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Earnings


FIRST HORIZON NAVIGATES TD DEAL'S DEMISE, BUT BIG TECH INVESTMENTS LOOM

By   Polo Rocha
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January 23, 2024, 5:02 p.m. EST 5 Min Read
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At Memphis, Tennessee-based First Horizon Corp., higher spending weighed down
profitability in the second half of last year. The bank's return on average
assets was 0.9% in the fourth quarter, up substantially from the previous
quarter but down sharply from 1.4% a year before.
Liam Kennedy/Bloomberg

Last year didn't go as planned for First Horizon Corp., the Memphis,
Tennessee-based regional bank that was due to be bought by TD Bank Group. 



But, forced to continue operating on its own, the bank is finding momentum. It
brought in new depositors last year by paying high interest rates, and it's
retained the vast majority of them thus far. It's also picked up some new
customers as competitors in the Southeast pull back from certain lines of
business.



Investors aren't convinced yet that the $81.7-billion asset bank's shares are
worth diving back into — its stock price is down 42% from this time a year ago.
While First Horizon's quarterly earnings report last week showed clear signs of
progress, analysts said the company will need more such quarters to show the
momentum is real.

"There's a little bit of a wait-and-see mentality," said Chris Marinac, an
analyst at Janney Montgomery Scott, who has a neutral rating on the stock.



One path forward for First Horizon remains, of course, another attempt at a
merger. There's "real value" in the bank's franchise, Marinac said, pointing to
a dependable base of depositors in Tennessee and elsewhere. Loyal customers in
its high-growth Southeast markets should be attractive to a would-be buyer.



The problem is that bank acquisitions have stalled. High interest rates are
continuing to dampen M&A activity across the sector. The regulatory environment
isn't all that friendly to dealmaking, either. Regulatory hang-ups involving TD
reportedly helped kill the Canadian bank's attempted purchase of First Horizon,
and any future deal involving First Horizon would be big enough to trigger
heightened scrutiny from Biden administration regulators.

So for now, First Horizon will "tread water" and stay focused on "building out
the power of this franchise," CEO Bryan Jordan said in a recent interview. Those
efforts include ensuring that the bank can continue capitalizing on its own 2020
acquisition of Louisiana-based IberiaBank, which expanded First Horizon's
footprint in the Southeast.

First Horizon CEO Bryan Jordan

"M&A will take care of itself down the road, but right now we're focused
internally on growing this business," Jordan said. He added that he would "never
say never" on a future deal.

Operating First Horizon as a standalone bank isn't cheap. One key benefit of
mergers is that a larger company has more money to invest in the types of
technology that give customers a modern banking experience. 

If the TD deal had gone through, First Horizon wouldn't have to undertake some
of that spending. After all, the Toronto-based bank's U.S. division, TD Bank, is
more than four times larger than First Horizon and has plenty of firepower for
tech investments.

So for now, First Horizon is catching up on tech spending. The bank said last
week that it expects its non-interest expenses to rise by 4% to 6% this year, a
significantly higher rate of increase than many peers, which are aiming to keep
costs flat or in the low single digits. 

Jordan told analysts that First Horizon is focused on controlling costs across
the company, even as it spends in areas where it "had to get caught up." 

Higher spending weighed down the bank's profitability in the second half of
2023. Its return on average assets was 0.9% in the fourth quarter, up
substantially from a quarter earlier but down sharply from 1.4% a year ago.

First Horizon, seeking new customers in the aftermath of the canceled TD deal,
spent heavily last year on a deposit-gathering campaign that proved successful.
It offered high rates on certificates of deposit, bringing in money from some
32,000 new customers.

But luring depositors with promotional interest rates is easy, at least compared
with keeping the funds and turning new customers into long-term business.

So First Horizon's focus now is "promo to primacy," which is Jordan's phrase to
describe the process of turning a promotional offer into a primary banking
relationship. He told analysts last week that the company is seeing some
progress there.

"While it is still early, we think we are making good progress in taking those
new-to-bank relationships and broadening and expanding those relationships," he
said. "And that doesn't happen instantaneously, but we see early indications
that are encouraging."

Another positive sign: First Horizon was able to lower its promotional deposit
rates without losing many of its new customers. The bank retained some 96% of
the new money, executives said last week, even as it brought down its
promotional rates by an average of 76 basis points. 

Earnings
First Horizon's hustle won it new customers. Now it needs to keep them.
July 19, 2023 1:12 PM

Lower interest expenses, combined with loans resetting to higher interest rates,
improved the bank's net interest margin. Many regional banks reported lower
profitability last quarter. First Horizon was one of the few that showed an
improvement in its net interest margin, which rose 10 basis points from a
quarter earlier to 3.27%. 

First Horizon had a "strong finish to 2023," said Brady Gailey, an analyst at
Keefe, Bruyette & Woods. But investors want to see more such quarters this year,
which would help provide "stability and consistency," he said.

Gailey, who has a neutral rating on First Horizon, credited the bank for
managing through a "pretty crazy year" that included the failure of three
regional banks and TD's scuttled acquisition.

"The management team has actually done a pretty good job of navigating through
all of those issues," Gailey said. "I think over time investors will get more
and more comfortable as First Horizon improves profitability."

David Chiaverini, an analyst at Wedbush Securities, has an "outperform" rating
on First Horizon's stock. In a research note last week, he wrote that the
company had a "solid quarter" and that its higher capital cushion relative to
competitors makes it more attractive as "credit quality potentially weakens"
across the banking industry.

The bank's stock price has jumped some 9% to $14.26 since last week's earnings
report, though the share price is still a long way from its February 2023 level
of nearly $25 per share.

For his part, Jordan said he tries not to "spend a whole lot of time focused on
the short-term stock price." After the TD deal failed, it was always going to
take time for First Horizon's share price to recover, he argued. But the company
creates "value over the long term" by serving customers well and bringing in
more of them, he said.

"We're not overly worried about what happens to valuation in the short term,"
Jordan said, noting that First Horizon is due to celebrate its 160th anniversary
this year. "We're thinking about how we build that franchise for the next 160
years."

Polo Rocha
Staff Writer, American Banker
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