Introduction

First Horizon Corporation (FHN) is a leading regional banking institution headquartered in Memphis, Tennessee, serving customers across the Southern United States. With a history dating back to 1864, the company has grown to become a diversified financial services provider, offering a range of commercial, personal, and specialty banking products and solutions.

The company's business model is anchored in its Regional Banking segment, which provides traditional lending, deposit-taking, and wealth management services to commercial and consumer clients primarily in the southern U.S. and other select markets. Complementing this core operation is the Specialty Banking segment, which delivers specialized industry expertise in areas such as asset-based lending, mortgage warehouse lending, commercial real estate, franchise finance, correspondent banking, equipment finance, and fixed income securities.

Historical Overview

First Horizon's journey from a small community bank to a diversified financial services company has been marked by significant milestones and strategic decisions. Founded as First National Bank of Memphis in 1864, the company initially served the local Memphis area. In the early 1900s, it began expanding its footprint by opening new branches throughout Tennessee, demonstrating resilience through challenging times such as the Great Depression and World War II.

The company underwent several name changes to reflect its growth and evolving identity. In 1969, it became First Tennessee National Corporation, signifying its statewide presence. This was followed by another rebranding in 1999 to First Horizon National Corporation, better representing its diverse financial services offerings, which had grown to include commercial banking, consumer banking, mortgage banking, and capital markets.

The 2000s presented new challenges for First Horizon, particularly during the subprime mortgage crisis. The company's legacy mortgage banking business suffered significant losses, leading to write-downs and restructuring efforts. However, First Horizon demonstrated its adaptability by refocusing on its core commercial and consumer banking operations, reinforcing its commitment to the regional banking model.

A transformative moment in First Horizon's history came in 2020 with its merger with IBERIABANK. This strategic move created one of the largest regional banking franchises in the southern United States, significantly expanding First Horizon's geographic footprint and service capabilities. Today, the combined entity operates under the First Horizon name, boasting over 450 business locations across 24 states and employing approximately 7,300 associates.

Throughout its long history, First Horizon has navigated various economic cycles and market conditions, demonstrating resilience and adaptability. The company's geographic footprint, diversified revenue streams, and prudent risk management have been instrumental in its ability to weather storms and capitalize on growth opportunities.

Financials: Weathering the Storm

In its most recent fiscal year (2023), First Horizon reported net income of $897 million, or $1.55 per diluted share. Total revenue for the year reached $3.15 billion, driven by a net interest income of $2.54 billion and noninterest income of $609 million. The company's return on average assets and return on average equity stood at 1.10% and 10.01%, respectively.

The first three quarters of 2024 have seen First Horizon maintain a solid financial performance, despite ongoing macroeconomic headwinds. For the nine-month period, the company reported net income of $675 million, or $1.22 per diluted share, on total revenue of $2.34 billion. The company's net interest margin has remained relatively stable, averaging 3.39% during this period.

In the most recent quarter, First Horizon reported revenue of $802 million and net income of $218 million. The company generated operating cash flow of $389 million and free cash flow of $383 million during this period, demonstrating strong cash generation capabilities.

One area of strength has been First Horizon's fixed income and capital markets business, which has seen a resurgence in activity as market conditions have improved. The company's average daily revenue from this segment increased by 22% quarter-over-quarter in the third quarter of 2024, contributing to a $7 million increase in fee income.

Navigating Challenges: Interest Rate Environment and Deposit Costs

The company's financial performance has not been without its challenges, however. The rising interest rate environment has put pressure on First Horizon's net interest margin, as the cost of deposits has increased at a faster pace than the yield on earning assets. This dynamic has been especially pronounced in the fourth quarter of 2024, as the Federal Reserve has implemented a series of rate hikes.

