First Horizon Corporation (FHN) — 2Q 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. First Horizon National Corporation reported results amid the COVID-19 pandemic and adopted the CECL expected-credit-loss standard on January 1, 2020.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $511.6 million | $461.6 million | $989.2 million | $897.2 million |
| Net interest income | $305.3 million | $303.6 million | $608.1 million | $598.1 million |
| Provision for loan losses | $110.0 million | $13.0 million | $255.0 million | $22.0 million |
| Net income attributable to common shareholders | $52.3 million | $109.3 million | $64.3 million | $208.4 million |
| Diluted EPS | $0.17 | $0.35 | $0.21 | $0.66 |
- Margins and expenses: Net interest margin was 2.90%, down 44 basis points year over year; lower interest rates and elevated excess cash weighed on margin. Noninterest income rose 31% in Q2, led by fixed-income revenue, while noninterest expense rose 11% to $332.2 million. The efficiency ratio was 64.74%, versus 65.08% a year earlier.
- Balance sheet at June 30: Assets were $48.6 billion; loans were $32.7 billion, net of unearned income, with $32.2 billion in net loans after the allowance. Deposits totaled $37.8 billion, up from $32.4 billion at year-end 2019. Total equity was $5.2 billion.
- Credit quality: The allowance for loan losses was $537.9 million, or 1.64% of loans, versus $200.3 million and 0.64% at year-end. The increase reflected CECL adoption and a deteriorating economic outlook. Q2 net charge-offs were $16.6 million; nonperforming assets were $245.4 million, compared with $181.9 million at year-end.
- Capital and liquidity: FHN reported Common Equity Tier 1 of 9.25%, Tier 1 capital of 10.69%, total capital of 12.47%, and Tier 1 leverage of 8.55%. Management said the company and bank remained above well-capitalized standards and the capital conservation buffer. Interest-bearing cash was $3.1 billion; the company reported $5.8 billion of available FHLB borrowing capacity.
- Debt and funding: Term borrowings were $2.0 billion, compared with $791 million at year-end. In Q2, FHN issued $800 million of senior notes; the bank issued $450 million of subordinated notes. FHN also issued $150 million of Series E preferred stock.
- Cash flows, six months: Operating activities used $503.0 million; investing activities used $5.23 billion; financing activities provided $5.48 billion. Cash and cash equivalents ended at $1.02 billion. Deposit inflows and debt and preferred issuances funded much of the investing outflow.
Changes, outlook, and risks
- Revenue increased, but earnings fell sharply as loan-loss provision expense surged. Management attributed the reserve build primarily to COVID-19-related deterioration in economic forecasts. The CECL adoption reduced opening retained earnings by $96.1 million, net of tax.
- Fixed-income results benefited from low rates, market volatility, and customer liquidity; Q2 fixed-income noninterest income was $112.4 million, versus $66.4 million. Pandemic-related fee pressure included lower transaction activity and waived fees.
- FHN had originated 15,512 PPP loans totaling $2.1 billion through June 30 and anticipated approximately $60 million in net lender fees. It estimated substantially all eligible PPP prepayments would occur by Q2 2021. PPP volume continued in Q3 at a lower level.
- As of June 30, borrowers had received loan payment deferrals on approximately $3.7 billion of loans. Management cautioned that relief and deferral programs could delay the visibility of credit deterioration; future charge-offs and reserve needs could rise if economic disruption persisted.
- Management’s CECL estimate relied on a baseline forecast that assumed no second COVID-19 wave and a relatively quick recovery. The filing emphasizes that reserve estimates are sensitive to economic assumptions and that actual conditions may differ.
- Post-quarter transactions: The merger with IBERIABANK closed July 1, 2020. FHN issued approximately 242 million common shares and preferred stock, acquired about $34.7 billion of assets, and assumed about $28.3 billion of deposits. Fair-value work was incomplete; management expected a purchase-accounting gain of approximately $500 million and said the separate credit-loss assessment would cause a substantial Q3 charge. On July 17, the bank acquired 30 branches, assumed about $2.2 billion of deposits, and purchased about $423.7 million of loans.
- Other risks include concentration in financial services-related C&I lending (31% of that portfolio), exposure to CRE hospitality and retail, LIBOR transition uncertainty, and legacy mortgage repurchase, servicing, and indemnification claims. The company reported $12.9 million accrued for mortgage repurchase and foreclosure exposures; it could not estimate a range of reasonably possible losses for certain other matters.
- No earnings guidance was provided in the supplied filing text. Management noted that future margins depend on rates, loan growth, PPP fees, trading inventory, credit spreads, and loans moving to nonaccrual status. It also expected capital ratios to remain above well-capitalized standards plus the required buffer during 2020.
Important facts for investors to verify
- Whether subsequent credit performance, deferrals, and charge-offs support the Q2 CECL reserve assumptions and management’s forecast.
- The final IBERIABANK purchase accounting, actual Q3 credit-loss charge, integration costs, and realization of the expected merger benefits.
- Whether deposit growth and excess cash persist, and how funding mix, lower rates, and PPP fee recognition affect net interest margin.
- Changes in nonperforming loans, criticized or potential problem assets, and exposures to financial services, hospitality, retail, and other stressed industries.
- Capital and liquidity after the merger, including regulatory ratios, deposit and borrowing capacity, and the sustainability of dividends.