Bank stocks have struggled recently due to investor worries over rising deposit costs. First Horizon seems to be a different story, as it held the line on deposits in the first quarter without losing customers.
That was no easy feat after the Memphis, Tennessee, bank
Having gained new depositors last year, First Horizon's challenge has been retaining those customers while not paying them the special rates they got last year. Its progress on that front was positive in the first quarter, analysts say, as were other parts of the bank's quarterly results announced Wednesday.
"This was another solid quarter that met high expectations," RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients.
First Horizon has "rightsized the ship following last year's failed acquisition," Alexander Yokum, an analyst at CFRA Research, wrote in a note to clients. Yokum upgraded his view of the company from a "hold" to a "buy," noting that its deposit costs are going in the right direction while other banks show pressures.
Investors welcomed the news, driving the regional bank's stock up about 1.9% on the day.
JPMorgan Chase, the country's biggest bank, saw its stock price fall more than 6% on Friday after its guidance on net interest income disappointed investors.
First Horizon's interest expenses are still far higher than last year, when it had some $232 million in quarterly interest costs. But it brought down that figure from $469 million in the fourth quarter to $448 million last quarter, a sign that expense pressures from its effort to attract and retain deposits last year have eased.
Its cost of deposits was 2.45% in the first quarter, down from 2.49% in the fourth quarter. But those new depositors are mostly sticking around even if they're getting paid slightly less interest. The bank retained some 90% of the clients it brought in through its promotional pricing last year.
"We continue to have momentum in retaining the balances and repricing them," Chief Financial Officer Hope Dmuchowski told analysts on the bank's quarterly earnings call.
Slightly lower deposit costs have helped the bank improve its profitability, as have the higher rates it's been able to charge on its loans. Loan yields rose from 6.19% in the fourth quarter to 6.28% last quarter. Dmuchowski said they "still have room to modestly expand" as some of their lower-yielding loans have yet to reprice to today's higher interest rates.
The bank stuck to its prior outlook that net interest income would rise 1% to 4% this year. But executives noted where it ultimately lands depends on the Federal Reserve, which has grown skeptical about whether it should cut interest rates soon.
Interest rate futures markets
First Horizon's balance sheet is naturally positioned better for the Fed keeping rates higher, Dmuchowski said, as the loans it holds as assets can continue repricing to higher rates. But the uncertainty over the Fed outlook makes forecasting deposit costs a bit tougher.
The market for deposits remains competitive, CEO Bryan Jordan noted, alluding to rising interest expenses at bigger banks as they too pay up for deposits.
"We're not playing solitaire," Jordan said. "We're doing this in a competitive marketplace, and we've seen pricing competition increase fairly significantly. I think you're seeing that show up in some of the earnings releases that are out there."
Softer loan growth has also weighed on banks by limiting their ability to bring on new loans at higher interest rates. Executives at big banks have noted commercial clients remain cautious on making new investments, a sentiment Jordan echoed somewhat.
"Loan demand is OK. It's not great," Jordan said, adding that there's "real strength" in some pockets of its markets in the South.
It will "take a little bit more certainty" on what the Fed will do with interest rates for some to grow more confident, Jordan said. The economy is "still very good in our view," he noted, but First Horizon is being cautious on what kinds of loans it makes to avoid taking on too much risk.
"We're still seeing good opportunities," Jordan said. "We're still being very selective about how and where we participate, particularly on price and structure, but we're looking for long-term growth and really those generational opportunities to move business."
The bank did see an uptick in loans that borrowers are having trouble repaying, with nonperforming loans rising to $505 million, or 0.82% of its loan book. That was up slightly from $462 million, or 0.75% last quarter, driven by loans to business customers and commercial real estate.
But the increase was "modest" and remains manageable, wrote Arfstrom, the RBC Capital Markets analyst.
Overall, the bank reported net income of $197 million during the quarter, up from $188 million the prior quarter but down from $256 million a year earlier.
