First Horizon (FHN) Q4 2025: $894M Buybacks Underscore Capital Return Shift as Loan Growth Outpaces Peers

2026-01-15 | By EarningsIQ Research

First Horizon’s fourth quarter showcased a decisive pivot toward capital return, with $894 million in buybacks and a new $1.2 billion authorization, while loan growth and disciplined deposit costs signal a more profitable balance sheet heading into 2026. Management’s tone is increasingly confident in sustainable 15%+ ROTCE, targeting further profitability gains through treasury and wealth management penetration. Guidance reflects a business model built for resilience across rate scenarios, but investors should closely watch credit normalization and deposit cost volatility as key swing factors.

Summary

• Capital Return Emphasis: Aggressive buybacks and new authorization highlight a shareholder-focused shift.
• Loan Growth Momentum: C&I and mortgage warehouse loans outperformed, supporting mid-single-digit growth targets.
• Profitability Focus: Management signals confidence in sustaining 15%+ ROTCE through 2026.

Performance Analysis

First Horizon delivered a fourth quarter defined by strong capital deployment, improved loan growth, and disciplined deposit cost management. The bank repurchased $335 million in shares during the quarter, totaling $894 million for the year, and announced a fresh $1.2 billion buyback program with just under $1 billion remaining. This capital return was enabled by robust loan growth—period-end balances increased by $1.1 billion, or 2% QoQ—driven primarily by loans to mortgage companies and broad-based C&I (Commercial & Industrial) expansion. Notably, the mortgage warehouse business saw a significant uptick, with refinancing activity rising to one-third of volume, up from 25% in recent quarters.

Net interest margin (NIM) dynamics were nuanced. While headline NIM compressed four basis points, excluding legacy Main Street Lending Program accretion, the core margin expanded two basis points. Deposit pricing discipline was evident as the average interest-bearing deposit cost fell 25 basis points to 2.53%, with cumulative deposit beta held at 64% since September. Fee income also improved, led by equipment finance lease activity. On expenses, higher personnel costs were mainly incentive-driven, reflecting outperformance against revenue targets, while technology and advertising investments continued, offset by lower non-interest expense from prior-period foundation contributions and typical seasonal marketing.

• Loan Mix Shift: C&I and mortgage warehouse segments drove outsized growth, supporting balance sheet profitability.
• Deposit Cost Control: Average interest-bearing deposit rates declined, cushioning NIM despite volatile rate conditions.
• Expense Discipline: Incentive-driven personnel costs rose, but underlying expense trajectory remains flattish for 2026.

Credit quality remained stable with net charge-offs at 19 bps and no provision for credit losses, as the allowance ratio declined on broad improvement in the commercial book. The bank’s CET1 capital ratio ended at 10.64%, with management reiterating a near-term target of 10.75% and a willingness to migrate toward 10–10.5% over time as economic clarity improves.

Executive Commentary

Strategic Positioning

1. Capital Allocation and Shareholder Returns

First Horizon’s stepped-up buyback activity and authorization signal a deliberate capital return strategy, enabled by a robust capital position and improving profitability. Management reiterated a long-run CET1 target of 10–10.5%, with flexibility to deploy capital opportunistically as economic and regulatory conditions allow. Organic growth remains the top priority, but leadership is prepared to return excess capital if loan demand or M&A does not absorb it.

2. Loan Growth Engine and Business Mix

Loan growth is being driven by diversified sources, with C&I and mortgage warehouse lending both outperforming. The C&I pipeline is broad-based across regions and specialty lines, while mortgage warehouse growth benefits from both new client wins and increased share of existing clients’ originations. CRE (Commercial Real Estate) balances, after a period of paydown, are showing early signs of inflection as construction starts and commitments rise, positioning the bank for a potential rebound in that segment later in 2026.

3. Deposit and Treasury Management Initiatives

Deposit growth is underpinned by product innovation and relationship deepening. A new treasury management system and expanded product suite are driving higher client penetration, while a refreshed consumer banking strategy and new branch openings are aimed at sustaining deposit growth. Management remains vigilant on deposit betas, citing macro liquidity as the key variable, and is focused on competitive pricing to defend and grow balances.

4. Operating Leverage and Cost Structure

Expense discipline is central to the 2026 outlook, with management targeting flat expenses outside of commission-driven increases tied to countercyclical revenue. Technology investments are rolling off, freeing capacity for branch and personnel expansion. Underlying expense growth is expected to normalize to 2.5–3% annually, aligned with inflation, after a period of elevated tech spend.

