FIRST HORIZON CORP quarterly report, Q3 FY2023

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First Horizon Corporation (FHN) — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.

Business context

FHN is a Memphis-based financial holding company operating First Horizon Bank and other financial businesses, primarily in the southern U.S. Its businesses include regional banking, specialized commercial lending, mortgage banking, wealth management, and capital markets. The Toronto-Dominion Bank merger agreement was mutually terminated on May 4, 2023.

Financial performance and condition

  • Q3 earnings: Net income was $142 million; net income available to common shareholders was $129 million, or $0.23 per diluted share. Revenue (net interest income plus noninterest income) was $778 million. Pre-provision net revenue, a non-GAAP measure, was $304 million.
  • Interest income and margin: Net interest income was $605 million and net interest margin was 3.17%. Interest expense was $475 million and provision for credit losses was $110 million.
  • Fees and expenses: Noninterest income was $173 million and noninterest expense was $474 million. Q3 included $10 million of restructuring costs and no TD merger and integration expense.
  • Nine-month results: Net income available to common shareholders was $689 million, or $1.23 per diluted share, versus $610 million and $1.08 per diluted share in 2022. Net interest income was $1.923 billion; provision for credit losses was $210 million; noninterest income was $745 million; and noninterest expense was $1.508 billion. Noninterest income included a $225 million gain on termination of the TD transaction.
  • Profitability indicators: Q3 return on average assets was 0.68%, return on average common equity was 6.28%, and efficiency ratio was 60.96%. The reported nine-month net interest margin was 3.47%.
  • Balance sheet at September 30: Total assets were $82.5 billion; loans and leases were $61.8 billion, net of a $760 million allowance; deposits were $67.0 billion; and total equity was $8.8 billion. Loans increased $3.7 billion and deposits increased $3.5 billion from December 31, 2022.
  • Funding and liquidity: Noninterest-bearing deposits fell $5.6 billion from year-end while interest-bearing deposits rose $9.2 billion. Estimated uninsured deposits were $26.2 billion, or 39% of deposits; $4.8 billion of uninsured deposits were collateralized. FHN reported $14.5 billion of available FHLB borrowing capacity and a 92% period-end loans-to-deposits ratio.
  • Debt and capital: Short-term borrowings were $2.5 billion and term borrowings $1.2 billion; FHN repaid $450 million of senior notes in May. FHN’s CET1 ratio was 11.12%, Tier 1 capital ratio 12.12%, and total risk-based capital ratio 13.63%. Management said FHN and the Bank met well-capitalized standards and the capital conservation buffer.
  • Cash flow, nine months: Operating activities provided $934 million; investing activities used $3.833 billion; financing activities provided $2.794 billion. Cash and cash equivalents ended at $1.438 billion, down $105 million from the start of the period.

Material changes versus comparable periods

  • Q3 net income available to common shareholders declined to $129 million from $257 million in Q3 2022 and $317 million in Q2 2023. Q3 diluted EPS was $0.23, compared with $0.45 and $0.56, respectively.
  • Q3 net interest income fell $57 million year over year and $25 million sequentially. Management attributed margin pressure to funding costs rising faster than earning-asset yields; year over year, funding costs increased 289 basis points while earning-asset yields increased 178 basis points.
  • Q3 provision for credit losses rose to $110 million from $60 million in Q3 2022 and $50 million in Q2 2023, principally due to a loss on one commercial relationship and loan growth. Q3 net charge-offs were $95 million, or an annualized 0.61% of average loans, versus $12 million and 0.08% a year earlier.
  • Q3 noninterest income was down $40 million year over year, including lower fixed-income revenue and the absence of prior-year securities gains and a title-business sale gain. Sequentially, it fell $227 million mainly because Q2 included the $225 million TD termination gain.
  • The allowance for loan and lease losses rose to $760 million from $685 million at year-end; its ratio to loans increased to 1.23% from 1.18%. Nonperforming loans rose to $394 million from $316 million, with nonperforming CRE loans increasing to $125 million from $9 million.
  • Q3 net interest margin was 3.17%, down from 3.48% in Q3 2022 and 3.38% in Q2 2023. For the first nine months, however, margin increased to 3.47% from 2.85% in 2022.
  • FHN’s $494 million Series G preferred stock converted into approximately 19.7 million common shares in June after the merger termination; this supported the increase in FHN’s CET1 ratio.

Outlook, risks, contingencies, and unusual items

  • Management outlook: No specific earnings guidance was provided. Management said margin may improve modestly if short-term rates remain steady, but meaningful improvement is unlikely until the yield curve steepens. Deposit competition and funding costs remain important pressures.
  • Deposits and rates: Promotional deposit pricing helped drive inflows, but management noted that rates were higher than in prior periods and that some campaign money-market rates would reprice in late 2023. Many campaign CDs mature in November–December 2023, with another group due in April–May 2024; retaining balances while moderating rates is a stated challenge.
  • Credit and economic risks: Credit loss estimates reflect loan growth and an evolving outlook involving inflation, interest rates, and other factors. A single C&I relationship drove a significant portion of charge-offs. C&I exposure to finance and insurance, including mortgage-company lending, was 20% of that portfolio. CRE was 23% of loans, including 20% office exposure within CRE.
  • FDIC assessment: The FDIC proposed a special assessment to replenish the deposit insurance fund. FHN expected its expense to be material in the quarter when the assessment is finalized; the final amount and timing were not established in this filing.
  • Regulatory proposals: FHN estimated that, if proposed rules were adopted as described and the company later crossed $100 billion in assets, additional regulatory compliance costs could be roughly $100 million annually. FHN stated it was more than $10 billion below that asset threshold at the time.
  • Interest-rate and securities exposure: Available-for-sale securities had $1.548 billion of gross unrealized losses at September 30; total accumulated other comprehensive loss was $1.582 billion. FHN said it did not intend, and was not more likely than not required, to sell the loss-position securities before recovery. Its interest-rate sensitivity analysis estimated projected 12-month NII would change +3.2% for a parallel 100-basis-point increase and −4.1% for a 100-basis-point decrease, under stated assumptions.
  • Legal and legacy mortgage matters: FHN had $2 million of liabilities for disclosed material loss contingency matters and estimated reasonably possible losses above those liabilities from zero to less than $1 million. A separate $16 million reserve covered legacy mortgage repurchase and foreclosure exposures. FHN could not estimate a reasonably possible loss range for a significant Nationstar servicing-indemnification claim.
  • Other unusual items: The TD termination yielded a $200 million cash payment plus a $25 million contractual expense reimbursement, recorded as a $225 million gain. FHN also made a $50 million First Horizon Foundation contribution in Q2. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting.

Important facts for investors to verify

  • Whether deposit balances are retained as promotional rates and CDs reprice or mature, and how this affects funding costs and net interest margin.
  • Whether credit deterioration persists beyond the single large relationship, particularly in CRE and the office portfolio, and how charge-offs, nonperforming loans, and reserves develop.
  • The final FDIC special-assessment amount, recognition timing, and effect on earnings.
  • Whether the unrealized securities losses, deposit trends, and available contingent funding remain manageable under changing market conditions.
  • How capital ratios and potential regulatory costs evolve, including the implications of any future approach to the $100 billion asset threshold.
  • Developments in the Nationstar claim and other legacy mortgage contingencies; the filing says the possible loss range for that claim is not estimable.