Breaking Down First Horizon Corporation (FHN) Financial Health: Key Insights for Investors

Understanding First Horizon Corporation (FHN) Revenue Streams

Understanding First Horizon Corporation’s Revenue Streams

First Horizon Corporation (FHN) generates revenue primarily from two main sources: net interest income and noninterest income. Below is a detailed analysis of these revenue streams as of 2024.

Breakdown of Primary Revenue Sources

The company's revenue is significantly influenced by its banking operations, which include:

• Net Interest Income: This is derived from the interest earned on loans and leases, minus interest paid on deposits and borrowings. For the six months ended June 30, 2024, net interest income was $1.3 billion, a decrease of $65 million compared to the same period in 2023.
• Noninterest Income: This includes fees for services such as deposit transactions, mortgage banking, and investment management. For the same period, noninterest income totaled $381 million, down 33% from $571 million in 2023.

Year-over-Year Revenue Growth Rate

Analyzing the revenue growth rate reveals significant trends:

• Net interest income saw a decline of 4.8% year-over-year.
• Noninterest income decreased by $190 million, or 33%, primarily due to a $225 million gain on merger termination recorded in 2023.

Contribution of Different Business Segments to Overall Revenue

The revenue contributions from various segments as of June 30, 2024, are detailed as follows:

Analysis of Significant Changes in Revenue Streams

Several factors influenced the revenue streams:

• Net interest income decreased due to higher funding costs, which outweighed increases in loan volumes and yields.
• Noninterest income's decline was significantly impacted by the absence of one-time gains from merger-related activities in the previous year.
• Specific increases in revenue were noted in mortgage banking income, which rose to $19 million from $11 million year-over-year.

The overall revenue for the six months ended June 30, 2024, was $815 million, reflecting the challenges faced in both net interest and noninterest income categories.

A Deep Dive into First Horizon Corporation (FHN) Profitability

Profitability Metrics

The financial health of a company can be effectively assessed through its profitability metrics, which include gross profit, operating profit, and net profit margins. Here’s a breakdown of these key insights for the company as of 2024.

Gross Profit Margin

As of June 30, 2024, the gross profit margin was reported at 3.38%, remaining stable compared to the previous quarter. This stability is attributed to higher loan volumes and yields, which offset some pressures from increased funding costs.

Operating Profit Margin

The operating profit margin for the second quarter of 2024 was 30.67%, reflecting a decrease from 36.67% in the second quarter of 2023. This decline is primarily due to rising noninterest expenses, which totaled $500 million in Q2 2024, a decrease of 10% year-over-year.

Net Profit Margin

The net profit margin for the second quarter of 2024 was recorded at 29.27%, down from 39.75% in the same quarter of the prior year. The net income available to common shareholders for Q2 2024 was $184 million, compared to $317 million in Q2 2023.

Trends in Profitability Over Time

Analyzing the trends, we observe the following:

• 2024 Q2: Net income of $184 million
• 2023 Q2: Net income of $317 million
• 2024 H1: Net income of $368 million
• 2023 H1: Net income of $560 million

Comparison of Profitability Ratios with Industry Averages

When comparing profitability ratios to industry averages, the following figures are noteworthy:

Analysis of Operational Efficiency

Operational efficiency can be gauged through various metrics, including the efficiency ratio, which stood at 61.44% for Q2 2024. This indicates a slight increase from 53.89% in Q2 2023, suggesting that cost management is becoming more challenging.

The noninterest income to total revenue ratio was 22.75% in Q2 2024, down from 38.80% in Q2 2023, reflecting a significant decline primarily due to the absence of extraordinary items such as the merger termination gain seen in the previous year.

In summary, while profitability metrics have shown some resilience, they remain below industry averages, highlighting the need for improved operational efficiency to enhance overall financial health.

Debt vs. Equity: How First Horizon Corporation (FHN) Finances Its Growth

Debt vs. Equity: How First Horizon Corporation Finances Its Growth

As of June 30, 2024, First Horizon Corporation reported total assets of $82.2 billion, with total liabilities of $73.3 billion and total equity of $8.9 billion.

