First Horizon Corp (FHN) - Q2 2024 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2024. First Horizon Corporation (FHN) is a financial holding company headquartered in Memphis, Tennessee, with its principal subsidiary being First Horizon Bank. The company operates through three segments: Regional Banking, Specialty Banking, and Corporate. As of June 30, 2024, FHN had over 450 business locations in 24 states and approximately 7,300 associates.
Key Financial Metrics
| Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Net Income (Attributable to Common) | $184 million | $317 million | $368 million | $560 million |
| Diluted EPS | $0.34 | $0.56 | $0.67 | $1.00 |
| Net Interest Income | $629 million | $630 million | $1,253 million | $1,318 million |
| Noninterest Income | $186 million | $400 million | $381 million | $571 million |
| Noninterest Expense | $500 million | $555 million | $1,015 million | $1,033 million |
| Provision for Credit Losses | $55 million | $50 million | $105 million | $100 million |
| Total Assets | $82.23 billion | $82.30 billion (Q2 2023) | $82.23 billion | $80.58 billion (YTD Avg) |
| Total Loans and Leases | $62.78 billion | $61.29 billion (Dec 31, 2023) | $62.78 billion | $61.29 billion (Dec 31, 2023) |
| Total Deposits | $64.79 billion | $65.78 billion (Dec 31, 2023) | $64.79 billion | $65.78 billion (Dec 31, 2023) |
| Net Charge-offs (Annualized) | 22 bps | 16 bps | 24 bps | 13 bps |
| CET1 Capital Ratio | 11.05% | 11.08% (Q2 2023) | 11.05% | 11.08% (Q2 2023) |
| Return on Average Assets (ROA) | 1.00% | 1.60% | 0.99% | 1.46% |
Material Changes vs. Prior Period
- Earnings Decline: Net income available to common shareholders decreased significantly year-over-year (Q2 2024 vs. Q2 2023) primarily due to the absence of a $225 million gain on merger termination recorded in Q2 2023 related to the terminated TD Transaction.
- Noninterest Income: Total noninterest income dropped 54% year-over-year ($186M vs. $400M) driven by the aforementioned merger termination gain. Excluding this one-time item, fixed income revenue increased 33% and mortgage banking income increased 67% due to higher origination volumes and favorable spreads.
- Net Interest Income (NII): NII remained relatively flat quarter-over-quarter but declined slightly year-over-year. The Net Interest Margin (NIM) held steady at 3.38% in Q2 2024, despite higher funding costs, as loan yields increased.
- Asset Quality: Nonperforming assets (NPAs) increased to $582 million (0.92% of loans) from $469 million at year-end 2023. This increase was largely driven by a rise in nonaccrual Commercial Real Estate (CRE) loans, specifically in the non-medical office property sector. Net charge-offs increased to $34 million (22 bps) from $23 million (16 bps) in Q2 2023.
- Capital Actions: FHN redeemed all outstanding shares of its Series D Preferred Stock ($100 million liquidation preference) on May 1, 2024. The company also continued its common stock repurchase program, buying back approximately $387 million of shares year-to-date.
Guidance, Outlook, and Risks
- Outlook: Management expects capital ratios to remain above well-capitalized standards plus the required capital conservation buffer throughout 2024. The company anticipates continued competitive pressure on deposit costs in the second half of 2024.
- Interest Rate Environment: The yield curve remains inverted. Market participants are projecting one or two rate cuts in the latter half of 2024. FHN's interest rate sensitivity analysis suggests a static balance sheet would see a slight increase in Net Interest Income with a +25 bps rate shock and a decrease with a -25 bps shock.
- Regulatory Risks: The SEC adopted final Climate Disclosure Rules in March 2024, which are currently stayed pending judicial review. Implementation timing is uncertain. Additionally, proposed regulatory changes for banks with assets over $100 billion could impact the industry, though FHN is currently under that threshold.
- Market Risks: FHN faces exposure to coastal markets (e.g., Florida, Louisiana) where rising hurricane-related insurance costs and availability issues could impact loan collateral values and borrower ability to pay. The company also monitors the potential for a recession, though current expectations remain low.
- Contingencies: FHN maintains a repurchase and foreclosure liability of $16 million related to pre-2009 mortgage origination and servicing businesses. Management believes loss contingencies related to pending litigation should not have a material adverse effect on consolidated financial condition.
Investor Verification Checklist
- Merger Gain Impact: Verify the exclusion of the $225 million Q2 2023 merger termination gain when comparing year-over-year profitability metrics.
- CRE Asset Quality: Review the specific concentration of nonaccrual loans in the non-medical office CRE portfolio and the adequacy of the allowance for credit losses (ACL) in that segment.
- Deposit Mix: Analyze the shift in deposit composition, specifically the decline in noninterest-bearing deposits and the associated rise in funding costs.
- Capital Ratios: Confirm that CET1 and Tier 1 capital ratios remain comfortably above regulatory minimums and the capital conservation buffer following share repurchases.
- Climate Regulation: Monitor the status of the SEC Climate Disclosure Rules stay and potential future compliance costs.