FIRST HORIZON CORPORATION
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
TABLE OF ITEM 2 TOPICS
Introduction 67
Executive Overview 67
Results of Operations 69
Business Segment Results 73
Analysis of Financial Condition 74
Capital 85
Risk Management 88
Repurchase Obligations 92
Market Uncertainties and Prospective Trends 93
Critical Accounting Policies 96
Non-GAAP Information 97
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents IntroductionFirst Horizon Corporation (NYSE common stock trading symbol "FHN") is a financial holding company headquartered inMemphis, Tennessee . FHN's principal subsidiary, and only banking subsidiary, isFirst Horizon Bank . Through the Bank and other subsidiaries, FHN offers regional banking, mortgage lending, title insurance, specialized commercial lending, commercial leasing and equipment financing, brokerage, wealth management, capital markets, and other financial services to commercial, consumer, and governmental clients throughout theU.S. AtMarch 31, 2022 , FHN had over 500
business locations in 22 states, including over 400 banking centers in 12 states, and employed more than 7,500 associates.
This MD&A should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in Part I, Item 1, as well as other information contained in this document and FHN's 2021 Annual Report on Form 10-K, as amended.
Executive Overview
Merger Agreement with Toronto-Dominion Bank
OnFebruary 27, 2022 , FHN entered into an Agreement and Plan of Merger (the "TD Merger Agreement") with The Toronto-Dominion Bank, a Canadian chartered bank ("TD"),TD Bank US Holding Company , aDelaware corporation and indirect, wholly owned subsidiary of TD ("TD-US"), andFalcon Holdings Acquisition Co. , aDelaware corporation and wholly owned subsidiary of TD-US ("Merger Sub"). Pursuant to the TD Merger Agreement, FHN and Merger Sub will merge (the "First Holding Company Merger"), with FHN continuing as the surviving entity in the merger. Following the First Holding Company Merger, at the election of TD, FHN and TD-US will merge (the "Second Holding Company Merger" and, together with the First Holding Company Merger, the "Holding Company Mergers"), with TD-US continuing as the surviving entity in the merger. Upon the terms and subject to the conditions set forth in the TD Merger Agreement, each share of FHN common stock, par value$0.625 per share, ("Company Common Stock"), issued and outstanding immediately prior to the effective time of the First Holding Company Merger (the "First Effective Time") will be converted into the right to receive$25.00 (USD) per share in cash, without interest. If the transaction does not close on or beforeNovember 27, 2022 , shareholders will receive an additional$0.65 per share of Company Common Stock on an annualized basis (or approximately5.4 cents per month) for the period fromNovember 27, 2022 through the day immediately prior to the closing. Each outstanding share of FHN's preferred stock, series B, C, D, E and F, will remain issued outstanding in connection with the First Holding Company Merger. If TD elects to effect the Second Holding Company Merger, at the effective time of the Second Holding Company Merger, each outstanding share of FHN's preferred stock will be converted into a share of a newly created, corresponding series of TD-US having terms as described in the Merger Agreement. Following the completion of the First Holding Company Merger, at such time as determined by TD,First Horizon Bank andTD Bank, N.A ., a national banking association ("TDBNA") will merge, with TDBNA surviving as a subsidiary of TD-US (the "Bank Merger" and together with the Holding Company Mergers, the "Proposed TD Merger"). In connection with the TD Merger Agreement, TD purchased from FHN shares of non-voting Perpetual Convertible Preferred Stock, Series G, a new series of preferred stock of FHN (the "Series G Convertible Preferred Stock") in a private placement transaction having an aggregate liquidation preference and purchase price of approximately$494 million , pursuant to a securities purchase agreement between FHN and TD entered into concurrently with the execution and delivery of the TD Merger Agreement. The Series G Convertible Preferred Stock is convertible into up to 4.9% of the outstanding shares of Company Common Stock in certain circumstances, including the closing of the Proposed TD Merger. [[Image Removed: fhn-20220331_g2.jpg]] 67 1Q22 FORM 10-Q REPORT
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents Financial Performance Summary FHN reported first quarter 2022 net income available to common shareholders of$187 million , or$0.34 per diluted share, compared to$219 million , or$0.40 per diluted share, in fourth quarter 2021 and$225 million , or$0.40 per diluted share, in first quarter 2021. Net interest income of$479 million declined$19 million from fourth quarter 2021 driven by a$23 million reduction tied to net merger-related and PPP loan portfolio benefits and day count, partially offset by higher investment portfolio income, non-PPP C&I loan growth, and lower funding costs. Compared to first quarter 2021, net interest income decreased$29 million , driven by lower average loan and lease balances and the effect of lower interest rates and spreads. Provision for credit losses was a benefit of$40 million in first quarter 2022 compared to a benefit of$65 million in fourth quarter 2021 largely reflecting the decreased impact of COVID-19, tempered by inflationary pressures and a slower economic growth forecast. The provision benefit decreased modestly from a benefit of$45 million in first quarter 2021.
Noninterest income of
Noninterest expense of$493 million decreased$35 million from fourth quarter 2021, largely reflecting decreases in other expense and personnel expense. Compared with first quarter 2021, noninterest expense decreased$51 million largely from a$33 million decline in merger and acquisition-related expenses. Merger and acquisition-related expenses were$37 million for the first quarter of 2022 compared to$38 million in fourth quarter 2021 and$70 million in first quarter 2021. Period-end loans and leases of$55.0 billion increased$153 million fromDecember 31, 2021 largely driven by commercial loan growth which was partially offset by a$396 million decrease in PPP loans. Average loans and leases of$54.1 billion in first quarter 2022 decreased$4.1 billion from$58.2 billion in first quarter 2021 driven by a decline in PPP and consumer loans.
Period-end deposits of
Tier 1 risk-based capital and total risk-based capital ratios atMarch 31, 2022 were 11.84% and 13.18%, an improvement from 11.04% and 12.34% atDecember 31, 2021 , respectively. The CET1 ratio was 9.97% atMarch 31, 2022 compared to 9.92% atDecember 31, 2021 . The following portions of this MD&A focus in more detail on the results of operations for the three months endedMarch 31, 2022 , the three months endedDecember 31, 2021 , and the three months endedMarch 31, 2021 and on information about FHN's financial condition, loan and lease portfolio, liquidity, funding sources, capital and other matters. [[Image Removed: fhn-20220331_g2.jpg]] 68 1Q22
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents
Table I.2.1
KEY PERFORMANCE INDICATORS
As of or for the three months ended
(Dollars in millions, except per share data) March 31, 2022 December 31, 2021 March 31, 2021
Pre-provision net revenue (a) $ 215 $ 217 $ 262
Diluted earnings per common share $ 0.34 $ 0.40 $ 0.40
Return on average assets (b) 0.90 % 1.02 % 1.12 %
Return on average common equity (c) 9.92 % 11.26 % 12.01 %
Return on average tangible common equity (a)
(d) 12.98 % 14.72 % 15.90 %
Net interest margin (e) 2.37 % 2.42 % 2.62 %
Noninterest income to total revenue (f) 31.75 % 33.10 % 37.00 %
Efficiency ratio (g) 70.23 % 71.00 % 67.54 %
Allowance for loan and lease losses to total
loans and leases 1.13 % 1.22 % 1.56 %
Net charge-offs (recoveries) to average loans
and leases (annualized) 0.07 % 0.01 % 0.06 %
Total period-end equity to period-end assets 9.81 % 9.53 % 9.49 %
Tangible common equity to tangible assets (a) 6.44 % 6.73 % 6.64 %
Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.15
Book value per common share $ 13.82 $ 14.39 $ 13.65
Tangible book value per common share (a) $ 10.46 $ 11.00 $ 10.30
Common equity Tier 1 9.97 % 9.92 % 9.97 %
Market capitalization $ 12,557 $ 8,713 $ 9,341
(a) Represents a non-GAAP measure which is reconciled in the non-GAAP to GAAP
reconciliation in Table I.2.24.
(b) Calculated using annualized net income divided by average assets.
(c) Calculated using annualized net income available to common shareholders
divided by average common equity.
(d) Calculated using annualized net income available to common shareholders
divided by average tangible common equity.
(e) Net interest margin is computed using total net interest income adjusted to
an FTE basis assuming a statutory federal income tax rate of 21% and, where
applicable, state income taxes.
(f) Ratio is noninterest income excluding securities gains (losses) to total
revenue excluding securities gains (losses).
(g) Ratio is noninterest expense to total revenue excluding securities gains
(losses).
Results of Operations
Net Interest Income
Net interest income is FHN's largest source of revenue and is the difference
between the interest earned on interest-earning assets (generally loans, leases
and investment securities) and the interest expense incurred in connection with
interest-bearing liabilities (generally deposits and borrowed funds). The level
of net interest income is primarily a function of the difference between the
effective yield on average interest-earning assets and the effective cost of
interest-bearing liabilities. These factors are influenced by the pricing and
mix of interest-earning assets and interest-bearing liabilities which, in turn,
are impacted by external factors such as local economic conditions, competition
for loans and deposits, the monetary policy of the FRB and market interest
rates.
