First Horizon Corporation (FHN) 2025 Stress Test and Q2 Earnings Analysis

First Horizon Corporation: Capital Resilience Amid Regional Banking Uncertainty#

First Horizon Corporation (FHN recently reported a compelling set of 2025 stress test results, underscoring its strong capital foundation in a challenging regional banking environment. The bank's minimum Common Equity Tier 1 (CET1) ratio of 9.7% far exceeds the regulatory minimum of 4.5%, providing a robust cushion against economic shocks. This capital strength is complemented by a loan portfolio stressed loss rate of only 2.3%, substantially lower than the Federal Reserve's peer median of 6.1%, reflecting prudent risk management and a conservative asset mix.

These stress test outcomes affirm FHN's resilience, with pre-provision net revenue (PPNR) reaching 4.7% of total assets, more than double the peer median of 2.3%. PPNR is a critical metric reflecting the bank's operational earnings capacity before loan loss provisions, highlighting the effectiveness of its diversified business model and expense discipline under stress conditions.

Key Stress Test Metrics Comparison#

(Source: Investing.com, GuruFocus

Diversified Business Model and Risk Management#

FHN’s diversified portfolio spans retail banking, mortgage lending, fixed income, and commercial loans. This mix emphasizes lower-risk assets such as mortgage loans, which have contributed to the bank’s lower stressed loss rates and enhanced revenue stability. The geographic concentration in the Southeast—a region with robust economic growth—adds a further layer of stability to revenue streams.

Moreover, FHN’s risk management framework is built on prudent underwriting standards and disciplined expense control, supporting its operational resilience. The bank’s counter-cyclical income sources, particularly mortgage and fixed income operations, help offset downturn-related pressures, sustaining PPNR even in adverse scenarios.

Q2 2025 Earnings: Operational Efficiency Amid Revenue Pressure#

In Q2 2025, First Horizon reported an adjusted EPS of $0.45, surpassing analyst estimates of around $0.41-$0.42. Revenue totaled approximately $830 million, slightly below the $831.93 million consensus. Despite this minor revenue shortfall, net interest income increased by $10 million sequentially, indicating solid core banking strength.

This earnings beat is a testament to FHN’s effective cost management and operational efficiency. The bank's ability to maintain profitability despite revenue headwinds aligns with the resilience reflected in its stress test performance.

Dividend Policy: Stability and Sustainability#

First Horizon continues to reward shareholders with a quarterly dividend of $0.15 per share, representing a dividend yield of approximately 2.85%. The payout ratio stands at a conservative 42.28%, well below the regional banking sector average of roughly 45%, underscoring dividend sustainability amid fluctuating earnings.

The dividend has remained steady since 2020, signaling management’s confidence in the bank’s capital and earnings stability. This consistency is especially notable given the macroeconomic uncertainties and regulatory stress test environment.

Valuation and Market Sentiment#

FHN trades at a price-to-earnings (P/E) ratio around 14.6x, modestly higher than the regional bank peer average of approximately 12.5x. This premium likely reflects investor recognition of FHN’s superior capital resilience and operational discipline. The stock’s momentum score of 10/10 and a valuation grade of B reinforce positive market sentiment and suggest potential upside, with analysts projecting earnings per share growth compounded annually at approximately 8.87% through 2027.

Forward P/E and EV/EBITDA Estimates#

The declining forward P/E ratio over the next three years suggests improving earnings expectations, consistent with analyst consensus on revenue and EPS growth.

Financial Performance Overview#

Revenue and Profitability Trends#

While FHN’s revenue has grown modestly by approximately 4.71% year-over-year, net income has contracted by around -13.6%, and diluted EPS has declined by -11.69% in the most recent fiscal year. This divergence suggests margin pressures and cost challenges despite top-line growth.

Historical margins have compressed from 2021 levels, with gross margin declining from over 100% to approximately 60% in 2024, and net margin dropping from 31.67% to 15.7%. These shifts warrant attention but remain consistent with industry-wide margin normalization post-pandemic.

Balance Sheet and Liquidity#

FHN maintains a solid balance sheet with total assets of $82.15 billion and total stockholders' equity of $8.82 billion as of year-end 2024. The bank's net debt stands at $2.15 billion, with a debt-to-equity ratio of 0.54x, reflecting prudent leverage management.

Liquidity remains robust, with cash and cash equivalents of $2.44 billion and cash plus short-term investments totaling $8.94 billion. The bank’s current ratio is low at 0.16x, typical for financial institutions, where asset-liability matching is managed differently than in non-financial firms.

Cash Flow Insights#

Operating cash flow remains strong at approximately $1.27 billion, with free cash flow of $1.22 billion in 2024. Capital expenditures are modest at $44 million, highlighting efficient use of capital. The bank’s financing activities include common stock repurchases of $626 million and dividends paid of $361 million, indicating active capital return policies balanced with growth investments.

What Does This Mean for Investors?#

First Horizon's stress test results and Q2 2025 earnings underscore its robust capital base, prudent risk management, and operational resilience. Despite pressure on margins and revenue growth, the bank’s ability to generate strong pre-provision net revenue and maintain dividends supports confidence in its financial stability.

Investors should note the bank's relatively conservative payout ratio and consistent dividend history, which indicate sustainable shareholder returns. The valuation premium reflects market recognition of these strengths amid a competitive regional banking landscape.

Looking ahead, management’s guidance on PPNR growth and return on tangible common equity above 15% suggests a focus on profitability and capital efficiency, key for navigating ongoing economic uncertainties.

Key Takeaways#

• First Horizon's 2025 stress test shows CET1 ratio well above regulatory minimum (9.7%) and loan loss rate significantly below peer median (2.3%).
• The bank’s PPNR at 4.7% of assets signals strong operational earnings power under stress.
• Q2 2025 earnings beat estimates with EPS of $0.45, driven by net interest income growth and cost control.
• Dividend yield of 2.85% with a conservative payout ratio supports dividend sustainability.
• Market values FHN at a P/E of ~14.6x, above peers, reflecting confidence in its resilience and strategic positioning.
• Forward-looking analyst estimates project steady EPS growth (~8.87% CAGR) and improving valuation multiples through 2027.

Sources#

• Investing.com - First Horizon Stress Test
• GuruFocus - First Horizon 2025 Stress Test Results
• TipRanks - First Horizon Stress Test
• Marketscreener - First Horizon Stress Test
• Investing.com - FHN Dividends
• GuruFocus - FHN Dividend History
• Simply Wall St - FHN Valuation
• Full Ratio - FHN P/E Ratio
• Seeking Alpha - Valuation Metrics