First Horizon Corporation (FHN) — Q3 2022 Form 10-Q
Business context and period: First Horizon is a Memphis-based financial holding company with regional banking, specialty banking and corporate businesses. This unaudited report covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Comparable period |
|---|---|---|
| Net interest income | $662 | $492 in Q3 2021; $542 in Q2 2022 |
| Noninterest income | $213 | $247 in Q3 2021 |
| Noninterest expense | $469 | $526 in Q3 2021 |
| Provision for credit losses | $60 expense | $85 benefit in Q3 2021 |
| Net income / income available to common shareholders | $268 / $257 | $235 / $224 in Q3 2021 |
| Diluted EPS | $0.45 | $0.41 in Q3 2021; $0.29 in Q2 2022 |
| Net interest margin | 3.49% | 2.41% in Q3 2021; 2.74% in Q2 2022 |
| Efficiency ratio | 54.29% | 71.27% in Q3 2021 |
- Nine-month results: Net interest income was $1.683 billion, up $187 million year over year; noninterest income was $642 million, down $187 million; noninterest expense was $1.450 billion, down $117 million. Net income available to common shareholders was $610 million and diluted EPS was $1.08, compared with $743 million and $1.34 a year earlier.
- Loans and deposits: Period-end loans and leases were $57.4 billion, up $2.5 billion from year-end 2021, including growth in CRE and consumer lending and a $909 million reduction in PPP loans. Deposits were $66.0 billion, down $8.9 billion (12%); management attributed the decline partly to runoff of pandemic-era excess liquidity.
- Assets, funding and liquidity: Total assets were $80.3 billion, down from $89.1 billion, primarily reflecting an $11.7 billion decrease in interest-bearing bank deposits. Period-end borrowings were $1.4 billion short-term and $1.6 billion term. The filing reports $14.3 billion of available FHLB borrowing capacity. Nine-month cash flows were $2.286 billion from operations, $7.155 billion from investing and negative $9.346 billion from financing; ending cash and cash equivalents were $1.883 billion.
- Credit and capital: Allowance for loan and lease losses was $664 million, or 1.16% of loans; total credit-loss allowance, including unfunded commitments, was $752 million. Nonperforming loans were $292 million (0.51% of loans), versus $275 million (0.50%) at year-end. Net charge-offs were $12 million in Q3, or an annualized 0.08%. FHN’s CET1, Tier 1 and total risk-based capital ratios were 9.94%, 11.71% and 13.10%, respectively; management said FHN and the bank remained well-capitalized.
- Equity and other metrics: Total equity was $8.3 billion. AOCI loss widened to $1.427 billion, chiefly reflecting unrealized losses on available-for-sale securities and cash-flow hedges. Tangible book value per common share was $9.72, down from $10.88 a year earlier.
Material changes and management commentary
- Higher interest rates, loan growth and increased investment-portfolio income lifted Q3 net interest income and margin; increased funding costs partly offset the benefit. Management’s static-balance-sheet sensitivity estimate showed projected 12-month net interest income up 8.3% for a 100-basis-point rate increase and down 9.1% for a 100-basis-point decrease. These are model scenarios, not guidance.
- Lower fixed-income and mortgage banking revenue drove much of the year-over-year decline in noninterest income. Fixed-income revenue was $46 million versus $96 million in Q3 2021; mortgage banking and title income was $9 million versus $34 million.
- Q3 noninterest income included a $21 million gain from the sale of the title services business. Q3 2022 provision reflected loan growth, a weaker macroeconomic forecast and a preliminary estimate for potential Hurricane Ian losses. Merger and integration expenses were $24 million in Q3 and $99 million for the first nine months.
- Management described inflation, rapid Federal Reserve rate increases, an inverted yield curve, recession risk, market volatility and the war in Ukraine as significant uncertainties. It noted that higher rates benefited banking spreads but hurt mortgage originations, mortgage-company lending and bond-trading activity; a recession could pressure loan demand, credit costs and fee revenue. Hurricane Ian’s financial effects were preliminary and might not be fully known for some time.
- Pending TD merger: The February 2022 agreement provided for $25 cash per FHN common share, subject to conditions, including U.S. and Canadian regulatory approvals. Shareholders approved the transaction in May 2022. If it did not close by November 27, 2022, the agreement provided for an additional $0.65 per share annually, accrued for the delay. Management expected completion in TD’s first fiscal quarter of 2023; completion was not assured. TD also purchased $494 million of Series G convertible preferred stock.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management said capital ratios were expected to remain above well-capitalized standards plus the required conservation buffer and described ongoing LIBOR-to-alternative-rate transition work.
Risks, contingencies and unusual items
- The pending merger was subject to closing conditions and regulatory approvals, with potential litigation, execution costs, business restrictions and management distraction identified as risks.
- FHN reported $2 million of established liabilities for material litigation loss-contingency matters and estimated reasonably possible losses above those liabilities at zero to less than $1 million for the matters covered by that estimate. It separately carried a $16 million liability for legacy mortgage repurchase and foreclosure exposures. Some pre-2009 mortgage indemnification claims could not be reasonably estimated.
- Management identified potential credit exposure from economic deterioration and Hurricane Ian, and concentration risk in financial-services borrowers: loans to mortgage companies and finance and insurance businesses represented 22% of the C&I portfolio. Rising rates and mortgage-market weakness also posed risks to related lending and fee businesses.
Important facts for investors to verify
- Current status, regulatory approvals, closing conditions and timing of the TD merger, including the agreement’s delayed-closing payment provisions.
- Deposit trends, funding costs and the sustainability of margin improvement as rates and deposit pricing change.
- Credit quality, allowance assumptions and realized effects of recession risk and Hurricane Ian, especially in CRE, consumer real estate and financial-services exposures.
- Unrealized securities losses, their effects on AOCI and capital, and management’s ability to avoid securities sales before recovery.
- Trends in fixed-income, mortgage banking and title-related revenue, including effects of the title business sale and mortgage-market conditions.