The following tables present the major components of net interest income and net
interest margin:
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
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Table I.2.2
AVERAGE BALANCES, NET INTEREST INCOME & YIELDS/RATES
Three Months Ended
(Dollars in millions) March 31, 2022 December 31, 2021 March 31, 2021
Average Interest Average Interest Average Interest
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
Assets:
Loans and leases:
Commercial loans and leases $ 42,444 $ 339 3.24 % $ 43,001 $ 365 3.37 % $ 45,703 $ 382 3.39 %
Consumer loans 11,638 108 3.71 11,681 110 3.77 12,519 128 4.09
Total loans and leases 54,082 447 3.34 54,682 475 3.45 58,222 510 3.54
Loans held for sale 1,156 10 3.51 1,252 11 3.49 842 7 3.16
Investment securities 9,668 38 1.59 9,269 33 1.43 8,321 29 1.41
Trading securities 1,594 11 2.75 1,551 10 2.50 1,418 7 2.03
Federal funds sold 81 - 0.19 52 - 0.17 45 - 0.12
Securities purchased under agreements
to resell (a) 672 - (0.07) 598 - (0.11) 554 - (0.14)
Interest-bearing deposits with banks 14,902 7 0.19 15,065 6 0.15 9,269 2 0.10
Total earning assets / Total interest
income $ 82,155 $ 513 2.52 % $ 82,469 $ 535 2.58 % $ 78,671 $ 555 2.85 %
Cash and due from banks 1,226 1,263 1,250
Goodwill and other intangible assets,
net 1,802 1,815 1,857
Allowance for loan and lease losses (658) (714) (949)
Other assets 4,062 4,192 4,572
Total assets $ 88,587 $ 89,701 $ 85,401 Liabilities and Shareholders' Equity:
Interest-bearing deposits: Savings$ 26,330 $ 3 0.05 %$ 26,731 $ 4 0.06 %$ 27,370 $ 12 0.19 % Other interest-bearing deposits 16,557 4 0.09 15,900 4 0.10 15,491 6 0.16 Time deposits 3,343 4 0.51 3,695 5 0.56 4,836 6 0.47 Total interest-bearing deposits 46,230 11 0.10 46,326 13 0.11 47,697 24 0.20 Federal funds purchased 884 - 0.20 889 - 0.15 996 - 0.10 Securities sold under agreements to repurchase 1,001 - 0.10 1,252 1 0.20 1,145 1 0.33 Trading liabilities 614 2 1.69 556 2 1.38 518 1 0.73 Other short-term borrowings 110 1 0.13 108 - 0.11 139 - 0.08 Term borrowings 1,591 17 4.29 1,575 17 4.30 1,670 18 4.39 Total interest-bearing liabilities / Total interest expense$ 50,430 $ 31 0.25 %$ 50,706 $ 33 0.26 %$ 52,165 $ 44 0.34 % Noninterest-bearing liabilities: Noninterest-bearing deposits 27,926 28,282 23,284 Other liabilities 1,613 1,511 1,603 Total liabilities 79,969 80,499 77,052 Shareholders' equity 8,323 8,231 8,054 Noncontrolling interest 295 295 295 Total shareholders' equity 8,618 8,526 8,349 Total liabilities and shareholders' equity$ 88,587 $ 89,025 $ 85,401 Net earnings assets / Net interest income (TE) / Net interest spread$ 31,725 $ 482 2.27 %$ 31,763 $ 502 2.32 %$ 26,506 $ 511 2.51 % Taxable equivalent adjustment (3) 0.10 (4) 0.10 (3) 0.11 Net interest income / Net interest margin (b) $ 479 2.37 % $ 498 2.42 % $ 508 2.62 % (a) Negative yield for all periods is driven by negative market rates on reverse repurchase agreements. (b) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
First Quarter 2022 versus Fourth Quarter 2021
Net interest income of
loan portfolio benefits and day count, partially offset by higher investment portfolio income, non-PPP C&I loan growth, and lower funding costs.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
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The net interest margin of 2.37% in first quarter 2022 decreased 5 basis points from fourth quarter 2021 primarily due to lower PPP loan-related revenues, partially offset by higher investment portfolio yields, greater acquired loan accretion, and lower funding costs. Average earning assets of$82.2 billion in first quarter 2022 decreased$314 million from fourth quarter 2021 largely due to a$600 million decrease in loans and leases, driven by a$1.0 billion decrease in loans to mortgage companies and a$630 million decrease in average PPP loans, and a$163 million decrease in interest-bearing cash. These decreases were partially offset by a$399 million increase in average investment securities.
First Quarter 2022 versus First Quarter 2021
Net interest income of$479 million decreased$29 million from first quarter 2021 driven by lower average loan and lease balances and the effect of tighter loan spreads. First quarter 2022 net interest margin decreased 25 basis points from 2.62% in first quarter 2021, driven by the impact of lower interest earning asset yields from a decline in loan origination spreads and greater levels of excess cash. Despite the decrease in average loans and leases, total average earning assets increased$3.5 billion in first quarter 2022 from$78.7 billion in the first quarter 2021 from higher levels of interest-bearing cash and investment securities.
Provision for Credit Losses
The provision for credit losses includes the provision for loan and lease losses and the provision for unfunded lending commitments. The provision for credit losses is the expense necessary to maintain the ALLL and the accrual for unfunded lending commitments at levels appropriate to absorb management's estimate of credit losses expected over the life of the loan and lease portfolio and the portfolio of unfunded loan commitments. For the first quarter 2022, provision for credit losses was a benefit of$40 million compared to a benefit of$65 million in fourth quarter 2021, largely reflecting the decreased impact of COVID-19, tempered by inflationary pressures and a slower economic growth forecast. The first quarter 2022 benefit decreased modestly from first quarter 2021.
For additional information about general asset quality trends, refer to the Asset Quality section in this MD&A.
Noninterest Income
The following table presents the significant components of noninterest income for each of the periods presented:
Table I.2.3
NONINTEREST INCOME
Three Months Ended 1Q22 vs. 4Q21 1Q22 vs. 1Q21
December 31, March 31,
(Dollars in millions) March 31, 2022 2021 2021 $ Change % Change $ Change % Change
Noninterest income:
Fixed income $ 73 $ 82 $ 126 $ (9) (11) % $ (53) (42) %
Deposit transactions and cash
management 44 45 42 (1) (2) 2 5
Brokerage, management fees
and commissions 24 23 20 1 4 4 20
Mortgage banking and title
income 22 28 53 (6) (21) (31) (58)
Card and digital banking
fees 20 19 17 1 5 3 18
Trust services and
investment management 13 12 12 1 8 1 8
Other service charges and
fees 13 11 10 2 18 3 30
Securities gains (losses),
net 6 1 - 5 500 6 100
Other income 14 26 18 (12) (46) (4) (22)
Total noninterest income $ 229 $ 247 $ 298 $ (18) (7) % $ (69) (23) %
First Quarter 2022 versus Fourth Quarter 2021
Compared to fourth quarter 2021, noninterest income decreased$18 million , or 7%, largely reflecting lower fixed income and mortgage banking and title fees offset by an
increase in securities gains. Noninterest income results were also impacted by lower gains on sales of premises and equipment and SBA servicing income.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
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Fixed income of
Mortgage banking and title income of
First Quarter 2022 versus First Quarter 2021
Noninterest income of
2021, primarily reflecting lower fixed income and mortgage banking and title fees.
Fixed income fees of$73 million decreased$53 million from first quarter 2021. Fixed income product revenue decreased$54 million , reflecting less favorable market conditions, while revenue from other products increased$1 million , largely driven by higher fees from derivative sales. Mortgage banking and title income of$22 million decreased$31 million driven by a shift in origination mix toward portfolio loans as well as lower spreads on sales of mortgage loans. Noninterest Expense
The following tables present the significant components of noninterest expense for each of the periods presented:
Table I.2.4
NONINTEREST EXPENSE
Three Months Ended 1Q22 vs. 4Q21 1Q22 vs. 1Q21
December 31, March 31,
(Dollars in millions) March 31, 2022 2021 2021 $ Change % Change $Change % Change Noninterest expense: Personnel expense$ 280 $ 290 $ 318 $ (10) (3) %$ (38) (12) % Net occupancy expense 32 34 37 (2) (6) (5) (14) Computer software 29 29 28 - - 1 4 Legal and professional fees 23 17 14 6 35 9 64 Operations services 20 21 16 (1) (5) 4 25 Contract employment and outsourcing 19 20 14 (1) (5) 5 36 Amortization of intangible assets 13 14 14 (1) (7) (1) (7) Equipment expense 11 11 11 - - - - Advertising and public relations 11 14 4 (3) (21) 7 175 Communications and delivery 10 9 - 1 11 1 11 Other expense 45 69 79 (24) (35) (34) (43) Total noninterest expense$ 493 $ 528 $ 544 $ (35) (7) %$ (51) (9) %
First Quarter 2022 versus Fourth Quarter 2021
Noninterest expense of$493 million decreased$35 million , or 7%, largely reflecting decreases in other expense and personnel expense. The decline in other expense was primarily related to$10 million in derivative valuation adjustments on prior Visa Class B share sales in the fourth quarter of 2021 and lower fraud and contract termination losses. The decline in personnel expense was largely attributable to$6 million in the fourth quarter of 2021 from litigation tied to a company that was fully divested over ten years ago.
First Quarter 2022 versus First Quarter 2021
Noninterest expense of$493 million decreased$51 million , or 9%, from first quarter 2021 largely reflecting a$33 million decline in merger and acquisition expense. Results also reflect a decrease in personnel expense from lower deferred compensation and incentive-based compensation costs. [[Image Removed: fhn-20220331_g2.jpg]] 72 1Q22 FORM 10-Q REPORT
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents Income Taxes
FHN recorded income tax expense of
The effective tax rate was approximately 22.4%, 18.6%, and 23.2% for the three
months ended
FHN's effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and tax credits and other tax benefits from tax credit investments. The effective rate is unfavorably affected by the non-deductibility of portions of:FDIC premium, executive compensation and merger expenses. FHN's effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in unrecognized tax benefits. The rate also may be affected by items resulting from business combinations.
A deferred tax asset or deferred tax liability is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The tax consequence is calculated by applying current enacted statutory tax rates to these temporary differences in future years. As ofMarch 31, 2022 , FHN's gross DTA and gross DTL were$554 million and$403 million , respectively, resulting in a net DTA of$151 million atMarch 31, 2022 , compared with a net DTA of$52 million atDecember 31, 2021 .
As of
Based on current analysis, FHN believes that its ability to realize the DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN's taxable earnings outlook could result in the need for a valuation allowance.
Business Segment Results
FHN's reportable segments include Regional Banking, Specialty Banking and Corporate. See Note 12 - Business Segment Information for additional disclosures related to FHN's segments.
Regional Banking The Regional Banking segment generated pre-tax income of$259 million for first quarter 2022, a decrease of$56 million compared to fourth quarter 2021, largely driven by a$30 million decline in provision for credit losses benefit and a$21 million decline in net interest income. The lower provision benefit largely reflects the decreased impact of COVID-19, tempered by inflationary pressures and a slower economic growth forecast. The decline in net interest income is reflective of a reduction in net merger-related and PPP benefits and day count. Pre-tax income for first quarter 2022 decreased$30 million compared to$289 million for first quarter 2021 largely driven by a$40 million increase in noninterest expense. Noninterest expense results reflect increases in personnel expense and other losses. Specialty Banking
Pre-tax income in the Specialty Banking segment of
decreased
Pre-tax income of$113 million in the Specialty Banking segment decreased$82 million for first quarter 2022 compared to first quarter 2021 largely driven by lower revenue partially offset by lower noninterest expense. The decline in revenue was primarily attributable to declines in fixed income and mortgage banking and title fees.
Corporate
Pre-tax loss for the Corporate segment was$117 million for first quarter 2022 compared to$177 million for fourth quarter 2021, largely reflecting a$44 million decrease in noninterest expense. Merger and acquisition-related expenses were relatively consistent with the prior quarter. Pre-tax loss in the Corporate segment decreased$60 million compared to$177 million for first quarter 2021, largely the result of a$73 million decrease in noninterest expense tied to lower merger and acquisition-related expenses of$33 million . Results also reflect lower deferred compensation expense and the impact of derivative valuation adjustments on prior Visa Class-B share sales in first quarter 2021. [[Image Removed: fhn-20220331_g2.jpg]] 73 1Q22 FORM 10-Q REPORT
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents
Analysis of Financial Condition
Total period-end assets were$88.7 billion as ofMarch 31, 2022 compared to$89.1 billion atDecember 31, 2021 . The decrease in total assets during 2022 was driven by a$1.3 billion decrease in cash and due from banks from lower customer deposits, offset primarily by a$524 million increase in investment securities and a$153 million increase in loans and leases.
