First Horizon Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. First Horizon is a Memphis-based financial holding company with regional banking, specialty banking and capital-markets businesses. The July 2020 IBERIABANK merger materially changed the company’s scale; Q1 2020 comparisons reflect legacy First Horizon only and are not directly comparable.
Financial performance and position
| Metric | Q1 2021 | Comparison |
|---|---|---|
| Net interest income | $508 million | $303 million Q1 2020; $522 million Q4 2020 |
| Net interest margin | 2.63% | 3.16% Q1 2020; 2.71% Q4 2020 |
| Provision for credit losses | Benefit of $45 million | Expense of $154 million Q1 2020; expense of $1 million Q4 2020 |
| Noninterest income | $298 million | $174 million Q1 2020; $288 million Q4 2020 |
| Noninterest expense | $544 million | $302 million Q1 2020; $508 million Q4 2020 |
| Net income available to common shareholders | $225 million; diluted EPS $0.40 | $12 million and $0.04 Q1 2020; $234 million and $0.42 Q4 2020 |
| Pre-provision net revenue | $262 million | $176 million Q1 2020; $302 million Q4 2020 (non-GAAP) |
| Return on average assets | 1.12% | 0.15% Q1 2020; 1.16% Q4 2020 |
Year-over-year earnings and revenue increases largely reflect the IBERIABANK merger and acquired branches, as well as lower credit-loss provisioning. Fixed-income revenue was strong; mortgage banking and title income also rose substantially year over year with the acquired business. The provision benefit reflected an improved macroeconomic outlook. Quarter over quarter, lower net interest income and higher integration costs contributed to lower common earnings.
Q1 2021 operating cash flow was $1.064 billion, investing cash flow was negative $4.072 billion, and financing cash flow was $3.049 billion. Cash and cash equivalents ended the quarter at $1.689 billion, up $41 million during the quarter.
At March 31, total assets were $87.5 billion, loans and leases $58.6 billion, deposits $73.2 billion, and total equity $8.3 billion. Deposits rose 5% from year-end, led by noninterest-bearing balances; loans rose 1%, with commercial growth, including PPP lending, offset partly by consumer declines. Short-term borrowings were $2.2 billion and term borrowings $1.7 billion. The company reported a 9.97% common equity Tier 1 ratio, 11.05% Tier 1 ratio and 12.84% total risk-based capital ratio; it stated that it met well-capitalized standards and the capital conservation buffer. Available FHLB borrowing capacity was $13.9 billion.
Material changes, outlook and risks
- Merger integration: Q1 merger and integration expense was $70 million, versus $6 million a year earlier. Noninterest expense included $33 million of fixed-asset impairments related to integration, office-space reductions and branch optimization. The company expected to complete provisional IBERIABANK purchase accounting by July 1, 2021.
- Credit quality: The allowance for loan and lease losses declined to $914 million from $963 million at year-end; allowance to loans was 1.56%. Net charge-offs were $8 million, or 0.06% annualized. Nonperforming assets were $410 million, 0.69% of loans plus foreclosed real estate. Potential problem assets increased to $738 million from $718 million.
- COVID-19 and portfolio exposures: PPP loans totaled $5.1 billion across 44,717 loans and were fully SBA-guaranteed; estimated remaining lender fees were approximately $81 million. COVID-19-related deferrals outstanding were $385 million. Mortgage-company and finance/insurance lending together represented 25% of the C&I portfolio; hospitality and retail real estate remained exposed to pandemic effects. Management expected pandemic effects to diminish as vaccination and reopening advanced, but noted risks from variants and ongoing service-sector weakness.
- Rates and LIBOR: Management’s static-balance-sheet model estimated favorable 12-month net interest income sensitivity of 2.5%, 4.7%, 9.3% and 16.0% for shocks of +25, +50, +100 and +200 basis points, respectively; declines of 25 and 50 basis points were estimated to reduce NII by 1.7% and 2.0%. These are scenario estimates, not guidance. The company was preparing for the end of U.S. dollar LIBOR tenors and stated that transition impacts could include higher costs and hedge-accounting changes.
- Capital returns and subsequent event: The board authorized a $500 million common-share repurchase program in January; $59 million had been repurchased by quarter-end. The common dividend declared was $0.15 per share. On May 3, 2021, after quarter-end, the company issued $150 million of Series F preferred stock for net proceeds of approximately $146 million.
- Contingencies and security incident: The company had $1 million of aggregate liabilities for material litigation loss contingencies and estimated reasonably possible losses above established liabilities at zero to less than $1 million, while noting that some legacy mortgage claims could not be estimated. A separate $16 million repurchase and foreclosure liability related primarily to pre-2009 mortgage activity remained unchanged. In April, an incident affected fewer than 200 online accounts and involved less than $1 million of fraud; the company said affected clients were reimbursed and it did not expect a material adverse effect.
No formal full-year earnings or financial guidance is provided in the supplied filing text. Management cautioned that operating results for the interim period are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm the merger-adjusted basis of comparisons and the progress, cost and expected benefits of IBERIABANK integration.
- Assess whether the credit-loss benefit and lower allowance remain appropriate as deferred loans resume payments and pandemic-related support changes.
- Track commercial real estate, hospitality, retail, mortgage-company and finance/insurance exposures, including potential-problem assets and delinquencies.
- Monitor deposit composition, loan growth, net interest margin and actual performance against the disclosed interest-rate sensitivity scenarios.
- Review capital ratios, repurchases, dividends and the effect of the May 2021 preferred-stock issuance.
- Follow LIBOR transition execution, legacy mortgage claims and remediation or any further consequences of the April cybersecurity incident.