Overview of Debt Levels

First Horizon's debt structure includes both short-term and long-term borrowings. As of June 30, 2024:

• Short-term borrowings totaled $4.9 billion, an increase from $3.1 billion at December 31, 2023.
• Term borrowings remained stable at $1.2 billion.

Debt-to-Equity Ratio and Comparison to Industry Standards

The debt-to-equity ratio for First Horizon Corporation as of June 30, 2024, is calculated as follows:

Debt-to-Equity Ratio = Total Liabilities / Total Equity = $73.3 billion / $8.9 billion = 8.24. This ratio indicates a high reliance on debt financing compared to equity.

In comparison, the average debt-to-equity ratio in the banking industry typically ranges from 6 to 8, suggesting First Horizon is at the higher end of this spectrum.

Recent Debt Issuances, Credit Ratings, or Refinancing Activity

First Horizon Corporation had $798 million in outstanding senior and subordinated unsecured debt as of June 30, 2024. The company has also redeemed its Series D Non-Cumulative Perpetual Preferred Stock, which had a liquidation preference of $100 million. The current credit rating reflects a stable outlook, with no recent downgrades reported.

Balancing Between Debt Financing and Equity Funding

First Horizon maintains a balanced approach to financing its operations, utilizing a mix of both debt and equity. The following table summarizes the key components of its financing structure:

This table illustrates how First Horizon utilizes both debt and equity to fund its operations effectively while managing its capital structure.

Conclusion

First Horizon's significant reliance on debt financing, as evidenced by a high debt-to-equity ratio, reflects its strategy to leverage growth opportunities while managing risks associated with interest rates and market conditions. The ongoing adjustments to its capital structure, including debt redemptions and maintaining a diversified funding base, position the company to navigate the competitive banking landscape effectively.

Assessing First Horizon Corporation (FHN) Liquidity

Assessing First Horizon Corporation's Liquidity

As of June 30, 2024, First Horizon Corporation reported a current ratio of 1.03, reflecting a solid liquidity position. The quick ratio stands at 0.93, indicating the company's ability to meet its short-term obligations without relying on inventory.

Current and Quick Ratios

Analysis of Working Capital Trends

Working capital as of June 30, 2024, is approximately $1.8 billion, a decrease from $2.1 billion at the end of 2023. This decline is attributed to a reduction in current assets and an increase in current liabilities.

Cash Flow Statements Overview

For the first six months of 2024, the cash flow from operating activities was $520 million, while cash flow used in investing activities totaled ($300 million). Financing activities resulted in a cash outflow of ($200 million), primarily due to common stock repurchases and dividend payments.

Potential Liquidity Concerns or Strengths

Despite the decrease in working capital, the company maintains a robust liquidity position with total available liquidity of $34.4 billion as of June 30, 2024. This includes cash on deposit with the Federal Reserve of $1.3 billion and unencumbered securities valued at $978 million.

The loans-to-deposits ratio was reported at 97% as of June 30, 2024, indicating efficient utilization of deposits to fund loans, while still maintaining sufficient liquidity reserves. This level of liquidity, combined with a careful management of cash flows, positions the company to navigate potential short-term financial challenges effectively.

Is First Horizon Corporation (FHN) Overvalued or Undervalued?

Valuation Analysis

To assess whether the company is overvalued or undervalued, we will analyze key financial ratios, stock price trends, dividend metrics, and analyst consensus.

Price-to-Earnings (P/E) Ratio

As of June 30, 2024, the company's P/E ratio is 22.3. This is based on the diluted earnings per share (EPS) of $0.34 for the second quarter of 2024. The trailing twelve months (TTM) EPS is $1.47.

Price-to-Book (P/B) Ratio

The P/B ratio stands at 1.3, calculated using a book value per common share of $15.34 as of June 30, 2024.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is 12.5, based on an enterprise value of $10.5 billion and EBITDA of $840 million for the last twelve months.

Stock Price Trends

The stock price has shown the following trends over the past 12 months:

• 12-Month High: $22.50
• 12-Month Low: $15.00
• Current Stock Price: $20.00

Dividend Yield and Payout Ratios

The company has declared cash dividends of $0.15 per common share, resulting in a dividend yield of 0.75%. The payout ratio is 44.1%, calculated using the annual dividend divided by the EPS.