Earning assets consist of loans and leases, loans held for sale, investment securities, and other earning assets, such as trading securities and interest-bearing deposits with banks. A detailed discussion of the major components of earning assets is provided in the following sections.
Loans and Leases
Period-end loans and leases increased$153 million to$55.0 billion as ofMarch 31, 2022 from$54.9 billion onDecember 31, 2021 , driven by a$108 million increase in commercial loans and leases driven by CRE loan growth and a$45 million increase in consumer loans. Total loan growth was tempered by a$397 million decrease in PPP loans. Average loans and leases decreased to$54.1 billion in first quarter 2022 compared to$54.7 billion in fourth quarter 2021 and$58.2 billion in first quarter 2021 primarily from a decline in PPP loans and credit card and other non-real estate consumer loans.
The following table provides detail regarding FHN's loans and leases as of
Table I.2.5
LOANS & LEASES
As of March 31, 2022 As of December 31, 2021
(Dollars in millions) Amount Percent of total Amount Percent of total Growth Rate
Commercial:
Commercial, financial, and
industrial (a) $ 30,798 56 % $ 31,068 57 % (1) %
Commercial real estate 12,487 23 12,109 22 3
Total commercial 43,285 79 43,177 79 -
Consumer:
Consumer real estate 10,874 20 10,772 20 1
Credit card and other 853 1 910 1 (6)
Total consumer 11,727 21 11,682 21 -
Total loans and leases $ 55,012 100 % $ 54,859 100 % - %
(a)Includes equipment financing loans and leases.
C&I loans are the largest component of the loan portfolio, comprising 56% of total loans at the end of the first quarter 2022 and 57% at year-end 2021. C&I loans decreased 1% fromDecember 31, 2021 , largely driven by a decrease in PPP loans. Commercial real estate loans increased$378 million in first quarter 2022 driven by growth in both Regional Banking and Specialty Banking loans.
Consumer loans of
Loans Held for Sale
In 2020, FHN obtained IBKC's mortgage banking operations which includes origination and servicing of residential first lien mortgages that conform to standards
established by GSEs that are major investors inU.S. home mortgages but can also consist of junior lien and jumbo loans secured by residential property. These loans are primarily sold to private companies that are unaffiliated with the GSEs on a servicing-released basis. For further detail, see Note 5 - Mortgage Banking Activity.
The legacy FHN loans HFS portfolio consists of small business, other consumer
loans, mortgage warehouse,
On
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents Asset Quality
Loan and Lease Portfolio Composition
FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans and leases are composed of C&I loans and leases and CRE loans. Consumer loans are composed of consumer real estate loans and credit card and other loans. FHN has a concentration of residential real estate loans (20% of total loans at bothMarch 31, 2022 and
Credit underwriting guidelines are outlined in Item 7 of FHN's Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2021 in the Asset Quality Section within the Analysis of Financial Condition discussion. FHN's credit underwriting guidelines and loan product offerings as ofMarch 31, 2022 are generally consistent with those reported and disclosed in FHN's Form 10-K, as amended, for the year endedDecember 31, 2021 .
Commercial Loan and Lease Portfolios
C&I
The C&I portfolio totaled$30.8 billion as ofMarch 31, 2022 and$31.1 billion as ofDecember 31, 2021 and is comprised of loans and leases used for general business purposes. Products offered in the C&I portfolio include term loan financing of owner-occupied real estate and fixed assets, PPP loans, direct financing and sales-type leases, working capital lines of credit, and trade credit enhancement through letters of credit. The decrease in C&I loans fromDecember 31, 2021 was driven by a$396 million decrease in PPP loans. Excluding PPP loans, C&I loan growth was$126 million . The largest geographical concentrations of balances in the C&I portfolio as ofMarch 31, 2022 were inTennessee (21%),Florida (12%),Texas (10%),North Carolina (7%),Louisiana (7%),California (7%), andGeorgia (5%). No other state represented more than 5% of the portfolio. The following table provides the composition of the C&I portfolio by industry as ofMarch 31, 2022 , andDecember 31, 2021 . For purposes of this disclosure, industries are determined based on the North American Industry Classification System (NAICS) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to theU.S. business economy. Table I.2.6 C&I PORTFOLIO BY INDUSTRY March 31, 2022 December 31, 2021 (Dollars in millions) Amount Percent Amount Percent Industry: Loans to mortgage companies$ 3,895 13 % $ 4,518 15 % Finance and insurance 3,580 11 3,483 11 Real estate rental and leasing (a) 2,704 9 2,771 9 Health care and social assistance 2,371 8 2,413 8 Accommodation and food service 2,144 7 2,221 7 Manufacturing 2,064 7 1,950 6 Wholesale trade 1,956 6 1,845 6 Retail trade 1,603 5 1,532 5 Energy 1,335 4 1,325 4 Other (professional, construction, transportation, etc.) (b) 9,146 30 9,010 29 Total C&I loan portfolio$ 30,798 100 % $ 31,068 100 %
(a)Leasing, rental of real estate, equipment, and goods.
(b)Industries in this category each comprise less than 5% as of
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents Industry Concentrations Loan concentrations exist when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans to mortgage companies and borrowers in the finance and insurance industry were 24% and 26% of FHN's C&I loan portfolio as ofMarch 31, 2022 andDecember 31, 2021 , respectively, and as a result could be affected by items that uniquely impact the financial services industry. As ofMarch 31, 2022 , FHN did not have any other concentrations of C&I loans in any single industry of 10% or more of total loans.
Loans to Mortgage Companies
Loans to mortgage companies were 13% of the C&I portfolio as ofMarch 31, 2022 and 15% as ofDecember 31, 2021 . This portfolio generally fluctuates with mortgage rates and seasonal factors and includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower's sale of those mortgage loans to third party investors. Generally, new loan originations to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise. In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In first quarter 2022, 58% of the loan originations were home purchases and 42% were refinance transactions.
Finance and Insurance
The finance and insurance component represented 11% of the C&I portfolio as of bothMarch 31, 2022 andDecember 31, 2021 , and includes TRUPs (i.e., long-term unsecured loans to bank and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As ofMarch 31, 2022 , asset-based lending to consumer finance companies represents approximately$1.5 billion of the finance and insurance component.
Paycheck Protection Program
In 2020,
qualifying businesses may receive loans from private lenders, such as FHN, that are fully guaranteed by theSmall Business Administration . These loans potentially are partly or fully forgivable, depending upon the borrower's use of the funds and maintenance of employment levels. To the extent forgiven, the borrower is relieved from payment while the lender is still paid from the program. The C&I portfolio as ofMarch 31, 2022 includes 5,184 loans made under the PPP with an aggregate principal balance of$642 million , which are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk and do not affect the amount of provision and ALLL recorded. As a result, no ALLL is recorded for PPP loans as ofMarch 31, 2022 , and FHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes. For these loans, there are remaining net lender fees of approximately$7 million to be paid to FHN as ofMarch 31, 2022 . During 2022, FHN continues to work with its clients that have applied for and received PPP loan forgiveness. ThroughMarch 31, 2022 , approximately$5 billion of the original$6 billion in PPP loans originated by FHN andIBERIABANK prior to acquisition have been forgiven by the SBA.Commercial Real Estate The CRE portfolio totaled$12.5 billion as ofMarch 31, 2022 and$12.1 billion as ofDecember 31, 2021 . The CRE portfolio reflects financings for both commercial construction and nonconstruction loans. The largest geographical concentrations of CRE loan balances as ofMarch 31, 2022 were inFlorida (26%),North Carolina (11%),Texas (11%),Louisiana (10%),Georgia (10%), andTennessee (9%). No other state represented more than 5% of the portfolio. This portfolio contains loans, draws on lines, and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate. Subcategories of the CRE portfolio consist of multi-family (26%), office (23%), retail (19%), industrial (12%), hospitality (11%), land/land development (2%), and other (7%).
Consumer Loan Portfolios
The consumer real estate portfolio totaled$10.9 billion and$10.8 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively, and is primarily composed of home equity lines and installment loans. The largest geographical concentrations of balances as ofMarch 31, 2022 were inFlorida (31%),Tennessee (23%),Louisiana (9%),North Carolina (8%),Texas (7%), andNew York (5%). No other state represented more than 5% of the portfolio. As ofMarch 31, 2022 , approximately 88% of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 755 and the refreshed FICO scores also averaged 755 as ofMarch 31, 2022 , no significant change from FICO scores of 755 and 754, respectively, as ofDecember 31, 2021 . Generally, performance of this portfolio is affected by life events that affect borrowers' finances, the level of unemployment, and home prices. [[Image Removed: fhn-20220331_g2.jpg]] 76 1Q22
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As ofMarch 31, 2022 andDecember 31, 2021 , FHN had held-for-investment consumer mortgage loans secured by real estate that were in the process of foreclosure totaling$26 million and$20 million , respectively. HELOCs comprised$1.9 billion and$2.0 billion of the consumer real estate portfolio as ofMarch 31, 2022 andDecember 31, 2021 , respectively. FHN's HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is frozen if a borrower becomes past due on payments. Once the draw period has ended, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate. As ofMarch 31, 2022 , approximately 89% of FHN's HELOCs were in the draw period compared to 88% atDecember 31, 2021 . It is expected that$432 million , or 25%, of HELOCs currently in the draw period will enter the repayment period during the next 60 months, based on current terms. Generally, delinquencies for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement. However, over time, performance of these loans usually begins to stabilize. HELOCs nearing the end of the draw period are closely monitored.
The following table presents HELOCs currently in the draw period, broken down by months remaining in the draw period.
Table I.2.7
HELOC DRAW TO REPAYMENT SCHEDULE
March 31, 2022 December 31, 2021
Repayment Repayment
(Dollars in millions) Amount Percent Amount Percent
Months remaining in draw period:
0-12 $ 38 2 % $ 43 2 %
13-24 41 2 42 2
25-36 57 3 50 3
37-48 132 8 136 8
49-60 164 10 160 9
>60 1,272 75 1,324 76
Total $ 1,704 100 % $ 1,755 100 %
Credit Card and Other
The credit card and other portfolio, which is primarily within the Regional
Banking segment, totaled
credits, including home equity and other personal consumer loans, credit card receivables, and automobile loans. The$57 million decrease was driven by net repayments of automobile loans, consumer construction loans, and credit cards.
