First Horizon Corporation (FHN) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance sheet as of June 30, 2022. FHN is a Memphis-based financial holding company operating regional banking, specialty banking, mortgage, capital markets and related businesses.
Financial results and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $542 million; net interest margin 2.74% | Q2 2021: $497 million and 2.47%; margin rose 37 basis points sequentially from Q1 2022 |
| Noninterest income | $201 million | Down $84 million, or 29%, from Q2 2021 |
| Noninterest expense | $488 million | Down $10 million from Q2 2021; includes $38 million of merger and integration costs |
| Provision for credit losses | $30 million expense | Q2 2021 had a $115 million benefit; Q1 2022 had a $40 million benefit |
| Net income / common earnings | $177 million net income; $166 million available to common shareholders | Q2 2021: $311 million and $295 million, respectively |
| Diluted EPS | $0.29 | Q2 2021: $0.53 |
| Six-month net income available to common / diluted EPS | $352 million / $0.63 | First six months of 2021: $519 million / $0.93 |
| Pre-provision net revenue | $255 million (non-GAAP) | Q2 2021: $284 million |
| Loans and leases | $56.5 billion; net loans $55.9 billion | Up $1.7 billion from year-end 2021; commercial real estate loans rose $833 million |
| Deposits | $70.5 billion | Down $4.3 billion, or 6%, from year-end 2021 |
| Assets / equity | $85.1 billion / $8.6 billion | Assets were $89.1 billion and equity $8.5 billion at year-end 2021 |
| Borrowings | $2.0 billion short-term and $1.6 billion term borrowings | Term borrowings were broadly unchanged from year-end 2021 |
| Credit quality | Allowance for loan and lease losses $624 million; nonperforming loans $301 million | Allowance was $670 million at year-end; nonperforming loans were $275 million |
| Capital | CET1 9.81%; Tier 1 11.62%; total risk-based capital 12.96% | At year-end 2021: 9.92%, 11.04% and 12.34%, respectively |
For the six months ended June 30, operating cash flow was $1.52 billion, investing cash flow was $2.72 billion and financing cash flow was negative $4.18 billion. Cash and cash equivalents increased $57 million to $1.85 billion. FHN reported $12.9 billion of available FHLB borrowing capacity at quarter-end.
Material changes and drivers
- Q2 net interest income increased year over year, supported by higher earning-asset yields and investment balances; higher rates also improved the margin sequentially, despite higher funding costs.
- Noninterest income fell primarily because of lower fixed-income revenue, deferred compensation income and securities gains. Fixed-income revenue was $51 million, down $51 million from Q2 2021.
- The year-over-year earnings decline reflected lower fee income and a swing from a prior-year credit-loss provision benefit to current-period expense. Six-month provision expense was a $10 million benefit versus a $160 million benefit in 2021.
- Noninterest expense declined year over year, mainly on lower personnel expense, partly offset by higher other expense. Q2 other expense included $12 million of valuation adjustments on derivatives related to prior Visa Class B share sales.
- Available-for-sale securities had $891 million of gross unrealized losses at June 30. Accumulated other comprehensive loss was $963 million, compared with $288 million at year-end 2021; the filing attributed much of the change to securities valuation and rate movements.
Outlook, transaction, risks and unusual items
- Proposed TD merger: Under the agreement with Toronto-Dominion Bank, FHN common shareholders would receive $25.00 per share in cash, subject to closing conditions. FHN shareholders approved the transaction on May 31, 2022; regulatory approvals remained outstanding. The filing expected completion in the first quarter of TD’s 2023 fiscal year. If closing did not occur by the specified November 2022 date, shareholders would receive an additional annualized $0.65 per share for the delay period.
- TD purchased $494 million of Series G convertible preferred stock. It could convert into up to 4.9% of FHN common shares in specified circumstances, including merger closing or termination of the agreement.
- Management described inflation, rising interest rates, supply-chain disruption, the Russia-Ukraine conflict and recession risk as important uncertainties. FHN may benefit from higher rates if loan yields rise faster than funding costs, but warned that recession could weaken loan demand, fee income and credit quality and increase reserves. Higher mortgage rates were already weighing on mortgage-related activity.
- In a static-balance-sheet simulation, projected 12-month net interest income varied by +20.5% under a 200-basis-point rate increase and −15.4% under a 100-basis-point decrease. These are modeled sensitivities, not earnings guidance.
- FHN recorded a $7 million liability for disclosed litigation loss contingencies; estimated reasonably possible losses above established liabilities were zero to less than $1 million for those matters. Separately, the pre-2009 mortgage repurchase and foreclosure liability was $17 million. The company said some legacy mortgage indemnification exposures could not be reasonably estimated.
- After quarter-end, on July 30, 2022, FHN sold Lenders Title Group; an approximately $20 million gain was expected to be recognized in Q3 2022.
- FHN reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track regulatory approvals, closing timing and any changes to the TD merger terms; assess the potential Series G conversion and dilution implications.
- Verify whether higher rates continue to support net interest margin as deposit costs rise and deposits decline.
- Monitor credit-loss provisions, nonperforming loans, commercial real estate and financial-services exposure, and the adequacy of reserves if economic conditions weaken.
- Assess whether fixed-income and mortgage-related fee income remains pressured, and confirm the timing and reported impact of the Lenders Title Group sale gain.
- Review the effect of unrealized securities losses on accumulated other comprehensive loss and capital, alongside regulatory capital ratios and liquidity sources.
- Revisit legacy pre-2009 mortgage claims, whose potential outcomes the filing says may be difficult to estimate.