First Horizon Corporation (FHN) — Q2 2023 Form 10-Q
Reporting period: Quarter ended June 30, 2023; comparisons are primarily with Q2 2022 and, where noted, December 31, 2022. Dollar amounts are in millions unless stated otherwise. First Horizon is a regional bank holding company operating primarily in the southern U.S.
Financial performance
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $630 | $542 in Q2 2022; down $58 from Q1 2023 |
| Net interest margin | 3.38% | 2.74% in Q2 2022; 3.88% in Q1 2023 |
| Noninterest income | $400 | $201 in Q2 2022; includes $225 TD termination gain |
| Noninterest expense | $555 | $488 in Q2 2022; includes $50 First Horizon Foundation contribution |
| Provision for credit losses | $50 | $30 in Q2 2022; unchanged from Q1 2023 |
| Net income / income available to common shareholders | $329 / $317 | $177 / $166 in Q2 2022 |
| Diluted earnings per share | $0.56 | $0.29 in Q2 2022; $0.43 in Q1 2023 |
| Efficiency ratio | 53.89% | 65.76% in Q2 2022; reported results include the termination gain |
For the first six months, net income available to common shareholders was $560 ($1.00 diluted EPS), versus $352 ($0.63) in 2022. Net interest income rose $297 year over year, while provision expense increased $110. Pre-provision net revenue, a non-GAAP measure, was $475 for Q2 and $856 year to date; the quarterly figure includes the TD termination gain.
Financial position, liquidity and capital
- At June 30, total assets were $85.1 billion, up from $79.0 billion at year-end; loans and leases were $61.3 billion, up 5%, and deposits were $65.4 billion, up 3%.
- Deposit mix shifted: interest-bearing deposits rose $6.6 billion while noninterest-bearing deposits fell $4.7 billion. Estimated uninsured deposits were $25.5 billion, or 39% of deposits; 7% of total deposits were collateralized.
- Short-term borrowings were $6.9 billion, versus $2.5 billion at year-end, largely reflecting increased FHLB borrowing. Term borrowings were $1.2 billion after retirement of $450 million in senior notes. FHN reported $10.9 billion of available FHLB borrowing capacity.
- Six-month cash flows were $236 operating, $(6,106) investing and $5,746 financing; cash and cash equivalents ended at $1,419. These cash-flow categories should be interpreted in the context of a bank’s funding and lending activity.
- Regulatory capital ratios at June 30: CET1 11.08%, Tier 1 12.09%, and total capital 13.58%. Management said FHN and the bank subsidiary met well-capitalized standards and the capital conservation buffer.
- Available-for-sale securities had $1.278 billion of gross unrealized losses; held-to-maturity securities had fair value $174 million below amortized cost. Management reported no identified credit losses in these portfolios and said it did not expect to be required to sell the securities before recovery.
Material changes, outlook and risks
- TD transaction ended: FHN and TD mutually terminated their merger agreement on May 4, 2023. TD paid $200 million plus a $25 million fee reimbursement; FHN recorded a $225 million gain and contributed $50 million to the First Horizon Foundation. The one-time gain materially boosted reported income. Merger and integration planning expense was $30 million in Q2 and $51 million year to date.
- Share conversion: Series G preferred stock converted on June 26 into 19.7 million common shares after the transaction ended. FHN’s CET1 ratio benefited from the conversion, while common share count increased.
- Margin and funding pressure: Q2 net interest income and margin fell from Q1 as deposit and other funding costs rose faster than asset yields. Management cited intensified deposit competition and said it expected to continue responding to competitive pressures. Its modeled 12-month NII sensitivity ranged from a 5.5% decline under a 100-basis-point rate decrease to a 7.3% increase under a 200-basis-point increase; these are scenarios, not forecasts.
- Credit quality: Nonperforming assets rose to $410 million from $327 million at year-end, and the nonperforming-loan ratio increased to 0.66% from 0.54%. The allowance for loan and lease losses was $737 million (1.20% of loans); the allowance including unfunded commitments was $827 million. CRE totaled $13.9 billion, including office loans equal to 21% of CRE. Loans to mortgage companies and finance/insurance borrowers together represented 20% of C&I loans.
- Economic and market risks: Management highlighted inflation, possible recession, elevated interest rates, yield-curve inversion, regional-bank deposit competition, and potential changes in regulation and FDIC assessments. It said recession could weaken loan demand and fee income while increasing credit losses.
- Legal contingencies: Recorded liabilities for material litigation matters were $2 million; estimated reasonably possible losses above those liabilities were zero to less than $1 million. The separate pre-2009 mortgage repurchase and foreclosure reserve was $16 million. FHN said it could not estimate a reasonably possible loss range for a significant Mr. Cooper servicing-indemnification claim.
- No formal earnings guidance is provided in the supplied filing text. Management expected capital ratios to remain above well-capitalized standards plus the required buffer during 2023.
Investor facts to verify
- How much future earnings depend on recurring operations versus the $225 million termination gain, and how the $50 million contribution and merger costs affect comparisons.
- Whether deposit growth is sustained, the pace and cost of deposit repricing, and reliance on short-term/FHLB funding.
- Trends in CRE—particularly office exposure—nonperforming assets, criticized/problem loans, and credit-loss reserves.
- Potential liquidity and capital implications of uninsured deposits and unrealized securities losses if funding needs or market conditions change.
- The impact of Series G conversion and higher common share count on per-share results, dividends, and future capital allocation.
- Developments in the unquantified Mr. Cooper claim and other legacy mortgage-related exposures.