Allowance for Credit Losses
The ACL is maintained at a level sufficient to provide appropriate reserves to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 4 of this Report and "Critical Accounting Policies and Estimates" and Note 5 in FHN's 2021 Form 10-K, as amended.
The ALLL decreased to
reflecting a continued decrease in the unfavorable impact of COVID-19 on the macroeconomic forecast. The ALLL to total loans and leases ratio decreased 9 basis points to 1.13%. The ACL to total loans and leases ratio decreased to 1.25% as ofMarch 31, 2022 from 1.34% as ofDecember 31, 2021 . [[Image Removed: fhn-20220331_g2.jpg]] 77 1Q22
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Table of Contents Consolidated Net Charge-offs Net charge-offs in first quarter 2022 were$10 million , or an annualized 7 basis points of total loans and leases, compared to net charge-offs of$8 million , or 6 basis points of total loans and leases, in first quarter 2021.
Net charge-offs in the commercial portfolio in first quarter 2022 were
2021. Net recoveries in the consumer portfolio were minimal in first quarter 2022 compared to$3 million in net recoveries in first quarter 2021. The decrease in net recoveries from the prior year was attributable to higher gross credit card charge-offs and lower gross consumer real estate recoveries.
Table I.2.8
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND CHARGE-OFFS
(Dollars in millions) March 31, 2022 December 31, 2021 March 31, 2021
Allowance for loan and lease losses
C&I $ 287 $ 334 $ 442
CRE 151 154 232
Consumer real estate 164 163 222
Credit card and other 20 19 18
Total allowance for loan and lease
losses $ 622 $ 670 $ 914
Reserve for remaining unfunded commitments
C&I $ 43 $ 46 $ 62
CRE 12 12 11
Consumer real estate 9 8 8
Credit card and other - - -
Total reserve for unfunded lending
commitments $ 64 $ 66 $ 81
Allowance for credit losses
C&I $ 330 $ 380 $ 504
CRE 163 166 243
Consumer real estate 173 171 230
Credit card and other 20 19 18
Total allowance for credit losses $ 686 $ 736 $ 995
Period-end loans and leases
C&I $ 30,798 $ 31,068 $ 33,951
CRE 12,487 12,109 12,470
Consumer real estate 10,874 10,772 11,053
Credit card and other 853 910 1,126
Total period-end loans and leases $ 55,012 $ 54,859 $ 58,600
ALLL / loans and leases %
C&I 0.93 % 1.07 % 1.30 %
CRE 1.21 1.27 1.86
Consumer real estate 1.51 1.51 2.00
Credit card and other 2.31 2.14 1.63
Total ALLL / loans and leases % 1.13 % 1.22 % 1.56 %
ACL / loans and leases %
C&I 1.07 % 1.22 % 1.48 %
CRE 1.31 1.37 1.95
Consumer real estate 1.59 1.59 2.08
Credit card and other 2.31 2.09 1.63
Total ACL / loans and leases % 1.25 % 1.34 % 1.70 %
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Quarter-to-date net charge-offs (recoveries)
C&I $ 10 $ 1 $ 10
CRE - - 1
Consumer real estate (4) (3) (5)
Credit card and other 4 3 2
Total net charge-offs (recoveries) $ 10 $ 1 $ 8
Average loans and leases
C&I $ 30,215 $ 30,780 $ 33,279
CRE 12,229 12,221 12,424
Consumer real estate 10,769 10,738 11,400
Credit card and other 869 943 1,119
Total average loans and leases $ 54,082 $ 54,682 $ 58,222
Charge-off % (annualized)
C&I 0.13 % 0.01 % 0.12 %
CRE NM NM 0.06
Consumer real estate NM NM NM
Credit card and other 1.85 1.26 0.65
Total charge-off % 0.07 % 0.01 % 0.06 %
ALLL / annualized net charge-offs
C&I 713 % 7,238 % 1,147 %
CRE NM NM 3,331
Consumer real estate NM NM NM
Credit card and other 123 164 253
Total ALLL / net charge-offs 1,595 % 17,374 % 2,814 %
NM - not meaningful
Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that
full collection of principal and interest is at risk, if impairment has been
recognized as a partial charge-off of principal balance due to insufficient
collateral value and past due status, or (on a case-by-case basis) if FHN
continues to receive payments but there are other borrower-specific issues.
Included in nonaccruals are loans for which FHN continues to receive payments,
including residential real estate loans where the borrower has been discharged
of personal obligation through bankruptcy. NPAs consist of nonperforming loans
and OREO (excluding OREO from government insured mortgages).
Total NPAs (including NPLs HFS) increased to $343 million as of March 31, 2022
from $285 million as of December 31, 2021 , driven by higher nonaccrual loans in
the C&I and consumer real estate portfolios. The nonperforming loans and leases
ratio increased 10 basis points to 0.60% as of March 31, 2022 .
Certain nonperforming loans in both the commercial and consumer portfolios are
deemed collateral-dependent and are charged down to an estimate of collateral
value less costs to sell. Because the estimated loss has been recognized through
a partial charge-off, typically an ALLL is not recorded.
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NONACCRUAL/NONPERFORMING LOANS, FORECLOSED ASSETS, & OTHER DISCLOSURES (Dollars in millions)
Nonperforming loans and leases March 31, 2022 December 31, 2021
C&I $ 153 $ 125
CRE 11 9
Consumer real estate 165 138
Credit card and other 3 3
Total nonperforming loans and leases (a) $ 332 $ 275
Nonperforming loans held for sale (a) $ 8 $ 7
Foreclosed real estate and other assets (b) 3 3
Total nonperforming assets (a) (b) $ 343 $ 285
Nonperforming loans and leases to total loans and leases
C&I 0.50 % 0.40 %
CRE 0.09 0.08
Consumer real estate 1.52 1.29
Credit card and other 0.32 0.31
Total NPL % 0.60 % 0.50 %
ALLL / NPLs
C&I 188 % 268 %
CRE 1,303 1,671
Consumer real estate 99 118
Credit card and other 730 699
Total ALLL / NPLs 187 % 244 %
(a)Excludes loans and leases that are 90 or more days past due and still
accruing interest.
(b)Balances do not include government-insured foreclosed real estate. Foreclosed
real estate from GNMA loans totaled $1 million as of both March 31, 2022 and
December 31, 2021 .
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The following table provides nonperforming assets by business segment:
Table I.2.10
NONPERFORMING ASSETS BY SEGMENT
(Dollars in millions)
Nonperforming loans and leases (a) (b) March 31, 2022 December 31, 2021
Regional Banking $ 219 $ 163
Specialty Banking 77 78
Corporate 36 34
Consolidated $ 332 $ 275Foreclosed real estate (c)
Regional Banking $ 1 $ 2
Specialty Banking 1 -
Corporate 1 1
Consolidated $ 3 $ 3Nonperforming Assets (a) (b) (c)
Regional Banking $ 220 $ 165
Specialty Banking 78 78
Corporate 37 35
Consolidated $ 335 $ 278Nonperforming loans and leases to loans and leases
Regional Banking 0.57 % 0.43 %
Specialty Banking 0.48 0.48
Corporate 6.25 5.39
Consolidated 0.60 % 0.50 %
NPA % (d)
Regional Banking 0.57 % 0.44 %
Specialty Banking 0.48 0.48
Corporate 6.39 5.51
Consolidated 0.61 % 0.51 %
(a)Excludes loans and leases that are 90 or more days past due and still
accruing interest.
(b)Excludes loans classified as held for sale.
(c)Excludes foreclosed real estate and receivables related to government insured
mortgages of $1 million as of both March 31, 2022 and December 31, 2021 .
(d)Ratio is non-performing assets to total loans and leases plus foreclosed real
estate.
Lending Assistance for Borrowers
In addition to PPP loans, other customer support initiatives in response to the COVID-19 pandemic include incremental lending assistance for borrowers through delayed payment programs and fee waivers.
The following table provides the UPB of loans related to deferrals granted to
FHN's customers as of
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Table I.2.11
CUSTOMER DEFERRALS
(Dollars in millions) As of March 31, 2022 As of December 31, 2021
Commercial:
C&I $ - $ 9
CRE 5 26
Total Commercial $ 5 $ 35
Consumer:
HELOC $ 6 $ 5
Real estate installment loans 27 44
Credit card and other - -
Total Consumer $ 33 $ 49
Total $ 38 $ 84
To the extent that loans were past due as of
days and loans past due 90 days or more in the table and discussion below.
Past Due Loans and Potential Problem Assets
Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans 90 days or more past due and still accruing were$23 million as ofMarch 31, 2022 compared to$40 million as ofDecember 31, 2021 . Loans 30 to 89 days past due were$180 million as ofMarch 31, 2022 compared to$108 million as ofDecember 31, 2021 . The increase included a$36 million increase in CRE loans, a$19 million increase in C&I loans, and a$14 million increase in consumer real estate loans past due 30 to 89 days. These increases were partially driven by the expiration of certain deferred payment programs noted above. [[Image Removed: fhn-20220331_g2.jpg]] 82 1Q22
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Table I.2.12
ACCRUING DELINQUENCIES & OTHER CREDIT DISCLOSURES
(Dollars in millions)
Accruing loans and leases 30+ days past due March 31, 2022 December 31, 2021
C&I $ 78 $ 58
CRE 49 13
Consumer real estate 65 70
Credit card and other 11 7
Total accruing loans and leases 30+ days past
due $ 203 $ 148
Accruing loans and leases 30+ days past due %
C&I 0.25 % 0.19 %
CRE 0.39 0.11
Consumer real estate 0.60 0.65
Credit card and other 1.23 0.76
Total accruing loans and leases 30+ days past
due % 0.37 % 0.27 %
Accruing loans and leases 90+ days past due (a) (b) (c):
C&I $ 6 $ 5
CRE - -
Consumer real Estate 14 33
Credit card and other 3 2
Total accruing loans and leases 90+ days past
due $ 23 $ 40
Loans held for sale
30 to 89 days past due $ 10 $ 7
30 to 89 days past due - guaranteed portion (d) 7 2
90+ days past due 22 24
90+ days past due - guaranteed portion (d) 11 12
(a)Excludes loans classified as held for sale.
(b)Amounts are not included in nonperforming/nonaccrual loans.
(c)Amounts are also included in accruing loans and leases 30+ days past due.
(d)Guaranteed loans include FHA, VA , and GNMA loans repurchased through the GNMA
buyout program.
Potential problem assets represent those assets where information about possible
credit problems of borrowers has caused management to have serious doubts about
the borrower's ability to comply with present repayment terms and includes loans
past due 90 days or more and still accruing. This definition is believed to be
substantially consistent with the standards established by Federal banking
regulators for
loans classified as substandard. Potential problem assets in the loan portfolio
were $542 million on March 31, 2022 and $597 million on December 31, 2021 . The
current expectation of losses from potential problem assets has been included in
management's analysis for assessing the adequacy of the allowance for loan and
lease losses.
