First Horizon FHN continues to benefit from rising loan balances, improving net interest income (NII) and inorganic growth strategies. Elevated expenses, subdued mortgage banking and worsening asset quality are major near-term headwinds.
First Horizon has been witnessing continued loan growth. The company’s loans and leases recorded a CAGR of 22.7% in the last three years (2019-2022). Further, deposits witnessed a CAGR of 25.1% in the same time period. While loan balance improved in the first half of 2023, deposits declined due to lower non-interest-bearing deposit balance. With a strong business mix of regional and specialty banking franchises across an attractive high-growth footprint, the company is well-poised to witness loan and deposit growth.
With the Federal Reserve expected to keep interest rates high in the near term, growth in First Horizon’s NII is likely to remain decent as rising funding costs will put some pressure. NII (FTE basis) witnessed a three-year CAGR of 25.4% (ended 2022), with momentum persisting in the first half of 2023. A 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), will likely support NII growth.
First Horizon has remained an active acquirer through which it diversified its product offerings and expanded its footprint in the Carolina and Florida markets. In 2020, the company merged with IBERIABANK. Given its expanded footprint due to the IBERIABANK merger and the reduced need for physical centers amid the pandemic, FHN optimized its banking center network. Through these efforts, the company achieved annualized net cost savings of $200 million by 2022-end.
Similarly, for Houston, TX-based Prosperity Bancshares PB, acquisitions remain a major contributor to its top-line growth. Over the years, the company has significantly expanded its operations through the buyout of community banks and branches of other banks. Since 1998, PB has completed more than 30 deals. In May 2023, the company acquired First Bancshares of Texas, while in October 2022, the company signed a deal to acquire Lone Star State Bancshares.
However, elevated expenses are a major concern for First Horizon. Non-interest expenses witnessed a four-year (2018-2022) CAGR of 12.5%, with an uptrend persisting in the first half of 2023. The company has delivered around $200 million in annualized merger integration cost savings. Management expects adjusted expenses to rise 6-8% this year on increased investment in technology, marketing and personnel.
Weakness in First Horizon’s mortgage banking business is a concern. The company’s mortgage banking income plunged in the first six months of 2023, mainly on 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 any significant growth. This is expected to reduce First Horizon’s mortgage banking income and affect fee income growth.
Likewise, Columbus, GA-based Synovus Financial SNV faces weakness in mortgage banking business. While the company’s mortgage income increased in 2019 and 2020, supported by low mortgage rates, the same witnessed a decline in 2021, 2022 and the first half of 2023. High mortgage rates have been hurting SNV’s mortgage origination volumes and refinancing activities.
Also, First Horizon’s asset quality has been deteriorating. Both provisions for credit losses and net charge-offs increased in the first half 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. In fact, the company expects the net charge-off ratio to be between 15 basis points (bps) and 25 bps for 2023, up from 11 bps reported in 2022.
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First Horizon Corporation (FHN) : Free Stock Analysis Report
Prosperity Bancshares, Inc. (PB) : Free Stock Analysis Report
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