First Horizon (FHN) Q2 2026 earnings review
Steady Execution Despite Rising Funding Costs
First Horizon delivered exactly what management promised: steady, profitable growth. Net Income to common shareholders rose 12% YoY to $260M, and EPS grew 20% to $0.54. The bank maintained its streak of generating >15% ROTCE (15.2% this quarter). Strong C&I loan growth fueled a 5% YoY increase in Net Interest Income. However, beneath the strong headline numbers, margin pressures are building. Deposit competition forced the bank to rely heavily on expensive time deposits to fund loan growth, compressing the Net Interest Margin by 3 bps sequentially. Despite this, credit quality remains excellent, providing a solid foundation for the second half of the year.
🐂 Bull Case
The bank achieved a 15.2% ROTCE, hitting its long-term >15% target for the fourth consecutive quarter through disciplined capital management and loan execution.
Nonperforming loans reversed their previous trend, dropping 12% sequentially driven by highly successful resolutions in the Commercial Real Estate (CRE) portfolio.
🐻 Bear Case
To support loan growth, the bank relied heavily on expensive time deposits (up 41% QoQ), driving total interest-bearing deposit costs up 5 bps and compressing NIM.
Adjusted noninterest expenses grew 6% YoY, directly challenging management's prior narrative of a flat expense year driven by technological efficiencies.
⚖️ Verdict: ⚪
Bullish leaning Neutral. The bank is executing well on its core commercial lending and credit quality metrics. However, rising reliance on wholesale funding and climbing third-party expenses require monitoring, as they threaten the operating leverage story.
Key Themes
C&I Loan Growth Accelerating
Commercial and Industrial (C&I) lending is accelerating, growing by $829M (+2%) sequentially to $37.3B. This was the primary engine behind the 5% YoY growth in Net Interest Income. Management previously noted strong momentum with business owners planning for growth, and this quarter's print validates that pipeline conversion is effectively driving the balance sheet.
Funding Mix Shifting to Wholesale
While loan growth was strong, the method of funding is a significant concern. The deposit mix is reversing from core to wholesale. Time deposits surged 41% (+$2.89B) sequentially, while cheaper savings accounts bled $454M. This reliance on brokered deposits drove interest-bearing deposit costs up 5 bps to 2.33%, compressing the Net Interest Margin by 3 bps to 3.49%.
Asset Quality Normalizing
Nonperforming loans are reversing their previous upward trend, dropping 12% sequentially to $531M. The improvement was heavily driven by Commercial Real Estate (CRE), where NPLs fell from $243M to $184M (-24%). This signals the successful workout of classified assets and removes a major overhang from the portfolio, allowing the ACL ratio to safely drift down to 1.24%.
Expense Run-Rate Contradicts Flat Guidance
Adjusted noninterest expense is accelerating, reaching $526M in Q2 (up 6% YoY). This directly contradicts management's positive narrative from Q1, where they explicitly guided for ~0% adjusted expense growth for FY26. The increase was driven by a $10M sequential jump in outside services. If this run-rate holds, the promised positive operating leverage story will break without severe H2 cost cutting.
Macro Environment Dragging Fixed Income
The macro interest rate environment continues to act as a headwind for the counter-cyclical side of the business. Fixed income trading revenue is decelerating, dropping 14% sequentially to $46M. Management previously warned that shifting expectations for Fed easing and flat yield curves create severe volatility. As long as rate cuts remain delayed, this segment will struggle to offset margin pressures.
Capital Efficiency Stable
The bank's capital strategy remains stable and highly effective. First Horizon successfully landed its CET1 ratio exactly at its 10.5% near-term target while simultaneously deploying capital into $100M of share buybacks and absorbing robust commercial loan growth. This disciplined capital allocation is the primary reason the bank has maintained its >15% ROTCE targets.
Technology Investments vs. Outside Services
In Q1, management specifically touted AI and technology investments as the critical infrastructure enabling them to scale revenue without adding back-office headcount. However, Q2 data reveals a different reality: 'Outside Services' jumped 15% sequentially to $79M. The promised operational leverage from these specific tech tools is currently invisible, completely offset by rising third-party vendor costs.
Other KPIs
Stable. PPNR was essentially flat compared to Q1 ($357M) but represents a 5% increase YoY. This shows that the core earnings engine is intact; loan volume growth is currently perfectly offsetting the headwinds of rising deposit costs and slightly higher noninterest expenses.
Accelerating. Fee income in this segment grew 7% sequentially and 17% YoY. This indicates early success in the bank's internal '$100M+ PPNR initiative', which focuses heavily on deepening existing commercial relationships by cross-selling wealth and treasury services.
Guidance
Stable. H1 2026 total revenue is tracking up roughly 5% YoY, perfectly aligning with the midpoint of the guidance provided in Q1. Strong NII growth (+5% YoY in Q2) is effectively offsetting the deceleration in fixed income trading fees. Highly likely to achieve.
Decelerating pace required. With Q2 adjusted expenses up 6% YoY to $526M, the bank must execute a severe deceleration in spending in the back half of the year to meet this target. Given the upward trajectory of outside services and deferred compensation, this guidance appears unlikely to be achieved.
Stable. Q2 NCOs came in at 0.20% (up slightly from 0.18% in Q1). This places the bank exactly at the midpoint of its annual guidance range. Excellent CRE resolutions are providing a buffer against mild normalization in consumer and C&I credit.
Stable. The bank ended Q2 with a CET1 ratio exactly at 10.5%. Management's cadence of using excess capital for buybacks ($100M this quarter) while safely funding 2% loan growth proves they can tightly manage capital to their stated targets.
Key Questions
Expense Target Viability
Given adjusted expenses grew 6% YoY in Q2 and outside services jumped sequentially, is the full-year ~0% expense growth guidance still realistic, and what specific cost cuts are planned for H2 to achieve it?
Wholesale Funding Dependency
Time deposits surged by 41% sequentially. How much of this was brokered CDs, and what does this reliance on wholesale funding mean for NIM trajectory if the Fed holds rates steady?
CRE Nonperforming Loans
CRE NPLs dropped by an impressive 24% this quarter. Was this driven entirely by payoffs and charge-offs, or are you seeing structural stabilization and upgrades in the underlying properties?
Fixed Income Volatility
Fixed income revenue declined 14% sequentially. Is this merely a symptom of seasonal summer slowness, or a structural headwind caused by the current macro environment and flat yield curve?