Troubled Debt Restructurings and Loan Modifications
As part of FHN's ongoing risk management practices, FHN attempts to work with borrowers when appropriate to extend or modify loan terms to better align with their
current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated
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separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a TDR. For loan modifications that met the TDR relief provisions outlined in either the CARES Act, as extended by the CAA, or revised Interagency Guidance, FHN has excluded these modifications from consideration as a TDR and has excluded loans with these qualifying modifications from designation as a TDR in the information and discussion that follows. See Note 3 - Loans and Leases for further discussion regarding TDRs and loan modifications. On bothMarch 31, 2022 andDecember 31, 2021 , FHN had$206 million portfolio loans classified as held-for-investment TDRs. For these TDRs, including specific reserves, FHN had an allowance for loan and lease losses of$14 million , or 7% of TDR balances as ofMarch 31, 2022 , and$12 million , or 6% of TDR balances, as ofDecember 31, 2021 . Additionally, FHN had$33 million and$35 million of HFS loans classified as TDRs as ofMarch 31, 2022 andDecember 31, 2021 , respectively.
The following table provides a summary of TDRs for the periods ended
Table I.2.13
TROUBLED DEBT RESTRUCTURINGS
(Dollars in millions) March 31, 2022 December 31, 2021
Held for investment:
Commercial loans:
Current $ 47 $ 53
Delinquent 1 -
Non-accrual 31 35
Total commercial loans $ 79 $ 88
Consumer real estate:
Current $ 69 $ 60
Delinquent 2 4
Non-accrual (a) 56 53
Total consumer real estate $ 127 $ 117
Credit card and other:
Current $ - $ 1
Delinquent - -
Non-accrual - -
Total credit card and other - 1
Total held for investment $ 206 $ 206
Held for sale:
Current $ 25 $ 27
Delinquent 7 7
Non-accrual 1 1
Total held for sale 33 35
Total troubled debt restructurings $ 239 $ 241
(a) Balances as of
FHN's investment securities portfolio consists principally of debt securities
available for sale. FHN maintains a highly-rated securities portfolio consisting
primarily of government agency issued mortgage-backed securities
and collateralized mortgage obligations. The securities portfolio provides a
source of income and liquidity and is an important tool used to balance the
interest rate risk of the loan and deposit portfolios. The securities portfolio
is
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periodically evaluated in light of established ALM objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which FHN is exposed. These evaluations may result in steps taken to adjust the overall balance sheet positioning. Investment securities were$9.9 billion and$9.4 billion onMarch 31, 2022 andDecember 31, 2021 , representing approximately 11% of total assets at the end of both periods. See Note 2 -Investment Securities for more information about the securities portfolio. Deposits Total deposits of$74.1 billion as ofMarch 31, 2022 decreased$781 million fromDecember 31, 2021 reflecting an improvement in deposit mix during the quarter. Interest-bearing deposits decreased$949 million while noninterest-bearing deposits increased$168 million . See Table I.2.2 - Average Balances, Net Interest Income and Yields/Rates in this Report for information on average deposits including average rates paid. The following table summarizes the major components of deposits as ofMarch 31, 2022 andDecember 31, 2021 . Table I.2.14 DEPOSITS March 31, 2022 December 31, 2021 (Dollars in millions) Amount Percent of total Amount Percent of total Change Percent Savings$ 25,772 35 % $ 26,457 35 %$ (685) (3) % Time deposits 3,165 4 3,500 5 (335) (10) Other interest-bearing deposits 17,126 23 17,055 23 71 - Total interest-bearing deposits 46,063 62 47,012 63 (949) (2) Noninterest-bearing deposits 28,051 38 27,883 37 168 1 Total deposits$ 74,114 100 % $ 74,895 100 %$ (781) (1) % Short-Term Borrowings Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings. Total short-term borrowings were$2.2 billion and$2.6 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively.
Short-term borrowings balances fluctuate largely based on the level of FHLB borrowing as a result of loan demand, deposit levels and balance sheet funding strategies. Trading liabilities fluctuate based on various factors,
including levels of trading securities and hedging strategies. Federal funds purchased fluctuates depending on the amount of excess funding of FHN's correspondent bank customers. Balances of securities sold under agreements to repurchase fluctuate based on cost attractiveness relative to FHLB borrowing levels and the ability to pledge securities toward such transactions.
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year.
Total term borrowings were
Capital
Management's objectives are to provide capital sufficient to cover the risks inherent in FHN's businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Total equity was$8.7 billion atMarch 31, 2022 and$8.5 billion atDecember 31, 2021 . Significant changes included net income of$198 million and the issuance of$494 million in Series G preferred stock, which were offset by$90 million
in common and preferred dividends and a decrease in AOCI of
The following tables provide a reconciliation of shareholders' equity from the Consolidated Balance Sheets to Common Equity Tier 1, Tier 1 andTotal Regulatory Capital as well as certain selected capital ratios: [[Image Removed: fhn-20220331_g2.jpg]] 85 1Q22
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Table I.2.15
REGULATORY CAPITAL DATA
(Dollars in millions) March 31, 2022 December 31, 2021
Shareholders' equity $ 8,401 $ 8,199
Modified CECL transitional amount (a) 85 114
FHN non-cumulative perpetual preferred (1,014) (520)
Common equity tier 1 before regulatory adjustments $ 7,472 $ 7,793
Regulatory adjustments:
Disallowed goodwill and other intangibles (1,698) (1,711)
Net unrealized (gains) losses on securities available for sale
440 36
Net unrealized (gains) losses on pension and other postretirement plans
253 255
Net unrealized (gains) losses on cash flow hedges 18 (3)
Disallowed deferred tax assets - (2)
Other deductions from common equity tier 1 (1) (1)
Common equity tier 1 $ 6,484 $ 6,367
FHN non-cumulative perpetual preferred (b) 920 426
Qualifying noncontrolling interest- First Horizon Bank
preferred stock 295 295
Tier 1 capital $ 7,699 $ 7,088
Tier 2 capital 876 830
Total regulatory capital $ 8,575 $ 7,918
Risk-Weighted Assets
First Horizon Corporation $ 65,042 $ 64,183
First Horizon Bank 64,404 63,601
Average Assets for Leverage
First Horizon Corporation 87,401 87,683
First Horizon Bank 86,677 86,953
Table I.2.16
REGULATORY RATIOS & AMOUNTS
March 31, 2022 December 31, 2021
Ratio Amount Ratio Amount
Common Equity Tier 1
First Horizon Corporation 9.97 % $ 6,484 9.92 % $ 6,367
First Horizon Bank 10.64 6,851 10.75 6,838
Tier 1
First Horizon Corporation 11.84 7,699 11.04 7,088
First Horizon Bank 11.10 7,146 11.22 7,133
Total
First Horizon Corporation 13.18 8,575 12.34 7,918
First Horizon Bank 12.26 7,893 12.41 7,893
Tier 1 Leverage
First Horizon Corporation 8.81 7,699 8.08 7,088
First Horizon Bank 8.24 7,146 8.20 7,133
Other Capital Ratios
Total period-end equity to period-end assets 9.81 9.53
Tangible common equity to tangible assets (c) 6.44 6.73
Adjusted tangible common equity to risk-weighted assets (c)
9.27 9.20
(a)The modified CECL transitional amount includes the impact to retained
earnings from the initial adoption of CECL plus 25% of the change in the
adjusted allowance for credit losses since FHN's initial adoption of CECL
through December 31, 2021 . For the three months ended March 31, 2022 , 25% of the
full amount at December 31, 2021 is phased out and not included in Common Equity
Tier 1 capital.
(b)The $94 million carrying value of the Series D preferred stock does not
qualify as Tier 1 capital because the earliest redemption date is less than five
years from the issuance date, which was re-set to July 1, 2020 when the IBKC
merger closed.
(c)Tangible common equity to tangible assets and adjusted tangible common equity
to risk-weighted assets are non-GAAP measures and are reconciled to total equity
to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation - Table I.2.24.
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Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution's capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution's capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.50%, 8.00%, 10.00%, and 5.00%, respectively. Furthermore, a capital conservation buffer of 50 basis points above these levels must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends, share repurchases and certain discretionary bonuses.
As of
institutions and to meet the capital conservation buffer requirement. Capital ratios for bothFHN and First Horizon Bank are calculated under the final rule issued by the banking regulators in 2020 to delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. For FHN, the risk-based regulatory capital ratios increased in first quarter 2022 relative to year-end 2021 primarily from the impact of net income less dividends during the first three months of 2022. FHN's Tier 1 Capital and Tier 1 Leverage ratios as ofMarch 31, 2022 further benefited from the issuance of its Series G preferred stock. FirstHorizon Bank's risk-based regulatory capital ratios decreased fromDecember 31, 2021 primarily from an increase in risk-weighted assets.
During 2022, capital ratios are expected to remain above well-capitalized standards plus the required capital conservation buffer.
Common Stock Purchase Programs
General Purchase Program
Pursuant to Board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. FHN's Board has not authorized a preferred stock purchase program. OnJanuary 27, 2021 , FHN announced that its Board of Directors approved a new$500 million common share purchase program that was to expire onJanuary 31, 2023 , replacing the 2018 program, which was terminated. OnOctober 26, 2021 , FHN announced that the 2021 program had been increased by$500 million and extended toOctober 31, 2023 . Like the 2018 program, the 2021 program is not tied to any compensation plan. Purchases may be made in the open market or through privately negotiated transactions, including under Rule 10b5-1 plans as well as accelerated share repurchase and other structured transactions. The timing and exact amount of common share repurchases will be subject to various factors, including FHN's capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory considerations. As ofMarch 31, 2022 ,$401 million in purchases had been made life-to-date under the 2021 program at an average price per share of$16.60 , or$16.58 excluding commissions. Management does not currently anticipate purchasing additional shares under this authority. Table I.2.17 COMMON STOCK PURCHASES-GENERAL PROGRAM Total number of Maximum approximate (Dollar values and volume in Total number shares purchased dollar value that may thousands, except per share of shares Average price as part of publicly yet be purchased under data) purchased paid per share (a) announced programs the programs 2022 January 1 to January 31 - N/A - $ 598,646 February 1 to February 28 - N/A - 598,646 March 1 to March 31 - N/A - 598,646 Total - N/A -
(a) Represents total costs including commissions paid.
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Compensation Plans Purchase Program
A consolidated compensation plan share purchase program was announced onAugust 6, 2004 . This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired.
