First Horizon Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. First Horizon is a Memphis-based financial holding company operating regional and specialty banking businesses, principally in the southern U.S. Figures are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Net income available to common shareholders | $187 million; diluted EPS $0.34 | $225 million and $0.40 in Q1 2021 |
| Net interest income | $479 million | Down $29 million year over year; Q1 2021 was $508 million |
| Net interest margin | 2.37% | Down 25 basis points year over year and 5 basis points from Q4 2021 |
| Provision for credit losses | $40 million benefit | Benefits of $45 million in Q1 2021 and $65 million in Q4 2021 |
| Noninterest income | $229 million | Down $69 million year over year |
| Noninterest expense | $493 million | Down $51 million year over year |
| Pre-provision net revenue | $215 million | Down from $262 million in Q1 2021 |
| Operating cash flow | $694 million | $1.064 billion in Q1 2021 |
Lower fixed-income and mortgage banking revenue were major contributors to the decline in noninterest income. Lower merger and integration costs and personnel expense helped reduce expenses. Merger and integration expense was $37 million, versus $70 million in Q1 2021; $9 million related to the proposed TD transaction. Return on average assets was 0.90%, and return on average common equity was 9.92%.
Balance sheet, funding and capital
- Total assets were $88.7 billion at March 31, 2022, down from $89.1 billion at year-end 2021. Total loans and leases were $55.0 billion, up $153 million; deposits were $74.1 billion, down $781 million.
- Cash and cash equivalents ended the quarter at $1.865 billion. The company reported $14.5 billion of available FHLB borrowing capacity. Average loans excluding loans held for sale and restricted real estate loans were 74% of average core deposits.
- Short-term borrowings were $2.2 billion and term borrowings were $1.6 billion. Loans and leases totaling $37.1 billion were pledged as collateral for borrowings.
- Common Equity Tier 1 was 9.97%; Tier 1 capital was 11.84%; and total risk-based capital was 13.18%. Management said the company and bank met well-capitalized standards and the capital conservation buffer.
- The allowance for loan and lease losses was $622 million, or 1.13% of loans, down from $670 million and 1.22% at year-end. Nonperforming loans were $332 million, with a 0.60% ratio; total nonperforming assets including loans held for sale were $343 million.
- Available-for-sale securities had $587 million of gross unrealized losses at quarter-end, compared with $112 million at year-end 2021. Management attributed the declines primarily to higher interest rates, reported no credit-loss impairment, and said it did not expect to be required to sell the securities before recovery. Accumulated other comprehensive loss increased by $424 million during the quarter.
Material changes and management commentary
- On February 27, 2022, First Horizon agreed to be acquired by The Toronto-Dominion Bank. FHN common shareholders are to receive $25.00 per share in cash, subject to closing conditions. If the transaction had not closed by November 27, 2022, the agreement provided for an additional $0.65 per share annualized from that date until closing.
- The merger was expected to close in the first quarter of TD’s 2023 fiscal year, subject to shareholder and U.S. and Canadian regulatory approvals and other customary conditions. The filing cautions that completion and timing are uncertain.
- TD purchased $494 million of Series G convertible preferred stock. It may convert into up to 4.9% of FHN common shares in specified circumstances, including merger completion. The proceeds strengthened reported regulatory capital.
- Period-end commercial real estate loans rose to $12.5 billion. Loans to mortgage companies and finance and insurance borrowers together represented 24% of the C&I portfolio, creating exposure to financial-services conditions.
- Management described rising inflation, supply-chain disruption, a tight labor market, the Russia-Ukraine conflict, a flattening or intermittently inverted yield curve, and recession risk. Higher rates may support net interest income if asset yields rise faster than funding costs, but were already weighing on mortgage-related business.
- On a static-balance-sheet basis, management’s 12-month simulation estimated net interest income increases of 3.8%, 8.1%, 16.4% and 28.9% under rate shocks of +25, +50, +100 and +200 basis points, respectively. These are scenario estimates, not a forecast.
- Legacy pre-2009 mortgage repurchase and foreclosure liability was $17 million. The company also disclosed $2 million of aggregate liabilities for specified litigation matters and estimated reasonably possible losses in excess of those liabilities from zero to less than $1 million; certain legacy mortgage indemnification exposures could not be estimated.
Key facts for investors to verify
- Whether the TD transaction received all required approvals, closed on schedule, and delivered the stated consideration and any applicable delay payment.
- How rising rates, deposit repricing and the yield curve affected net interest income and margin after quarter-end, compared with the filing’s modeled sensitivities.
- Whether unrealized securities losses, deposit trends and capital ratios changed materially after March 31, 2022.
- Whether credit quality worsened, particularly in commercial real estate, consumer real estate, and financial-services-related C&I lending, and whether reserves remain adequate.
- How continued weakness in fixed-income and mortgage banking revenue, merger costs, and legacy mortgage contingencies affected subsequent results.