-time benefit from the Main Street lending program. The NIM expansion translated into a sequential six cent increase in adjusted EPS and a 135 basis point rise in adjusted return on tangible common equity (ROTCE) to 15%.

Deposit balances declined modestly, with brokered CDs down $652 million, offset by growth in index and promotional deposits tied to mortgage company seasonality. Importantly, non-interest-bearing deposits rose by $131 million, and retention remained robust at 97% on repricing events. Fee income rebounded $26 million quarter-over-quarter, led by a surge in FHN Financial’s fixed income business and a $6 million gain from a mortgage servicing rights (MSR) sale. Expenses increased $45 million, reflecting incentive payouts, technology investments, and a $20 million foundation contribution.

• Loan Growth Diverges by Segment: C&I loans grew $174 million, while loans to mortgage companies and CRE balances declined, reflecting seasonality and project transitions.
• Credit Quality Stable: Net charge-offs dropped by $7 million to $26 million, with the net charge-off ratio at 17bps and criticized loans down 9%.
• Buybacks Accelerate: Share repurchases totaled $190 million, with $300 million in authorization remaining, as capital ratios remain strong.

Overall, First Horizon’s results reflect disciplined execution in a volatile environment, with margin and fee tailwinds offsetting ongoing deposit and expense pressures.

Executive Commentary

Strategic Positioning

1. Deposit Franchise Defense

Deposit retention and pricing discipline are central to FHN’s strategy, as the bank faces industry-wide deposit outflows and rising competition for funds. Management highlighted a 97% retention rate on repriced deposits and ongoing efforts to attract new-to-bank clients with marketing and cash offers. There is a clear focus on balancing competitive rates with cost control, especially as the loan-to-deposit ratio remains elevated near 97%.

2. Organic Growth Prioritized Over M&A

Leadership repeatedly emphasized that organic growth and capital return remain top priorities, with M&A optionality reserved for “fill-in” opportunities within the existing southern footprint. While recent regulatory and market shifts have made bank M&A more feasible, FHN’s stance is to only consider deals that enhance franchise value and cultural fit, reinforcing a long-term, shareholder-focused approach.

3. Margin and Fee Income Resilience

FHN’s counter-cyclical fee businesses, especially FHN Financial, provided a crucial offset to rate-driven NII headwinds, with fixed income revenues surging on heightened customer activity. The bank’s ability to generate fee income during periods of NIM compression is a core differentiator, supporting its goal of sustainable ROTCE above 15%.

4. Capital and Buyback Flexibility

Capital management remains agile, with CET1 stable at 11% and a near-term target of 10.75%. Share buybacks are calibrated quarterly based on loan growth forecasts, ensuring that excess capital is returned to shareholders when not deployed to organic expansion. Management is clear that buybacks are secondary to balance sheet growth but remain a key lever for capital optimization.

5. Technology and Efficiency Initiatives

Ongoing investment in technology, risk, and process improvements is intended to drive both revenue and efficiency gains, with the bank nearing completion of a three-year, $100 million technology investment program. Outsourcing and strategic partnerships (e.g., JLL for facilities management, LPL for broker-dealer services) are yielding cost benefits, positioning FHN to absorb future growth without material expense inflation.

Key Considerations

This quarter’s results underscore First Horizon’s disciplined approach to balancing growth, risk, and capital deployment as it navigates a complex macro and competitive landscape.

Key Considerations:

• Deposit Competition Intensifies: Retention remains high, but industry-wide deposit outflows and client shifts to brokerage accounts challenge organic funding growth and pricing power.
• Loan Growth Lumpy, but Pipelines Building: CRE paydowns continue, but C&I growth and improved origination momentum signal potential for mid-single-digit loan growth in 2026.
• Expense Discipline Must Offset Investment: Flat expense guidance is predicated on realizing technology efficiencies and maintaining revenue momentum in fee businesses.
• M&A Optionality Not a Near-Term Catalyst: Management’s stance is opportunistic, focused on in-footprint, culturally aligned targets, with no shift in willingness to sell or buy outside the core franchise.
• Credit Remains Benign, but Watch NDFI Exposure: Criticized and classified loans declined, but NDFI lending (non-depository financial institutions) is closely monitored for emerging risks.

Risks

Deposit attrition and pricing pressure remain the most immediate risks, with the loan-to-deposit ratio at the upper end of comfort and industry-wide funding costs rising. Fee income volatility, especially in FHN Financial, could challenge revenue stability if market activity wanes. M&A speculation has increased share price volatility, and any shift in capital deployment priorities or regulatory headwinds could alter the risk-reward calculus for investors.

Forward Outlook

For Q4 2025, First Horizon guided to:

• Revenue at the higher end of flat to up 4% range, contingent on FHN Financial maintaining strong activity
• Expenses tracking to the top end of guidance, reflecting incentive and technology investments

For full-year 2025, management maintained guidance:

• Year-over-year PPNR growth
• Stable charge-off and tax outlook

Management highlighted several factors that will shape results:

• Deposit repricing will lag Fed rate cuts, pressuring margin in a falling rate environment
• Loan growth expected to accelerate as pipelines build and borrower confidence improves

Takeaways

First Horizon’s quarter demonstrated margin and fee income resilience, but the path forward will require deft management of deposit flows, expense control, and strategic capital deployment.

• Margin and Fee Income Provide Cushion: The combination of higher loan yields, one-time Main Street income, and robust FHN Financial results offset deposit and expense pressures.
• Deposit Retention and Growth Remain the Core Challenge: Sustaining organic funding and repricing discipline is vital as the industry faces deposit migration and heightened competition.
• Investors Should Watch Capital Deployment and M&A Narrative: Any shift in buyback pace, loan growth, or M&A stance will be pivotal, especially as the regulatory and competitive environment evolves.

Conclusion

First Horizon’s Q3 2025 results reflect a well-managed, counter-cyclical business model, with margin and fee tailwinds supporting profitability. Deposit dynamics and capital allocation discipline will be decisive for long-term value creation, as leadership balances organic growth, expense management, and selective M&A optionality.

Industry Read-Through

First Horizon’s experience highlights sector-wide challenges in deposit gathering and repricing, as regional banks face client migration to higher-yield alternatives and rising funding costs. Fee income diversification, especially in fixed income and trading businesses, proved critical in offsetting NIM compression, a lesson for peers reliant on traditional lending. M&A optionality is back on the table for regionals, but successful deals will require cultural alignment and disciplined capital deployment. Expect continued focus on technology-driven efficiency and agile capital management as banks adapt to a volatile rate and regulatory environment.

FHN Financials Regional Banks Deposit Competition Buybacks Fee Income M&A Loan Growth