First Horizon (FHN) — Q2 Beat, Tightening Costs and a Capital Cushion

Q2 Surprise: EPS Beat, Cost Tightening and a Larger Buyback#

First Horizon ([FHN]) reported an adjusted Q2 EPS of $0.45, beating consensus of roughly $0.42 and delivering the most immediate piece of news investors wanted: earnings upside driven by net interest income and expense discipline (see the Q2 summary) First Horizon reports Q2 EPS $0.45 (Nasdaq). The quarter combined a modest sequential NII lift, a narrowed full‑year expense growth outlook (now flat–2%), and an enlarged share‑repurchase cadence (common stock repurchases accelerated to $626MM in FY2024) — a mix that supports near‑term EPS durability even as underlying annual trends show pressure.

That Q2 beat is the headline, but the more consequential development is the trade‑off management is running: deploy capital to buybacks and maintain a $0.15 quarterly dividend while leaning on expense discipline and targeted loan growth to offset margin pressure. The bank’s 2025 company‑run stress test — which showed a stressed CET1 around 9.7% and roughly $4B of pre‑tax loss absorption capacity — gives management latitude to pursue that course First Horizon announces results of its 2025 company-run stress test (StockTitan), Investing.com stress test coverage.

The tension is clear: a quarter of execution and capital flexibility versus FY2024 financials that show slowing profitability, rising net debt and compressed operating leverage. The rest of this report connects those dots — recalculating FY trends from the company’s financials, mapping Q2 drivers to the balance sheet and capital plan, and setting out what matters next for investors.

Financials in Focus — FY2024 by the Numbers (re‑calculated)#

Using First Horizon’s FY figures (filed 2025‑02‑27), the company generated $4.94B of revenue in 2024 and $775MM of net income. Those totals mask directional moves worth noting: revenue was up from $4.71B in 2023 to $4.94B in 2024 — a recalculated YoY rise of +4.97%. By contrast, net income fell from $897MM to $775MM, a decline of -13.56% year‑over‑year. Those simple arithmetic results underscore a key theme: revenues grew modestly but profitability declined meaningfully in FY2024 (company FY2024 financial statements, filed 2025‑02‑27).

Profitability ratios computed from the FY2024 statement show the following: gross margin of 59.76%, operating margin of 20.24%, and net margin of 15.71% — all calculated as the line item divided by revenue. Return metrics recalculated on FY figures show a trailing FY ROE of 8.79% (net income / average shareholders' equity proxied by FY-end equity) and an ROA of 0.94% (net income / total assets). Those levels are consistent with a regional bank generating stable core earnings but without the margin expansion that would be needed to offset rising capital deployment.

These per‑year margins illustrate a multi‑year compression: peak margins in 2021–2022 gave way to lower percentages in 2023–2024 as revenue mix shifted and operating costs remained material. The company’s FY2024 EBITDA was $1.11B, yielding a net‑debt‑to‑EBITDA computed at ~1.94x (net debt $2.15B / EBITDA $1.11B). That metric is lower than some TTM ratio figures published elsewhere in the dataset — differences reflect timing and denominator choices (FY vs TTM) and should be kept in mind when comparing sources.

Two balance‑sheet trends stand out. First, liquidity shifted materially from 2021 to 2024: cash and short‑term investments dropped from $24.76B at end‑2021 to $8.94B in 2024, reflecting a normalization from pandemic‑era balances and active capital deployment. Second, net debt moved from a large net‑cash position in 2021 to a modest net‑debt position in 2024 (net debt $2.15B), driven partly by increased long‑term and short‑term borrowings and buybacks.

Q2 Drivers — NII, Loan Mix and Expense Discipline#

Management framed the Q2 beat as an NII story: a sequential NII uptick of roughly $10MM (management commentary summarized in Q2 press coverage) supported the quarter’s EPS, aided by higher‑yield mortgage warehouse balances and growth in commercial & industrial lending Earnings call transcript (Investing.com). The bank reported modest period‑end loan and deposit expansion in the quarter, with management describing loan growth concentrated in mortgage warehouse and C&I pockets rather than broad risk‑on lending.

Crucially, management narrowed FY expense growth guidance to flat–2% (from 2–4%), converting a Q2 operational beat into a higher probability of sustained EPS outperformance for the year — but only if NII continues to hold up and credit costs remain benign First Horizon beat on Q2 earnings, drops expense outlook (American Banker). The Seeking Alpha summary of guidance also points to management targeting incremental PPNR improvements as a key lever for earnings growth in 2025 Seeking Alpha: expense guidance & PPNR target.

Margins tell a nuanced story. The company reported a modest compression in reported NIM at the quarter, attributed to a small pick‑up in deposit costs and tactical use of brokered CDs. That suggests the Q2 EPS beat relied on a balance of small NII gains and outsized expense control rather than a sustainable margin inflection. With FY2024 operating margin at 20.24%, incremental expense saves can have outsized impact on EPS — which is exactly what management signaled it would pursue.

Capital Allocation: Dividends, Buybacks and Stress‑Test Cushion#

First Horizon maintains a quarterly common dividend of $0.15 (annualized $0.60). Using FY2024 net income of $775MM and dividends paid of $361MM, a simple payout calculation (dividends / net income) yields a FY payout ratio of 46.58%. That is higher than one published payout figure in the dataset (which used a different denominator or TTM approach), so investors should note methodological differences when comparing sources. The company’s capital plan keeps the dividend intact and prioritizes selective buybacks, as evidenced by $626MM of repurchases in FY2024 (cash flow statement) alongside the dividend Barchart: dividend declaration, Simply Wall St: dividend note.

