First Horizon Corporation’s (FHN Quick QuoteFHN - Free Report) premier regional franchise, as well as robust commercial and specialty banking capabilities, is likely to drive its balance sheet strength. Further, continued capital distribution activities will enhance shareholders’ value.

However, mounting operating expenses are concerning for First Horizon. Weak mortgage banking performance, deteriorating asset quality on expected economic slowdown and high debt level are other headwinds.

First Horizon has been enjoying balance sheet strength. The company’s loans and leases saw a compound annual growth rate (CAGR) of 22.7% in the last three years (2019-2022). Deposits witnessed a CAGR of 25.1% in the same period. Both metrics improved in the first nine months of 2023.

With a strong business mix of regional and specialty banking franchises across its attractive, high-growth footprint, we believe that the company is well-positioned to witness loan and deposit growth.

FHN’s footprint in higher-growth markets offers scope for gathering lower-cost core deposits. This, along with an asset-sensitive balance sheet (significant exposure to floating rate loans) and the fact that the Fed will likely keep interest rates high in the near term, is expected to support margins and net interest income (NII) in the upcoming period.

First Horizon’s capital distribution activities remain decent. The company announced a 7% dividend hike to 15 cents per share in January 2020 and maintained the same since then. It authorized a $500-million program in January 2021 and increased it by $500 million in October 2021. In the first half of 2023, $401 million worth of shares were repurchased. Given the earnings strength, the company’s capital distributions seem sustainable.

Elevated expenses are major concerns for First Horizon. Non-interest expenses witnessed a four-year (2018-2022) CAGR of 12.5%, with an uptrend persisting in the first nine months of 2023. Management expects adjusted expenses to rise 6-8% on increased investment in technology, marketing and personnel. Such an increase in the cost base will limit bottom-line growth.

Weakness in First Horizon’s mortgage banking business is a major headwind. The company’s mortgage banking income plunged in the first nine months of 2023, mainly on higher mortgage rates that led to a fall in demand for loans and refinancing. This is expected to affect fee income growth.

First Horizon’s asset quality has been deteriorating. Provision for credit losses and net charge-offs have been volatile. Both provisions and net charge-offs increased in the first nine months of 2023. The company’s credit quality is likely to remain under pressure in the near term, given the rising loan balance and deteriorating macroeconomic outlook.

As of Sep 30, 2023, debt (comprising short-term and term borrowings) was $3.6 billion, and cash and dues from the bank, and interest-bearing deposits with banks were $2.93 billion. Hence, we believe that the company has a high chance of not being able to meet debt repayment obligations if the economic situation worsens.

FHN’s shares have gained 8.1% in the past six months against the industry’s fall of 1.7%.

Image Source: Zacks Investment Research

The company currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

A couple of better-ranked stocks from the banking space are First Citizens BancShares, Inc. (FCNCA Quick QuoteFCNCA - Free Report) and Fifth Third Bancorp (FITB Quick QuoteFITB - Free Report) .

First Citizens BancShares currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been revised 3.7% upward over the past 30 days. In the past six months, FCNCA shares have improved 10.5%.

Earnings estimates for FITB have been revised marginally upward for 2023 over the past 30 days. Shares of FITB have rallied 3.3% in the past six months. FITB currently carries a Zacks Rank #2.