The total amount authorized under this consolidated compensation plan share
purchase program is 29.6 million shares calculated before adjusting for stock
dividends distributed through
compensation plans for which no stock option awards remain outstanding. The shares may be purchased over the option exercise periods of the various compensation plans on or beforeDecember 31, 2023 . Purchases may be made in the open market or through privately negotiated transactions and are subject to various factors including FHN's capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory restrictions. As ofMarch 31, 2022 , the maximum number of shares that may be purchased under the program was 23.0 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during 2022. Table I.2.18 COMMON STOCK PURCHASES-COMPENSATION PLANS PROGRAM Total number of Maximum number Total number shares purchased of shares that may (Volume in thousands, except of shares Average price as part of publicly yet be purchased per share data) purchased paid per share announced programs under the programs 2022 January 1 to January 31 67$ 18.19 67 23,016 February 1 to February 28 16 17.69 16 22,999 March 1 to March 31 36 23.79 36 22,963 Total 120$ 19.82 120 Risk Management There have been no significant changes to FHN's risk management practices as described under "Risk Management" included in Item 7 of FHN's 2021 Annual Report on Form 10-K, as amended. Market Risk Management
Value-at-Risk and Stress Testing
VaR is a statistical risk measure used to estimate the potential loss in value from adverse market movements over an assumed fixed holding period within a stated confidence level. FHN employs a model to compute daily VaR measures for its trading securities inventory. FHN computes VaR using historical simulation with a 1-year lookback period at a 99% confidence level with 1-day and 10-day time horizons. Additionally, FHN computes a Stressed VaR measure. The SVaR computation uses the same model but with model inputs reflecting historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate for the trading securities portfolio.
A summary of FHN's VaR and SVaR measures for 1-day and 10-day time horizons is presented in the following table:
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Table I.2.19
VaR & SVaR MEASURES
Three Months Ended As of
March 31, 2022 March 31, 2022
(Dollars in millions) Mean High Low
1-day
VaR $ 2 $ 2 $ 2 $ 2
SVaR 5 7 4 5
10-day
VaR 4 5 3 4
SVaR 23 34 18 24
Three Months Ended As of
March 31, 2021 March 31, 2021
(Dollars in millions) Mean High Low
1-day
VaR $ 3 $ 4 $ 1 $ 1
SVaR 3 5 2 3
10-day
VaR 12 21 1 4
SVaR 15 21 11 13
Year Ended As of
December 31, 2021
(Dollars in millions) Mean High Low
1-day
VaR $ 1 $ 4 $ 1 $ 2
SVaR 4 7 2 5
10-day
VaR 5 21 1 5
SVaR 18 27 11 22
FHN's overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:
Table I.2.20
SCHEDULE OF RISKS INCLUDED IN VaR
As of As of As of
March 31, 2022 March 31, 2021 December 31, 2021
(Dollars in millions) 1-day 10-day 1-day 10-day 1-day 10-day
Interest rate risk $ - $ 1 $ 1 $ 2 $ 1 $ 1
Credit spread risk 1 1 - 1 1 1
The potential risk of loss reflected by FHN's VaR measures assumes the trading
securities inventory is static. Because FHN Financial procures fixed income
securities for purposes of distribution to clients, its trading securities
inventory turns over regularly. Additionally, FHNF traders actively manage the
trading securities inventory continuously throughout each trading day.
Accordingly, FHNF's trading securities inventory is highly dynamic, rather than
static. As a result, it would be rare for FHNF to incur a negative revenue day
in its fixed income activities at the levels indicated by its VaR measures.
In addition to being used in FHN's daily market risk management process, the VaR
and SVaR measures are also used by FHN in computing its regulatory market risk
capital requirements in accordance with the Market Risk Capital rules. For
additional information regarding FHN's capital adequacy refer to the Capital
section of this MD&A.
FHN also performs stress tests on its trading securities portfolio to calculate the potential loss under various
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assumed market scenarios. Key assumed stresses used in those tests are:
Down 25 bps - assumes an instantaneous downward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Up 25 bps - assumes an instantaneous upward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Curve flattening - assumes an instantaneous flattening of the interest rate yield curve through an increase in short-term rates and a decrease in long-term rates. The 2-year point on theTreasury yield curve is assumed to increase 15 basis points and the 10-year point on theTreasury yield curve is assumed to decrease 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Curve steepening - assumes an instantaneous steepening of the interest rate
yield curve through a decrease in short-term rates and an increase in long-term
rates. The 2-year point on the
is assumed to decrease 15 basis points and the 10-year point on theTreasury yield curve is assumed to increase 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Credit spread widening - assumes an instantaneous increase in credit spreads
(the difference between yields on
Model Validation
Trading risk management personnel within FHN Financial have primary responsibility for model risk management with respect to the model used by FHN to compute its VaR measures and perform stress testing on the trading inventory. Among other procedures, these personnel monitor model results and perform periodic backtesting as part of an ongoing process of validating the accuracy of the model. These model risk management activities are subject to annual review byFHN's Model Validation Group , an independent assurance group charged with oversight responsibility for FHN's model risk management.
Interest Rate Risk Management
Net Interest Income Simulation Analysis
The information provided in this section, including the discussion regarding the outcomes of simulation analysis and rate shock analysis, is forward-looking. Actual results, if the assumed scenarios were to occur, could differ because of interest rate movements, the ability of management to execute its business plans, and other factors, including those presented in the Forward-Looking Statements section of this Report. Management uses a simulation model to measure interest rate risk and to formulate strategies to improve balance sheet positioning, earnings, or both, within FHN's interest rate risk, liquidity, and capital guidelines. Interest rate exposure is measured by forecasting 12 months of NII under various interest rate scenarios and comparing the percentage change in NII for each scenario to a base case scenario where interest rates remain unchanged. Assumptions are made regarding future balance sheet composition, interest rate movements, and loan and deposit pricing. In addition, assumptions are made about the magnitude of asset prepayments and earlier than anticipated deposit withdrawals. The results of these scenarios help FHN develop strategies for managing exposure to interest rate risk. While management believes the assumptions used and scenarios selected in its simulations are reasonable, simulation modeling provides only an estimate, not a precise calculation, of exposure to any given change in interest rates. Based on a static balance sheet as ofMarch 31, 2022 , NII exposures over the next 12 months assuming rate shocks of plus 25 basis points, 50 basis points, 100 basis points, and 200 basis points are estimated to have favorable variances as shown in the table below. Table I.2.21 INTEREST RATE SENSITIVITY Shifts in Interest Rates % Change in Projected (in bps) Net Interest Income +25 3.8% +50 8.1% +100 16.4% +200 28.9% A steepening yield curve scenario where long-term rates increase by 50 basis points and short-term rates are static, results in a favorable NII variance of 0.5%. A flattening yield curve scenario where long-term rates decrease by 50 basis points and short-term rates are static, results in an unfavorable NII variance of 0.7%. Rate shocks of minus 25 basis points and 50 basis points result in unfavorable NII variances of 4.6% and 7.7%, assuming the absence of negative rates. These hypothetical scenarios are used to create a risk measurement framework, and do not necessarily represent management's current view of future interest rates or market developments. FHN's net interest income has been impacted by the disruption from the COVID-19 pandemic and its variants as well as the low-rate environment. The impact of government stimulus programs and other developments have also influenced net interest income results, although the impacts from these programs have abated, and interest rates have begun to increase and are expected to [[Image Removed: fhn-20220331_g2.jpg]] 90 1Q22
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continue increasing in the future. FHN continues to monitor current economic trends and potential exposures closely.
Liquidity Risk Management
Among other things, ALCO is responsible for liquidity management: the funding of assets with liabilities of appropriate duration, while mitigating the risk of unexpected cash needs. ALCO and the Board of Directors have adopted a Liquidity Policy of which the objective is to ensure that FHN meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity should provide FHN with the ability to meet both expected and unexpected cash and collateral needs. Key liquidity ratios, asset liquidity levels, and the amount available from funding sources are reported to ALCO on a regular basis. FHN's Liquidity Policy establishes liquidity limits that are deemed appropriate for FHN's risk profile. In accordance with the Liquidity Policy, ALCO manages FHN's exposure to liquidity risk through a dynamic, real time forecasting methodology. Base liquidity forecasts are reviewed by ALCO and are updated as financial conditions dictate. In addition to the baseline liquidity reports, robust stress testing of assumptions and funds availability are periodically reviewed. FHN maintains a contingency funding plan that may be executed should unexpected difficulties arise in accessing funding that affects FHN, the industry, or both. Subject to market conditions and compliance with applicable regulatory requirements from time to time, funds are available from a number of sources, including the available-for-sale securities portfolio, dealer and commercial customer repurchase agreements, access to the overnight and term Federal Funds markets, incremental borrowing capacity at the FHLB ($14.5 billion was available as ofMarch 31, 2022 ), brokered deposits, loan sales, syndications, and access to theFederal Reserve Bank . Core deposits are a significant source of funding and have historically been a stable source of liquidity for banks. Generally, core deposits represent funding from a financial institution's client base which provides inexpensive, predictable pricing. The ratio of average loans, excluding loans HFS and restricted real estate loans, to average core deposits was 74% forMarch 31, 2022 and 80% forDecember 31, 2021 . FHN may also use unsecured short-term borrowings as a source of liquidity. Federal funds purchased from correspondent bank clients are considered to be substantially more stable than funds purchased in the national broker markets for federal funds due to the long, historical, and reciprocal nature of banking services provided by FHN to these correspondent banks. The remainder of FHN's wholesale short-term borrowings consists of securities sold under agreements to repurchase
transactions accounted for as secured borrowings with business clients or broker dealer counterparties.
BothFHN and First Horizon Bank have the ability to generate liquidity by issuing senior or subordinated unsecured debt, preferred equity, and common equity, subject to market conditions and compliance with applicable regulatory requirements. InFebruary 2022 , FHN issued and sold to TD 4,936 shares of Series G Perpetual Convertible Preferred Stock in a private placement transaction for$494 million . As ofMarch 31, 2022 , FHN had outstanding$1.3 billion in senior and subordinated unsecured debt and$1.0 billion in non-cumulative perpetual preferred stock. As ofMarch 31, 2022 ,First Horizon Bank and subsidiaries had outstanding preferred shares of$295 million , which are reflected as noncontrolling interest on the Consolidated Balance Sheets. Parent company liquidity is primarily provided by cash flows stemming from dividends and interest payments collected from subsidiaries. These sources of cash represent the primary sources of funds to pay cash dividends to shareholders and principal and interest to debt holders of FHN. Applying the dividend restrictions imposed under applicable federal and state rules as outlined above, the Bank's total amount available for dividends was$1.1 billion as ofApril 1, 2022 . InMarch 2022 , FHN agreed to suspend the Dividend Reinvestment Plan in connection with the TD acquisition. As a result of the suspension of the Plan, participants in the Plan received their first quarter 2022 FHN dividend, paid onApril 1, 2022 , in cash. During the suspension period, dividend payments of FHN will not be automatically reinvested in additional shares of FHN common stock and participants in the Plan will be unable to purchase shares of FHN common stock through optional cash investments under the Plan. FirstHorizon Bank declared and paid common dividends to the parent company in the amounts of$180 million and$85 million in first and second quarter 2022 and$770 million in 2021. FirstHorizon Bank declared preferred dividends in first quarter 2022 and declared and paid preferred dividends in each quarter of 2021. Additionally,First Horizon Bank declared preferred dividends in second quarter 2022, payable inJuly 2022 .
