Weekly Real Estate News
Summary
First Horizon recognized a $473 million charge on an agreed $4.5 billion sale of lower-yielding residential mortgages; settlement is expected in the fourth quarter. Its third-quarter common-shareholder loss was $94 million, while adjusted earnings were 53 cents per share.
First Horizon Corporation has agreed to sell approximately $4.5 billion of lower-yielding residential mortgages, accepting a $473 million accounting loss on the pending transaction as it shifts capital away from loans the bank says offer limited opportunities for broader customer relationships.
The Memphis-based lender disclosed the deal alongside its third-quarter earnings release Thursday. First Horizon reported a $94 million loss available to common shareholders, or 20 cents per diluted share, compared with $254 million in profit a year earlier. Without the quarter’s separately identified notable items, the bank reported adjusted earnings of 53 cents per share.
The sale agreement was signed in early October after the bank began evaluating the portfolio during the third quarter. Settlement is expected early in the fourth quarter. The bank has not said the sale has closed, and its public materials do not identify the buyer.
The loss is substantial, but management is betting that removing mortgages with relatively low yields will improve earnings and free capacity for commercial lending. In its investor presentation, First Horizon projected about $45 million in incremental annual after-tax earnings in 2027, equivalent to roughly 4% earnings accretion against the consensus forecast it used as of October 2. It also forecast an improvement of approximately 150 basis points in return on tangible common equity. Those figures are projections, not gains already realized.
Why the bank is selling at a loss
The mortgages were part of the bank’s consumer real estate portfolio. First Horizon describes them as its lower-yielding residential loans with limited relationship value. Keeping such loans on a balance sheet can tie up funding and capital for years, particularly when their interest rates are below the returns available on new lending. Selling them may crystallize a loss today while reducing the bank’s exposure to longer-duration assets.
First Horizon recognized the $473 million charge in noninterest income when it reclassified the loans as held for sale. The accounting change also allowed a $45 million reversal of reserves associated with the portfolio. Together with $3 million in restructuring costs and a $5 million Visa derivative valuation expense, notable items reduced third-quarter pretax results by $436 million, or $347 million after tax.
The distinction matters. The reported $94 million common-shareholder loss does not mean the bank’s remaining operations lost the same amount. Excluding notable items, adjusted earnings available to common shareholders were $253 million. Those adjusted results are non-GAAP and should be read alongside the reported figures, rather than substituted for them.
First Horizon said the mortgage portfolio action lowered its common equity tier 1 capital ratio to an estimated 10.3%, from 10.5% in the previous quarter. Tangible book value per common share fell to $13.84 from $14.53. The company expects the sale to improve its loan-to-deposit ratio by approximately 700 basis points to around 88%, providing greater flexibility to fund other loans.
The bank’s reported period-end loan-to-deposit ratio was already 88.34% at September 30, compared with 95.97% in June, because the mortgages had been moved out of the loans-held-for-investment category before the cash sale settles. The lower reported ratio should therefore not be mistaken for evidence that settlement had already occurred.
What remains in First Horizon’s loan book
Period-end loans and leases were $59.8 billion, down $5.5 billion from the previous quarter. First Horizon attributed most of that change to the mortgage reclassification. Consumer real estate balances fell by $4.6 billion, while loans to mortgage companies decreased by $891 million. Commercial real estate balances rose $97 million to $13.7 billion.
Adjusted net interest income on a fully taxable-equivalent basis rose $7 million to $686 million, while net interest margin edged down one basis point to 3.48%. The bank attributed the margin pressure to higher deposit costs, partly offset by improved loan yields. Average client deposits increased $1.3 billion during the quarter.
Those figures help explain management’s priorities. The sale is part of a broader effort to favor lending relationships that generate additional deposits, fees or other business, rather than retain a large pool of low-coupon consumer mortgages. First Horizon says 62% of its remaining loans, excluding those held for sale, are indexed to short-term rates, a mix that can respond more quickly to changes in market rates.
The restructuring also carries trade-offs. Removing the mortgages reduces the bank’s existing interest-earning assets, and replacing that income depends on finding profitable new loans or deploying proceeds effectively. Management’s estimates assume future conditions that may differ from the interest-rate environment, demand and credit performance that actually develop.
A balance-sheet decision with implications beyond one bank
For mortgage bankers, the transaction is a reminder that the economics of a loan can change considerably after origination. A residential mortgage originated when rates were lower may remain sound from a credit perspective but offer an unattractive return compared with current funding costs and new lending opportunities. A portfolio sale can resolve that mismatch at the expense of an immediate accounting hit.
First Horizon has not publicly specified the loans’ weighted-average coupon, vintage distribution, credit characteristics, geographic concentration, servicing arrangements or the purchaser’s identity in Thursday’s materials. Without those details, it is not possible to determine precisely how the price compares with similar mortgage assets or whether another lender could expect comparable sale economics.
Chairman, President and Chief Executive Bryan Jordan said the bank is focused on deploying capital where it best supports long-term value creation. The company also signaled that the restructuring could support future share repurchases, though the timing and scale of any repurchases remain management decisions subject to capital needs and market conditions.
The next milestone is settlement of the $4.5 billion transaction. Investors will then be able to judge whether the bank’s lower funding needs, redeployment of capital and mortgage-business changes deliver the improvement management has forecast. Until then, the sale remains an agreed transaction with its financial impact recognized, rather than a completed transfer.
Featured image: Aerial view of residential homes. Photograph by Tom Rumble/Unsplash; illustrative, not properties identified in First Horizon’s mortgage portfolio.