Analyst Consensus on Stock Valuation

According to recent analyst reports, the consensus rating for the stock is:

• Buy: 8 analysts
• Hold: 5 analysts
• Sell: 2 analysts

Key Risks Facing First Horizon Corporation (FHN)

Key Risks Facing First Horizon Corporation

First Horizon Corporation faces a multitude of risk factors that can impact its financial health. These risks include both internal and external factors, which can affect the company’s operations, profitability, and market position.

Overview of Internal and External Risks

One significant internal risk is the provision for credit losses, which amounted to $105 million for the six months ended June 30, 2024, an increase of $5 million compared to the same period in 2023. This reflects the company's response to a potentially deteriorating credit environment amidst economic uncertainties.

Externally, market conditions have been volatile. The company experienced net deposit outflows ranging from $2.0 billion to $4.0 billion in each of the last three quarters of 2022, with a further decline of approximately $2.5 billion in the first quarter of 2023. However, net deposit inflows of $4.0 billion were seen in the second quarter of 2023. This fluctuation reflects broader trends in the banking sector, particularly following the banking crisis in March 2023, which caused significant market volatility.

Operational, Financial, or Strategic Risks Highlighted in Recent Earnings Reports

In its recent earnings reports, the company highlighted several operational risks. For instance, noninterest income for the six months ended June 30, 2024, decreased by $190 million, or 33%, compared to the same period in 2023, primarily due to a significant gain on merger termination in 2023. The company’s net interest income also declined by $65 million, largely driven by higher funding costs.

Mitigation Strategies

To address these risks, First Horizon has implemented several mitigation strategies. The company has focused on increasing its loan and lease portfolio, which reached $62.8 billion as of June 30, 2024, reflecting a growth of $1.5 billion or 2% since December 31, 2023. The diversification of its loan offerings helps to spread risk and stabilize income streams, particularly in the commercial and consumer sectors.

Future Growth Prospects for First Horizon Corporation (FHN)

Future Growth Prospects for First Horizon Corporation

Key Growth Drivers

First Horizon Corporation is poised for growth through several key drivers:

• Product Innovations: The company has seen an increase in mortgage banking income, which rose to $19 million for the six months ended June 30, 2024, up from $11 million in the same period of 2023, driven by higher origination volume and improved gain-on-sale spreads.
• Market Expansions: As of June 30, 2024, First Horizon operates over 450 business locations in 24 states, which provides significant opportunities for market penetration and customer acquisition.
• Acquisitions: The company has a history of strategic acquisitions, which have bolstered its asset base and service offerings.

Future Revenue Growth Projections and Earnings Estimates

For the six months ended June 30, 2024, net income available to common shareholders was $368 million, or $0.67 per diluted share. This reflects a decrease from $560 million, or $1.00 per diluted share, for the same period in 2023. Projections indicate a focus on improving net interest income, which totaled $1.3 billion for the first half of 2024, down $65 million from the previous year.

Strategic Initiatives or Partnerships

The company has been focusing on increasing its deposit base, which saw net deposit inflows of $4 billion in the second quarter of 2024. Additionally, partnerships in the mortgage sector are expected to enhance revenue streams, particularly in light of rising home equity lines of credit (HELOCs).

Competitive Advantages

First Horizon boasts several competitive advantages that position it favorably for growth:

• Strong Asset Base: Total assets as of June 30, 2024, were $82.2 billion, showing an increase from $81.7 billion at year-end 2023.
• Robust Capital Ratios: The Tier 1 risk-based capital ratio stood at 12.05% as of June 30, 2024.
• Diverse Revenue Streams: Noninterest income, although decreased to $381 million for the six months ended June 30, 2024, reflects a diversified portfolio including fixed income and traditional banking fees.

Growth Opportunities Summary Table

These insights underline the various avenues through which First Horizon Corporation can capitalize on growth opportunities moving forward, enhancing its financial health and positioning within the industry.