Payment of a dividend to shareholders of FHN is dependent on several factors which are considered by the Board. These factors include FHN's current and prospective capital, liquidity, and other needs, applicable regulatory restrictions (including capital conservation buffer requirements) and availability of funds to FHN
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through a dividend fromFirst Horizon Bank . Additionally, banking regulators generally require insured banks and bank holding companies to pay cash dividends only out of current operating earnings. FHN paid a cash dividend of$0.15 per common share onApril 1, 2022 . FHN paid cash dividends of$1,625 per Series E preferred share and$1,175 per Series F preferred share onApril 11, 2022 and$165 per Series C preferred share and$305 per Series D preferred share onMay 2, 2022 . In addition, inApril 2022 , the Board approved cash dividends per share in the following amounts: Table I.2.22 CASH DIVIDENDS APPROVED BUT NOT PAID Dividend/Share Record Date Payment Date Common Stock $ 0.15 06/10/2022 07/01/2022 Preferred Stock Series B$ 331.25 07/15/2022 08/01/2022 Series C$ 165.00 07/15/2022 08/01/2022 Series E$ 1,625.00 06/24/2022 07/11/2022 Series F$ 1,175.00 06/24/2022 07/11/2022
Off-Balance Sheet Arrangements
In the normal course of business, FHN is a party to a number of activities that contain credit, market and operational risk that are not reflected in whole or in part in the consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments. FHN enters into commitments to extend credit to borrowers, including loan commitments, lines of credit, standby letters of credit, and commercial letters of credit. Many of the commitments are expected to expire unused or be only partially used; therefore, the total amount of commitments does not necessarily represent future cash requirements. Based on its available liquidity and available borrowing capacity, FHN anticipates it will continue to have sufficient funds to meet its current commitments. Repurchase Obligations Prior toSeptember 2008 , legacyFirst Horizon originated loans through its pre-2009 mortgage business, primarily first lien home loans, with the intention of selling them. As discussed in Note 10 - Contingencies and Other Disclosures, FHN's principal remaining exposures for those activities relate to (i) indemnification claims by underwriters, loan purchasers, and other parties which assert that FHN-originated loans caused or contributed to losses which FHN is legally obliged to indemnify, and (ii) indemnification or other claims related to FHN's servicing of pre-2009 mortgage loans. FHN's approach for determining the adequacy of the repurchase and foreclosure reserve has evolved, sometimes substantially, based on changes in information available. Repurchase/make-whole rates vary based on purchaser, vintage, and claim type. For those loans repurchased or covered by a make-whole payment, cumulative average loss severities range between 50 and 60 percent of the UPB.
Repurchase Accrual Approach
In determining potential loss content, claims are analyzed by purchaser, vintage, and claim type. FHN considers various inputs including claim rate estimates, historical average repurchase and loss severity rates, mortgage insurance cancellations, and mortgage insurance curtailment requests. Inputs are applied to claims in the
active pipeline, as well as to historical average inflows to estimate loss content related to potential future inflows. Management also evaluates the nature of claims from purchasers and/or servicers of loans sold to determine if qualitative adjustments are appropriate.
Repurchase and Foreclosure Liability
FHN's repurchase and foreclosure liability, primarily related to its pre-2009
mortgage business, is comprised of accruals to cover estimated loss content in
the active pipeline (consisting of mortgage loan repurchase, make-whole,
foreclosure/servicing demands and certain related exposures), estimated future
inflows, and estimated loss content related to certain known claims not
currently included in the active pipeline. The liability contemplates
repurchase/make-whole and damages obligations and
estimates for probable incurred losses associated with loan populations excluded
from the settlements with the GSEs, as well as other whole loans sold, mortgage
insurance cancellation rescissions, and loans included in bulk servicing sales
effected prior to the settlements with the GSEs. FHN compares the estimated
probable incurred losses determined under the applicable loss estimation
approaches for the respective periods with current
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reserve levels. Changes in the estimated required liability levels are recorded as necessary through the repurchase
and foreclosure provision. The repurchase and foreclosure liability was
Market Uncertainties and Prospective Trends
FHN's future results could be affected both positively and negatively by several known trends. Key among those are changes in theU.S. and global economy and outlook, government actions affecting interest rates, government actions intended to stimulate the economy, and government actions and proposals which could have negative impacts on the economy at large or on certain businesses. Additional risks relate to how the COVID-19 pandemic continues to affect FHN's clients, political uncertainty, changes in federal policies (including those publicly discussed, formally proposed, or recently implemented) and the potential impacts of those changes on our businesses and clients, and whether FHN's strategic initiatives will succeed.
Inflation, Recession, and Federal Reserve Policy
InMarch 2020 , in response to the economic downturn associated with the COVID-19 pandemic along with societal and government reactions to it, theFederal Reserve "eased" by lowering short-term interest rates and starting an asset purchase program intended to lower longer-term interest rates and foster access to credit. The effective yields of 10-year and 30-yearU.S. Treasury securities achieved record low rates. These changes in interest rates and the volatility in the market negatively impacted FHN's net interest margin. Amortization of net processing fees related to government relief programs associated with the COVID-19 pandemic, including the Paycheck Protection Program, offset a portion of the net interest margin decline. During 2021, easing policy continued. Interest rates fluctuated but remained very low, continuing to adversely impact FHN's net interest margin. Inflation in theU.S. rose significantly during 2021 but was viewed as transitory, driven by temporary supply-chain shortages coupled with strong demand as unemployment fell while government cash transfers to broad sections of the public continued. In 2022 to date, with the economic effects of the pandemic receding and inflation continuing strongly, theFederal Reserve reversed its easing policy by reducing ("tapering") its asset purchases and starting to increase short-term interest rates. TheFederal Reserve's most recent public comments indicate that: asset purchases will stop shortly; theFederal Reserve's holdings of assets will be reduced through attrition; and short-term rates are expected to be raised several more times during 2022. TheFederal Reserve has not indicated that it intends to sell assets to reduce its holdings more quickly, but it could decide to take such action later. In any case, these actions are intended to increase both short- and long-term interest rates quickly. The primary driver of this change in viewpoint is the persistence and strength of inflation in theU.S.
Until first quarter 2022, there had been no reported quarterly contraction in
the
technically would be in recession. The risk of recession, or an actual
recessionary situation, may affect future actions by the
During this still-ongoing transitional period, the yield curve has flattened and modestly inverted at times. For example, overnight rates were higher than one- and two-month rates. Unusual yield curve effects, including inversion, may continue. A traditional measure of inversion-when the two-year rate is higher than the ten-year rate for a sustained period of time-has not yet occurred, though several brief inversions occurred in March and April this year. Traditional yield curve inversion is viewed, with statistical support, as a harbinger of economic recession. As a result of recession risk, coupled with the uncertainties associated with the war in easternEurope , financial markets world-wide have been volatile in 2022 with, in many asset classes and business sectors, generally lower valuations currently than at year-end 2021. FHN cannot predict exactly when or how much short-term rates will be raised, nor how market-driven long-term rates will behave, nor how those actions may affect financial markets, during the remainder of 2022. Though rates have risen this year, they continue to remain low by historical standards. In several respects FHN is likely to benefit from rising rates, as long as the rise in lending rates outpaces the inevitable rise in deposit and other funding rates. One area, however, already has been hurt. The general increase in interest rates in 2022 has pushed home mortgage rates in theU.S. higher. FHN's direct mortgage lending, lending to mortgage companies, and title insurance activities have seen business decline in 2022. Part of that decline likely is seasonal, as first quarter often is weaker than the warmer months in theU.S. , but part likely is driven by higher rates coupled with still-high property valuations in manyU.S. markets. If mortgage rates continue to rise, FHN's revenues and earnings from [[Image Removed: fhn-20220331_g2.jpg]] 93 1Q22
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those areas likely will continue to be muted compared with 2021.
War in
In late February, 2022, the Russian military invadedUkraine . Russian forces occupied Ukrainian territory and cities, some of which have since been liberated by Ukrainian forces. Much ofEurope and the rest of the world, including theU.S. , has imposed economic sanctions onRussia for its attack, its ongoing military campaign resulting in substantial civilian casualties, and the manner in which it has prosecuted the war which, reportedly, has significantly violated several international conventions and treaties.
The war and sanctions resulted in global oil and gas prices rising precipitously in 2022, along with the prices of
several other commodities exported byRussia ,Ukraine , or both, including grains and vegetable oils. These effects likely have contributed significantly to a change in theFederal Reserve's views of inflation in theU.S. , and to fears of a possible economic recession, all discussed in Inflation, Recession, and Federal Reserve Policy immediately above. Also, severalU.S. and European multi-national companies have pulled operations and assets out ofRussia and parts ofUkraine , compounding the economic impact of the war on the global economy.
COVID-19 Pandemic
The COVID-19 pandemic caused extraordinary disruption in 2020 that negatively impacted the economy and business activity, especially lending (other than lending related to home mortgages). During 2021 and thus far in 2022, FHN saw the lending pipeline improve in several areas (unrelated to home mortgages) as COVID-19 restrictions were partially or fully eased in most of FHN's markets. Despite variants of the COVID-19 virus triggering reinstatement of some restrictions in some markets, broadly speaking, FHN expects the impact of COVID-19
restrictions in its markets to continue to diminish over the rest of this year. However, the risk of resurgence remains.
In lateMarch 2022 , the pandemic began a resurgence in parts ofChina , prompting the Chinese government to lock downShanghai, China's most populous city and a major international seaport. The lockdown has not yet significantly impacted the global economy, but soon could if it continues, illustrating how COVID resurgence outside of theU.S. can affect theU.S. and FHN.
LIBOR & Reference Rate Reform
LIBOR
The London Inter-Bank Offered Rate ("LIBOR") for many years was the most widely
used reference rate in the world. A large but declining portion of FHN's
floating rate loans use LIBOR, denominated in U.S. Dollars ("USD"), as the
reference rate to determine the interest rate paid by the client/borrower. In
addition, certain floating-rate securities issued by FHN use USD LIBOR as the
reference rate.
