First Horizon Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. First Horizon is a Memphis-based bank holding company operating primarily through First Horizon Bank, with regional banking, specialty banking and corporate segments. The company reported $79.0 billion in year-end assets; its revenue was primarily net interest income.
Financial performance and condition
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Net interest income | $2.392 billion | $1.994 billion | Up $398 million, or 20% |
| Net interest margin | 3.10% | 2.48% | Up 62 basis points |
| Noninterest income | $815 million | $1.076 billion | Down $261 million, or 24% |
| Provision for credit losses | $95 million expense | $310 million benefit | Shifted to expense amid loan growth and a weaker macroeconomic forecast |
| Noninterest expense | $1.953 billion | $2.096 billion | Down $143 million, or 7% |
| Net income | $912 million | $1.010 billion | Down 10%; common shareholders’ net income was $868 million versus $962 million |
| Diluted EPS | $1.53 | $1.74 | Down $0.21 |
| Cash dividends declared per common share | $0.60 | $0.60 | Unchanged |
Drivers and margins: Higher interest rates lifted earning-asset yields by 79 basis points, while the cost of interest-bearing liabilities rose 30 basis points. The efficiency ratio improved to 61.24% from 68.56%. Return on average assets was 1.08% versus 1.15%; return on average common equity was 11.81% versus 12.53%.
Balance sheet and funding: Year-end loans and leases increased 6% to $58.1 billion, including 9% growth in commercial real estate and 12% growth in consumer loans. Deposits fell 15% to $63.5 billion from $74.9 billion, including declines in both interest-bearing and noninterest-bearing deposits. Estimated uninsured deposits were $30.3 billion. Total assets declined to $79.0 billion from $89.1 billion, primarily alongside a sharp reduction in interest-bearing deposits held at banks.
Term borrowings were $1.6 billion, broadly unchanged year over year; short-term borrowings were $2.8 billion. The company reported $8.5 billion of total equity. Regulatory capital ratios improved at the holding company: CET1 was 10.17%, Tier 1 was 11.92%, and total capital was 13.33%. The Bank’s CET1 ratio was 10.77%; management reported both entities above applicable well-capitalized standards.
Cash flow: Operating activities provided $2.311 billion, investing activities provided $8.313 billion, and financing activities used $10.869 billion. Cash and cash equivalents decreased $245 million to $1.543 billion. The large investing inflow included a $13.523 billion net decrease in interest-bearing deposits with banks; financing outflows included the $11.406 billion net decline in deposits.
Material changes versus 2021
- Net interest income and margin expanded as loan and investment yields repriced faster than funding costs.
- Noninterest income declined, led by fixed-income revenue, down 50% to $205 million, and mortgage banking and title income, down 56% to $68 million. Higher rates and volatility weighed on fixed income and mortgage activity.
- Credit-loss provision moved from a $310 million benefit to a $95 million expense. Net charge-offs rose to $59 million from $2 million; nonperforming assets increased to $327 million from $285 million, while nonperforming loans were 0.54% of loans versus 0.50%.
- Merger and integration expenses were $136 million, down from $187 million. Total expenses also reflected a $22 million gain on the sale of the title services business and $22 million of derivative valuation adjustments related to prior Visa Class B share sales.
- Accumulated other comprehensive loss widened to $1.368 billion from $288 million, primarily reflecting unrealized losses on available-for-sale securities and cash flow hedges amid rising rates.
Outlook, merger, risks and unusual items
- Pending TD acquisition: Under the 2022 agreement, common shareholders were to receive $25.00 per share in cash, plus an annualized $0.65 per share for the period after November 27, 2022 until closing. Shareholders approved the deal, but regulatory approvals remained outstanding. The outside date was extended to May 27, 2023; TD told First Horizon it did not expect approvals in time for that date and could not provide a new projected closing date. A further extension was under discussion, with no assurance it would be agreed or the transaction completed.
- Merger-related exposure: First Horizon issued TD $494 million of Series G convertible preferred stock. Depending on termination circumstances, conversion could dilute common shareholders by up to 4.9%; a termination fee of up to $435.5 million may also apply in specified circumstances. Merger preparation expenses were $87 million in 2022, included in total merger and integration expenses.
- Management’s market view: The company identified Federal Reserve rate policy and the risk, depth and duration of a U.S. recession as key 2023 uncertainties. It expected short-term rates to continue rising in small increments, while noting that an inverted yield curve could pressure margins. No specific numerical earnings guidance is provided in the supplied filing text.
- Credit and market risks: Management said the effects of higher rates on borrower performance were not yet fully reflected in defaults. Exposure includes commercial lending, geographic concentrations in the southern U.S., and financial-services-related borrowers representing about 20% of C&I loans. Higher deposit competition and further deposit outflows could increase funding costs.
- Contingencies: The company reported a $16 million reserve for legacy pre-2009 mortgage repurchase and foreclosure exposures. It could not estimate loss ranges for certain mortgage indemnification claims. Separately, established liabilities for other material litigation matters totaled $2 million; estimated reasonably possible losses above recorded liabilities were less than $1 million, excluding the separately discussed mortgage exposures.
- Liquidity: First Horizon reported $13.9 billion of available FHLB borrowing capacity at year-end and stated it had additional liquidity sources. Deposits nevertheless declined materially, and the company noted the possibility of further outflows.
Investor facts to verify
- Current status and terms of any further extension, regulatory approval or termination of the TD merger, including the ticking payment and Series G conversion or termination-fee consequences.
- Subsequent deposit trends, deposit pricing and uninsured-deposit balances, given the 15% year-end deposit decline.
- Whether loan-loss provisions, charge-offs and nonperforming assets rise as higher rates and potential economic weakness affect borrowers.
- Net interest margin performance as funding costs catch up with asset yields, and the effects of the inverted yield curve.
- Fair-value and capital impacts of securities losses: the filing reports $1.288 billion of gross unrealized losses on AFS securities at year-end, while the company’s reported AOCI also reflects other items.
- Developments in legacy mortgage claims and other contingencies for which ultimate outcomes or loss amounts remain uncertain.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2022.