First Horizon Corporation (FHN) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are primarily with Q1 2019 for earnings and December 31, 2019 for balance-sheet figures. The filing covers a regional banking, wealth-management and fixed-income business operating principally in the southeastern United States.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $477.6 million | Up 10% from $435.6 million in Q1 2019 |
| Net interest income | $302.8 million | Up from $294.5 million |
| Net interest margin | 3.16% | Down 15 basis points from 3.31% |
| Provision for loan losses | $145.0 million | Up from $9.0 million |
| Noninterest income | $174.8 million | Up from $141.0 million |
| Noninterest expense | $311.3 million | Up from $296.1 million |
| Net income / earnings available to common shareholders | $16.5 million / $12.1 million; diluted EPS $0.04 | Compared with $103.4 million / $99.0 million; diluted EPS $0.31 |
| Cash flows | Operating: $(1.4) billion; investing: $(2.5) billion; financing: $3.7 billion | Cash and cash equivalents ended at $1.13 billion, down $136.8 million during the quarter |
| Total assets / loans | $47.2 billion / $33.4 billion | Assets up 9% and loans up 7% from year-end 2019 |
| Deposits / shareholders’ equity | $34.4 billion / $4.76 billion | Deposits up 6%; equity down modestly from year-end |
| Allowance for loan losses | $444.5 million, or 1.33% of loans | $200.3 million, or 0.64%, at year-end 2019 |
Higher fixed-income revenue—$95.6 million versus $53.7 million—helped lift revenue, while negative equity-market valuations reduced deferred-compensation income. The sharp rise in credit provisions and reserves drove most of the earnings decline. Net charge-offs were $7.2 million; nonperforming loans were $189.8 million, and nonperforming assets were $207.3 million.
At March 31, short-term borrowings totaled approximately $5.8 billion and term borrowings were $792.8 million. FHN reported regulatory capital ratios of 8.54% CET1, 9.52% Tier 1, 10.78% total capital and 9.00% leverage. Management said FHN remained well-capitalized; the bank subsidiary’s total capital ratio was slightly below its capital-conservation-buffer requirement. The bank had $2.1 billion of additional FHLB borrowing capacity at quarter-end.
Material changes and notable items
- FHN adopted CECL on January 1, 2020. Adoption increased the loan allowance by $106.4 million and the unfunded-commitment reserve by $24.0 million, reducing retained earnings by $96.1 million after tax. The quarter-end reserve for unfunded commitments was $39.3 million.
- COVID-19-driven economic deterioration led to higher expected losses and a $145.0 million loan-loss provision. Management’s CECL baseline forecast assumed a recession beginning in the first half of 2020, unemployment peaking at 9% in Q2, and a return to full employment by 2023; these were model assumptions, not guidance.
- Loans increased notably, including mortgage-company lending and commercial line draws. Mortgage-company loans reached $5.7 billion, 26% of C&I loans; management highlighted that 39% of the C&I portfolio was exposed to finance and insurance or mortgage-company activity.
- Period-end deposits rose amid March market volatility and customers shifting funds to cash. Short-term borrowings also increased to fund lending and balance-sheet needs.
- Q1 2020 other comprehensive income was $103.4 million, largely reflecting unrealized gains on available-for-sale securities; accumulated other comprehensive loss narrowed to $136.2 million.
Outlook, management commentary and risks
- Management said COVID-19 effects on credit quality, loan demand, fee income, funding and operations remained uncertain. It warned that deferrals and government relief programs could delay or mask emerging credit deterioration, and that charge-offs could rise if disruption persisted.
- Management expected interest-rate changes and market volatility to pressure net interest margin; PPP fee amortization and wider spreads on new loans could partly offset pressure. No specific full-year earnings or revenue guidance was provided. The filing’s modeled rate scenarios showed NII sensitivity, but management cautioned that these were hypothetical.
- Through April 30, FHN had processed $3.2 billion of customer loan payment deferrals. It originated 6,761 Paycheck Protection Program loans totaling $1.7 billion in April and anticipated $45–$50 million of net origination fees, with substantially all eligible fees expected to be recognized in 2020 as loans were forgiven or prepaid.
- The pending merger with IBERIABANK was expected to close in Q2 2020, subject to regulatory approval and customary conditions. FHN warned that purchase accounting and a separate expected-credit-loss assessment for acquired loans could create a substantial charge to income in the closing quarter. The planned purchase of 30 SunTrust branches was expected to close in Q3 2020.
- In April, First Horizon Bank issued $450 million of 5.750% subordinated notes due 2030, generating approximately $446 million of net proceeds. FHN paid a $0.15-per-share common dividend in April and approved another $0.15 dividend for July. The bank’s dividend capacity for Q2 was limited to $70.9 million without prior regulatory approval.
- Contingencies include legacy pre-2009 mortgage repurchase, servicing and indemnification claims, and a new putative shareholder class action related to the 2017 Capital Bank Financial merger. Established liabilities for identified material litigation matters totaled $0.6 million; management could not estimate a material reasonably possible loss range for certain matters. The separate mortgage repurchase and foreclosure liability was $13.5 million.
- Other key risks include LIBOR transition, interest-rate and market risk, commercial real-estate exposure to hospitality and retail conditions, and possible disruption or added costs to the pending merger from COVID-19. Trading VaR rose during the quarter amid extreme volatility.
Important facts for investors to verify
- How subsequent quarters’ credit provisions, deferrals, delinquencies and charge-offs compare with the Q1 CECL assumptions and reserves.
- Whether deposits remain stable and short-term borrowing needs, liquidity and capital ratios evolve as expected; also monitor the bank subsidiary’s dividend restrictions.
- The realized impact of low rates, deposit pricing, PPP fee recognition and loan growth on net interest margin and earnings.
- The status, final terms and purchase-accounting credit impact of the IBERIABANK merger, plus completion and economics of the branch acquisition.
- Developments in legacy mortgage claims, the shareholder lawsuit and other contingencies, for which losses may exceed recorded liabilities.