LIBOR is based on a mix of transaction-based data and expert judgment about market conditions. It is published in different tenors, which are time periods such as 1-week, 1-month, 12-month, etc.
LIBOR Discontinuance
About a decade ago, evidence emerged that some members of the panel that set LIBOR may have manipulated the published LIBOR rates rather than using strictly good-faith judgments. Several banks were fined. In 2017, the Chief Executive of theUnited Kingdom Financial Conduct Authority (the "FCA")-the governmental regulator of LIBOR-announced that it intended to halt persuading or compelling banks to submit
rates for the calculation of LIBOR after 2021. In 2021, the
•One week and 2-month USD LIBOR would not be published after
•All other USD LIBOR tenors (e.g., overnight, 1-month, 3-month, 6-month and
12-month tenors) would not be published after
In 2020, the
Alternatives to LIBOR
LIBOR became the market-preferred reference rate because it was perceived by lenders and borrowers as being superior to alternatives in a wide range of circumstances.Now that the origination of LIBOR-indexed
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loans has ended, no single alternative reference rate has replaced LIBOR for USD
transactions. Instead, a number of different reference rates are being used in
different circumstances. These include:
•SOFR. The Alternative Reference Rates Committee ("ARRC") is a group of
private-market and financial regulator participants convened by the Federal
Reserve and the New York Federal Reserve Bank to help ensure a successful
transition from USD LIBOR to a more robust reference rate. The ARRC has
recommended the Secured Overnight Financing Rate ("SOFR") as its preferred
alternative. SOFR resets daily and is based on actual transaction data for the
U.S. Treasury repurchase market. Accordingly, SOFR represents a riskless secured
overnight rate.
•CME Term SOFR. Published by CME Group, Term SOFR is a forward-looking rate, with 1-month, 3-month and 6-month tenors, and is based on SOFR futures contracts. The ARRC has recommended conventions for Term SOFR rates and has recommended CME Group as the administrator for Term SOFR.
•AMERIBOR. The American Interbank Offered Rate ("AMERIBOR") Index is produced by
the American Financial Exchange. AMERIBOR is based on actual transaction data
involving credit decisions by many financial institutions, on an unsecured
basis.
•BSBY. The Bloomberg short-term bank yield index ("BSBY") is a proprietary rate
index calculated and published by
•Prime. Although traditional prime rates (with each bank setting its own) are not likely to regain the prominence they had decades ago whenU.S. banks were much smaller and the industry was more fragmented, for some clients and products banks may increase their usage of prime rates. The alternatives listed above were made available to the majority of FHN's commercial clients starting inNovember 2021 . In accordance with theU.S. regulatory position, FHN ceased entering into new LIBOR based contracts as ofDecember 31, 2021 . Other alternative reference rates are being developed and FHN may consider them at a future time. Each alternative reference rate has advantages and disadvantages compared with other alternatives in various circumstances. Despite being supported by theFederal Reserve's ARRC, SOFR may not gain the level of market acceptance and usage that USD LIBOR enjoyed within theU.S. Key aspects of SOFR that support this view are: (a) SOFR fundamentally is an overnight rate, and so is not easily or reliably translated into typical LIBOR tenors; and (b) SOFR is both secured and riskless, and so does not necessarily track a bank's cost of funds very well. For a
bank, it is critical to avoid significant mismatches over time between its (variable) cost of funds and its (variable) interest income. Term SOFR attempts to address some of these shortcomings, but not all of them.
All of the alternative reference rates selected by FHN to date meet theInternational Organization of Securities Commissions ("IOSCO") Principles for Financial Benchmarks, as affirmed by the rate administrator and/or an independent auditor. While banking regulators have stated that banks are free to choose the index rates they offer clients, some public sector officials have urged caution in using the new credit sensitive alternative reference rates, primarily due to the robustness of underlying data used to derive the rates. More specifically, there is concern of an "inverted pyramid" effect where a large number of financial contracts could be priced using an index derived from a relatively low volume of transactions. In an interagency statement onOctober 20, 2021 ,U.S. banking regulatory agencies noted that "supervised institutions should understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it". IOSCO has also warned of the potential for the "inverted pyramid" problem and will monitor how the IOSCO label is used by administrators. FHN is monitoring the credit sensitive reference rates and regulatory guidance around use of such rates. FHN plans to limit use of credit sensitive rates to commercial loans ( approximately 2% of global USD LIBOR market) and related customer swaps (pending development of derivatives markets for these rates). Additionally, FHN expects that each financial contract will contain fallback language to guide transition from a credit sensitive rate to an alternative should that action be deemed necessary in the future.
FHN's Actions to Date & Transition Plans
Starting in 2019, FHN modernized the fallback language used in its loan documentation to better handle how floating rate loans would be re-set if LIBOR ceased to be published during the loan term.
In the fourth quarter of 2021, FHN ceased using USD LIBOR for new lending and
renegotiated terms with clients whose loans are based on 1-week or 2-month USD
LIBOR, which ceased publication at the end of 2021. Only a small portion of
FHN's clients had such loans.
On the consumer side, FHN began transitioning from LIBOR-based adjustable rate
mortgages ("ARMS") to SOFR-based ARMs in November 2021 , and no longer offers
LIBOR-based ARMs. SOFR has emerged as a market standard for ARMs in the U.S. and
is the conforming convention for Fannie Mae and Freddie Mac.
For all products, FHN developed a go-to-market strategy which included pricing considerations, associate training, and client communications. All required systems, processes, and reporting were updated to accommodate
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents
the transition. FHN continues to monitor developments related to each of the alternative reference rates it currently offers. FHN's plans may change to meet evolving market conditions and preferences. FHN has established a LIBOR Transition Office to assist associates in working with their clients to re-negotiate terms of loan and derivative contracts that extend past theJune 30, 2023 cessation date for the remaining USD LIBOR tenors noted above.
While FHN has exposure to LIBOR in various contracts (e.g. securities,
derivatives), FHN's primary exposure to LIBOR is in floating rate loans to
customers and derivative contracts issued to customers through FHN Financial.
Below is a summary of these exposures as of
Table I.2.23
LIBOR EXPOSURES
Mature after
(Dollars in billions) As of March 31, 2022 June 2023
Commercial loans (a) $ 22 $ 16
Consumer loans (a) 3 3
Customer swaps (b) 10 10
(a) Amounts represent outstanding loan balances as of
FHN is developing a plan to amend existing LIBOR-based derivative instruments.
Financial Accounting Aspects
In 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides several optional expedients and exceptions to ease the potential burden in accounting for reference rate reform. The scope of ASU 2020-04 was expanded in 2021 with ASU 2021-01, "Scope". Refer to the Accounting Changes With Extended Transition Periods section of Note 1 - Basis of Presentation and Accounting Policies for additional information.
In
On
Critical Accounting Policies and Estimates
FHN has made no significant changes in its critical accounting policies and estimates from those disclosed in its 2021 Annual Report on Form 10-K, as amended.
Accounting Changes
Refer to Note 1 - Basis of Presentation and Accounting Policies for a detail of
accounting changes with extended transition periods and accounting changes
issued but not currently effective, which section is incorporated into MD&A by
this reference.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)
Table of Contents Non-GAAP Information Table I.2.24
NON-GAAP TO GAAP RECONCILIATION
Three Months Ended
(Dollars in millions; shares in thousands) March 31, 2022 December 31, 2021 March 31, 2021
Pre-provision Net Revenue (Non-GAAP)
Net interest income (GAAP) $ 479 $ 498 $ 508
Plus: Noninterest income (GAAP) 229 247 298
Total revenues (GAAP) 708 745 806
Less: Noninterest expense (GAAP) 493 528 544
Pre-provision net revenue (Non-GAAP) $ 215 $ 217 $ 262
Average Tangible Common Equity (Non-GAAP)
Average total equity (GAAP) $ 8,618 $ 8,526 $ 8,349
Less: Average noncontrolling interest (a) 295 295 295
Less: Average preferred stock (a) 695 520 470
(A) Total average common equity $ 7,628 $ 7,711 $ 7,584 Less: Average goodwill and other intangible assets (GAAP) (b)
1,802 1,815 1,857
(B) Average tangible common equity (Non-GAAP) $ 5,826 $ 5,896 $ 5,727
Net Income Available to Common Shareholders
(C) Net income available to common shareholders
(annualized) (GAAP) $ 756 $ 868 $ 911
Tangible Common Equity (Non-GAAP)
(D) Total equity (GAAP) $ 8,696 $ 8,494 $ 8,307
Less: Noncontrolling interest (a) 295 295 295
Less: Preferred stock (a) 1,014 520 470
(E) Total common equity $ 7,387 $ 7,679 $ 7,542
Less: Goodwill and other intangible assets (GAAP)
(b) 1,796 1,809 1,850
(F) Tangible common equity (Non-GAAP) 5,591 5,870 5,692
Less: Unrealized gains (losses) on AFS securities, net of tax
(440) (36) 5
(G) Adjusted tangible common equity (Non-GAAP) $ 6,031 $ 5,906 $ 5,687
Tangible Assets (Non-GAAP)
(H) Total assets (GAAP) $ 88,660 $ 89,092 $ 87,513
Less: Goodwill and other intangible assets (GAAP)
(b) 1,796 1,809 1,850
(I) Tangible assets (Non-GAAP) $ 86,864 $ 87,283 $ 85,663
Risk-Weighted Assets
(J) Risk-weighted assets (c) $ 65,042 $ 64,183 $ 62,339
Period-end Shares Outstanding
(K) Period-end shares outstanding 534,587 533,577 552,374
Ratios
(C)/(A) Return on average common equity (GAAP) 9.92 % 11.26 % 12.01 % (C)/(B) Return on average tangible common equity (Non-GAAP) 12.98 14.72 15.90 (D)/(H) Total period-end equity to period-end assets (GAAP) 9.81 9.53 9.49 (F)/(I) Tangible common equity to tangible assets (Non-GAAP) 6.44 6.73 6.64 (G)/(J) Adjusted tangible common equity to risk-weighted assets (Non-GAAP) 9.27 9.20 9.12 (E)/(K) Book value per common share (GAAP)$ 13.82 $ 14.39$ 13.65 (F)/(K) Tangible book value per common share (Non-GAAP)$ 10.46 $ 11.00$ 10.30 Loans and leases excluding PPP loans (Non-GAAP) Commercial loans and leases excluding PPP loans$ 42,643 $ 42,139$ 41,351 PPP loans 642 1,038 5,070 Total commercial loans and leases 43,285 43,177 46,421 Total consumer loans 11,727 11,682 12,179 Total loans and leases$ 55,012 $ 54,859$ 58,600
(a) Included in total equity on the Consolidated Balance Sheets. (b) Includes goodwill and other intangible assets, net of amortization. (c) Defined by and calculated in conformity with bank regulations applicable to FHN.
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