First Horizon Corporation (FHN) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial amounts are in millions of dollars unless noted. FHN is a financial holding company serving primarily the southern U.S.; its businesses include regional and specialty banking, mortgage lending, fixed income, and wealth services. Results reflect the July 2020 merger with IBERIABANK (IBKC), which affects comparisons with 2020.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $492 | $532 | $1,496 | $1,140 |
| Provision for credit losses | Benefit of $85 | Expense of $227 | Benefit of $245 | Expense of $502 |
| Noninterest income | $247 | $823 | $829 | $1,204 |
| Noninterest expense | $526 | $587 | $1,567 | $1,210 |
| Net income | $235 | $539 | $781 | $612 |
| Net income available to common shareholders | $224 | $523 | $743 | $588 |
| Diluted EPS | $0.41 | $0.95 | $1.34 | $1.50 |
| Net interest margin | 2.40% | 2.84% | 2.50% | 2.93% |
Q3 total revenue, defined as net interest income plus noninterest income, was $739 million; pretax income was $298 million and income tax expense was $63 million. The effective tax rate was 21.1%, versus 0.4% in Q3 2020. Pre-provision net revenue, a non-GAAP measure, was $213 million versus $768 million; the prior-year figure included the IBKC merger purchase accounting gain.
For the nine-month period, total revenue was $2,325 million, pretax income $1,003 million, and income tax expense $222 million. The effective tax rate was 22.1%, compared with 3.1% in 2020. Management attributes the unusually low prior-year rate partly to the non-taxable merger accounting gain.
Balance sheet, liquidity and capital
- At September 30, 2021, total assets were $88.5 billion, up from $84.2 billion at December 31, 2020. Deposits were $74.3 billion, up 6%; noninterest-bearing deposits rose 23% to $27.3 billion.
- Loans and leases totaled $55.4 billion, down 5% from year-end, primarily reflecting a $2.0 billion decline in PPP loans. Excluding PPP loans, commercial loans and leases increased $713 million year-to-date; management cited $447 million growth in C&I loans excluding PPP.
- Short-term borrowings were $2.2 billion and term borrowings $1.6 billion. Cash and cash equivalents were $1.6 billion at period-end. Available FHLB borrowing capacity was $14.2 billion.
- For the first nine months, operating cash flow was $568 million, investing cash flow was negative $4.5 billion, and financing cash flow was positive $3.8 billion. Cash and cash equivalents decreased $90 million.
- FHN’s CET1 ratio was 10.09%, Tier 1 ratio 11.24%, and total risk-based capital ratio 12.64%; the company reported that FHN and the bank met well-capitalized requirements and the capital conservation buffer. Tangible common equity to tangible assets was 6.80% (non-GAAP).
- Common dividends declared were $0.15 per share for Q3. The company repurchased $272 million of common stock during the first nine months.
Changes, outlook and management commentary
- Compared with Q3 2020, net interest income fell $40 million, as lower rates and spreads and lower average loan balances outweighed lower deposit costs. Net interest margin declined 44 basis points year over year; management also cited excess cash and tighter loan spreads.
- The $85 million Q3 credit-loss provision benefit reflected improved economic forecasts and positive credit-grade migration. The allowance for loan and lease losses fell to $734 million from $963 million at year-end; nonperforming assets declined to $361 million from $406 million.
- Q3 noninterest income was sharply lower year over year, chiefly because Q3 2020 included a $532 million IBKC purchase accounting gain. Q3 2021 also included a $23 million loss on extinguishment of legacy IBKC trust preferred securities.
- FHN postponed the IBKC operating-system conversion and rebranding, originally planned for October 2021, to Q1 2022 following Hurricane Ida. It now expects to reach $200 million of annualized pretax merger cost savings by Q4 2022. Merger and integration expenses were $46 million in Q3 and $147 million year-to-date.
- Management reported accelerated branch optimization: 52 centers closed in July 2021 and 10 in October; 10 additional planned closures shifted to Q1 2022. It cited digital adoption and pandemic-related changes in customer behavior.
- No specific earnings or revenue guidance was provided. Management described improved lending pipelines in some markets but said COVID-19 effects, low rates, and government assistance impacts could continue to affect results. Its static-balance-sheet sensitivity model estimated higher 12-month net interest income under rising-rate shocks: +3.7% for +25 basis points and +15.8% for +100 basis points; modeled declines were 1.8% and 2.4% for -25 and -50 basis points, respectively. These are scenarios, not forecasts.
Risks, contingencies and unusual items
- Key disclosed risks include COVID-19 and economic uncertainty, interest-rate and yield-curve changes, real estate values, borrower credit quality, merger integration and savings execution, competition, regulation, and operational or cyber risks.
- Loans to mortgage companies and finance and insurance borrowers represented 26% of the C&I portfolio, creating exposure to financial-services industry conditions. The portfolio also has regional and real-estate concentrations.
- FHN cited LIBOR transition uncertainty: it planned to stop using USD LIBOR for new lending in Q4 2021 and to offer alternatives, including SOFR and other reference rates. The company noted uncertainty about which alternatives clients will adopt and potential implementation and basis-risk challenges.
- At September 30, aggregate liabilities for material litigation contingencies were $1 million; estimated reasonably possible losses above recorded liabilities ranged from zero to $6 million. The $16 million pre-2009 mortgage repurchase and foreclosure liability was unchanged from year-end. Some legacy mortgage indemnification claims could not be reasonably estimated.
- Other notable items included $33 million of fixed-asset impairments year-to-date, primarily associated with integration and branch optimization, and redemption of $80 million of legacy IBKC junior subordinated debt in Q3. The company expected an additional $3 million debt-extinguishment loss on a further redemption in Q4 2021.
Investor verification priorities
- Review the reconciliation and recurrence of the $532 million prior-year merger accounting gain, current-period merger costs, and debt-extinguishment charges when assessing comparable earnings.
- Track the planned Q1 2022 systems conversion, Q4 2022 cost-savings target, and integration-related spending and impairments.
- Monitor deposit mix and pricing, excess cash deployment, loan growth excluding PPP, and net interest margin as rates and spreads change.
- Assess credit trends, particularly financial-services concentrations, commercial real estate, deferrals, nonperforming assets, and the adequacy of the allowance as reserve releases moderate.
- Verify capital and liquidity capacity alongside share repurchases, dividends, and the effect of planned debt redemptions; review the assumptions behind interest-rate sensitivity scenarios.
- Follow LIBOR transition execution and developments in legacy mortgage claims, for which some potential exposures remain difficult to estimate.