To combat the impact of rising deposit costs, First Horizon has taken proactive measures, such as shortening the duration of its new-to-bank deposit promotions from 90 days to 45 days. The company has also been actively managing its deposit pricing, aiming to strike a balance between retaining its existing customer base and acquiring new relationships. These efforts have helped mitigate some of the margin compression, but the company remains vigilant in monitoring the evolving interest rate landscape.

Liquidity and Capital Position

Despite the macroeconomic challenges, First Horizon has maintained a robust credit profile. In the third quarter of 2024, the company reported net charge-offs of just 15 basis points, reflecting the strength of its underwriting and risk management practices. The allowance for credit losses stood at 1.44% of total loans and leases, providing ample coverage against potential future losses.

The company's capital position also remains strong, with a Common Equity Tier 1 ratio of 11.2% as of the end of the third quarter of 2024. This positions First Horizon well to navigate the current environment and continue executing on its growth strategies, which include both organic and inorganic opportunities.

Outlook and Strategic Initiatives

Looking ahead, First Horizon remains cautiously optimistic about the future, despite the ongoing economic uncertainty. The company has provided guidance for the full year 2024, expecting total revenue to be flat to up 2% year-over-year. This range reflects the potential impact of further interest rate cuts, which could pressure net interest income, offset by the resilience of the company's fee-generating businesses.

First Horizon has reiterated its previous guidance on revenue, expenses, and capital, though noting uncertainty around the exact impact of future interest rate moves on their net interest income versus fee businesses. The company continues to target an 11% CET1 ratio near-term and has left its net charge-off guidance range unchanged until more information is available on potential losses from recent weather events in their footprint.

To drive long-term value creation, First Horizon is focused on several strategic initiatives, including deepening client relationships, enhancing its technology and digital capabilities, and optimizing its operations for greater efficiency. The company is also exploring opportunities to expand its specialty banking offerings and selectively pursue acquisitions that align with its growth objectives.

Business Segments

First Horizon operates through three main reportable business segments: Regional Banking, Specialty Banking, and Corporate.

The Regional Banking segment offers a variety of financial products and services, including traditional lending and deposit-taking, to commercial and consumer clients primarily in the southern United States and other selected markets. This segment also provides investment, wealth management, financial planning, trust, and asset management services for consumer clients. In the second quarter of 2024, the Regional Banking segment reported pre-tax income of $241 million, a decrease of $44 million compared to the first quarter. Net interest income for this segment was $522 million, down $10 million from the prior quarter, driven by a decline in average noninterest-bearing deposits and higher interest-bearing deposit costs, partially offset by higher loan balances and yields.

The Specialty Banking segment consists of lines of business that deliver product offerings and services with specialized industry knowledge. This includes asset-based lending, mortgage warehouse lending, commercial real estate, franchise finance, correspondent banking, equipment finance, and mortgage. The segment also has a fixed income securities sales, trading, underwriting, and strategies business for institutional clients. Pre-tax income for Specialty Banking was $118 million in the second quarter of 2024, an increase of $20 million from the prior quarter, driven largely by a $22 million decrease in provision for credit losses.

The Corporate segment primarily consists of corporate support functions including risk management, audit, accounting, finance, executive office, and corporate communications. It also includes the revenue and expense associated with run-off businesses such as pre-2009 mortgage banking elements, run-off consumer and trust preferred loan portfolios, and other exited businesses. The pre-tax loss for the Corporate segment was $99 million in the second quarter of 2024, an improvement of $30 million from the first quarter, primarily due to a $9 million increase in net interest income and a $23 million decrease in noninterest expense, partially offset by $3 million in restructuring costs.

Conclusion

First Horizon Corporation has demonstrated its ability to navigate challenging market conditions, leveraging its diversified business model, prudent risk management, and commitment to serving its customers. While the current interest rate environment poses headwinds, the company's strong capital position, resilient credit performance, and strategic initiatives position it well to continue delivering value to shareholders. As First Horizon navigates the uncertain times ahead, investors will closely watch the company's ability to adapt and capitalize on emerging opportunities within its regional banking and specialty banking segments.