The company‑run stress test for 2025 is the linchpin that permits continued distributions. First Horizon reported a stressed CET1 of ~9.7% and roughly $4B of pre‑tax loss absorption capacity under a severe scenario — outcomes that management used to justify the current capital allocation mix and to underline balance‑sheet resilience Investing.com stress test coverage. Those stress results are meaningful: they provide breathing room for dividends and buybacks if near‑term credit remains benign, but they are not a guarantee against a materially worse macro shock.

Credit and Cash‑Flow Quality#

Credit metrics through FY2024 remained stable in headline terms and the company emphasized low stressed loan‑loss rates in its internal exercise (~2.3% stressed loss rate in the firm’s published scenario). Operating cash flow remained positive but showed a small YoY decline: net cash provided by operating activities was $1.27B in 2024 versus $1.30B in 2023, a reduction of -2.31%, and free cash flow decreased from $1.26B to $1.22B (down -3.17%). These cash‑flow figures validate that the Q2 reported EPS beats are backed by operating cash and not solely paper gains, but they also underline why management is cautious on expenses and selective about capital deployment (company cash flow statements, FY2024).

How FHN Compares with Regional Peers#

Relative to peers like Huntington (HBAN) and FNB, First Horizon’s recent execution sits in the upper middle of the pack. Market coverage shows Huntington with sequential loan growth and an NIM around 3.11%, while FNB reported stronger sequential top‑line gains in its market disclosures Huntington Q2 2025 report (IR), FNB Q2 2025 slides (Investing.com). First Horizon trades at a modest premium to regional peers on P/E and P/B metrics embedded in the dataset (P/E ~ 13.25x–14.16x depending on the source; P/B ~ 1.24x), reflecting investor willingness to pay for the combination of steady NII potential, an improving expense story, and strong stress‑test positioning.

What This Means For Investors#

First, the Q2 EPS beat and the narrowed expense guidance materially improve the near‑term earnings visibility for [FHN]. A small positive NII push coupled with tighter operating expense assumptions can drive outsized EPS leverage in a bank of this size because operating leverage is still meaningful relative to revenue.

Second, FY2024’s multi‑year margin compression and the shift from net cash to net debt are concrete reminders that durable EPS improvements must come from both sustained NII expansion and continued discipline on costs. Investors should monitor NII trends (loan yields, warehouse balances and deposit costs) along with quarterly changes in buybacks and dividend declarations to see how management balances returns with capital prudence.

Third, the company‑run stress test provides an important buffer but not immunity. The reported stressed CET1 near 9.7% and $4B in loss absorption capacity mean management has optionality, but widening credit losses or a sharp deposit cost shock would compress that cushion quickly. Keep an eye on asset‑quality indicators and provision expense in upcoming quarters.

Finally, valuation implies a modest premium for FHN’s combination of execution and capital strength. That premium is justified only if the company continues to convert PPNR gains and expense discipline into consistent EPS growth while maintaining capital ratios. Any slippage in NII or spike in provisions will pressure that premium.

Near‑Term Catalysts and Risks (data‑anchored)#

Catalysts: continued NII growth from mortgage warehouse and C&I lending (already cited in Q2 commentary), further expense‑outcome beats that lower full‑year operating expense growth below the flat–2% range, and sustained buyback execution while maintaining CET1 above regulatory buffers.

Risks: rising deposit funding costs that compress NIM beyond the small Q2 uptick, deterioration in commercial or consumer credit that raises provisions, and capital erosion if buybacks outpace capital generation. The payout ratio computed from FY2024 (dividends / FY net income = 46.58%) indicates sensitivity: a material drop in net income would force management to choose between cutbacks in buybacks, reduced dividends or capital raising.

Conclusion — Execution Matters More Than the Headline#

First Horizon’s Q2 beat (adjusted EPS $0.45 vs consensus ~$0.42) and a tightened expense outlook illustrate that management can drive incremental EPS upside through targeted NII opportunities and cost control. The company’s capital posture — a maintained $0.15 quarterly dividend, accelerated buybacks, and a company‑run stress test showing a ~9.7% CET1 under stress — provides policymakers and shareholders with a cushion to execute the plan.

At the same time, FY2024 financials show meaningful profitability compression and a move from net cash to net debt that investors must weigh. The immediate story is one of operational execution and optionality; the longer story depends on whether NII can continue to rise modestly and whether expense discipline can be sustained without sacrificing growth investments.

For market participants, the most actionable signals to watch next are quarterly NII trajectory, provision trends, and capital actions (buybacks vs dividend consistency). Those data points will determine whether the premium the market places on [FHN]’s stability and execution is warranted.

Data sources: First Horizon FY2024 financial statements (filed 2025‑02‑27) and the company’s Q2 earnings materials and related coverage First Horizon reports Q2 EPS $0.45 (Nasdaq), Investing.com Q2 & stress‑test coverage, American Banker: expense outlook, StockTitan: stress test summary, and peer releases from Huntington and FNB (IR and Investing.com links cited inline).