5. Profitability and PPNR Expansion

The $100 million incremental pre-provision net revenue (PPNR) opportunity remains a central lever, with progress in 2025 and further gains expected in 2026–27. Key drivers include deeper penetration of treasury and wealth management products, better pricing discipline, and leveraging the bank’s regional footprint and talent. Management is explicit that the 15%+ ROTCE target is now viewed as sustainable, with room for upside as these initiatives mature.

Key Considerations

The quarter’s narrative centers on profitable growth, disciplined capital return, and a resilient business model designed to weather a range of macro scenarios. Management’s confidence in sustaining elevated ROTCE and unlocking further PPNR gains is underpinned by broad-based loan growth and improved deposit dynamics, but execution risk remains around credit normalization and deposit cost volatility.

Key Considerations:

• Buyback Acceleration: Management’s willingness to return capital at scale signals confidence in balance sheet strength and earnings durability.
• Loan Growth Breadth: Momentum in both C&I and mortgage warehouse lending is broad-based, reducing reliance on any single segment.
• Deposit Beta Management: Sustaining low deposit costs will be critical as macro liquidity tightens and the Fed’s balance sheet evolves.
• Expense Normalization: Tech investment run-off supports flat expense guidance, but future wage and commission pressures warrant monitoring.
• Credit Quality Stability: Net charge-offs remain low, but the trajectory of criticized assets and provision normalization is a key forward watchpoint.

Risks

Key risks include potential deposit cost resurgence if macro liquidity tightens or competitive pressures intensify, as well as credit normalization that could drive higher provisions if economic conditions deteriorate. CRE exposures, while stabilizing, remain sensitive to construction starts and market confidence. Execution on technology and branch expansion must translate to tangible deposit and revenue growth to justify continued investment.

Forward Outlook

For Q1 2026, First Horizon guided to:

• Stable to modestly higher average loans, with typical seasonal decline in mortgage warehouse offset by C&I growth.
• Flattish expenses, with seasonal dip in marketing and advertising and normalization of incentive accruals.

For full-year 2026, management maintained guidance:

• 3%–7% total revenue growth, assuming mid-single-digit loan growth and a range of rate scenarios.
• Flat core expenses, with commission-driven increases tied to countercyclical revenue upside.
• Net charge-off ratio of 15–25 basis points, reflecting continued confidence in underwriting and credit trends.

Management highlighted several factors that will shape 2026:

• Macro uncertainty around rates and liquidity as key swing variables for both loan and deposit growth.
• Further progress on the $100 million PPNR expansion opportunity, with gains expected to build into 2027.

Takeaways

First Horizon enters 2026 with clear momentum in loan growth and capital return, but must navigate a complex landscape of deposit competition, credit normalization, and macro policy shifts. The bank’s diversified business mix and disciplined expense management provide resilience, but execution on treasury, wealth, and deposit initiatives will be crucial to sustaining profitability gains.

• Capital Return Inflection: Buybacks at scale and lower CET1 targets mark a strategic pivot toward shareholder returns, supported by robust capital generation.
• Loan and Deposit Engines: Broad-based growth in C&I, mortgage warehouse, and treasury management underpin revenue resilience, but require ongoing execution and risk vigilance.
• Profitability Levers: Sustainable 15%+ ROTCE is now the baseline, with further upside tied to deeper client penetration and operational leverage.

Conclusion

First Horizon’s fourth quarter confirms a business model pivoting toward capital return and sustainable profitability, underpinned by diversified loan growth and disciplined deposit management. The path forward will be defined by execution on PPNR expansion, credit vigilance, and the ability to manage through evolving macro and competitive dynamics.

Industry Read-Through

First Horizon’s results reinforce a sector-wide shift toward capital return as balance sheets strengthen and regulatory clarity improves. The bank’s ability to drive loan growth ahead of peers, particularly in C&I and mortgage warehouse, signals that relationship-driven regional banks can capture share as national players retrench. The focus on treasury management and client deepening is a playbook being adopted across the industry, with expense normalization and tech investment roll-offs providing operating leverage tailwinds. However, the sector remains exposed to deposit competition and credit normalization risks, with macro liquidity and policy decisions set to determine winners and losers in 2026.

FHN Financials Banking Capital Return Loan Growth Treasury Management Deposit Beta PPNR