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Balance Sheet Growth Aids First Horizon (FHN), High Costs Ail

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First Horizon Corporation (FHN - Free Report) benefits from its solid balance sheet position and rising net interest income (NII). Also, its inorganic growth moves have been supporting its expansion. On the flip side, high costs hinder bottom-line growth. Also, given its unsound liquidity position, capital deployment activities seem unsustainable.

Given the competitive banking environment, most banks faced challenges in achieving decent loan growth. In stark contrast, First Horizon witnessed continued loan growth on increase in commercial and consumer loans. It recorded a compound annual growth rate of 22.7% in the last three years (2019-2022). The trend continued in first-quarter 2023.

Further, though FHN’s deposits declined in first-quarter 2023, it has been rising over the years. With a strong business mix of regional and specialty banking franchises across its attractive high-growth footprint, we believe the company is well-positioned to grow organically and strengthen its balance sheet.

Such expectational growth in loans along with high interest rates have helped FHN’s NII to rise over the years. Moreover, its footprint in higher-growth markets offers scope for gathering lower-cost core deposits and an asset-sensitive balance sheet (significant exposure to floating rate loans) will likely support margins and NII. This is likely to benefit top-line growth in the upcoming period.

First Horizon has also been growing through several acquisitions. This greatly diversified its product offerings and strengthened footprint in the Carolina and Florida markets. In July 2020, the company merged with IBERIABANK and has integrated its systems. This has expanded its footprint and reduced the need for physical centers by optimizing its banking center network.

However, elevated expenses are major concerns for First Horizon. Non-interest expenses have been rising over the years. Management expects adjusted expenses to grow 6-8% due to increased investment in technology, marketing and personnel. Such an increase in cost base will limit bottom-line growth.

Also, FHN’s mortgage banking income declined 77% year over year in first-quarter 2023, mainly due to higher mortgage rates that led to a fall in demand for loans and refinancing. As mortgage rates are expected to remain high in the near future, origination volumes and refinancing activities are less likely to witness growth, thereby reducing First Horizon’s mortgage banking income.

First Horizon’s capital deployment activities keep us apprehensive. Given the cash and dues from bank of $987 million and debt (comprising short-term borrowings and term borrowings) worth $8.08 billion as of Mar 31, 2023, its liquidity position seems unsound. Hence, we believe that FHN’s capital deployment activities might not be sustainable in the long term.

Further, the current rapidly changing macroeconomic backdrop and high interest rates may put some strain on commercial lending. In case of any economic downturn, the asset quality of the loan category might deteriorate as well. Thus, FHN’s substantial exposure to commercial and commercial real estate loans is likely to hurt its financials if the economic situation worsens.

Shares of this Zacks Rank #3 (Hold) company have lost 52.2% over the past six months compared with the industry’s decline of 26.3%.


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