First Horizon Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. First Horizon is a financial holding company headquartered in Memphis, Tennessee, operating primarily through First Horizon Bank. 2021 was the first full year reflecting the July 2020 merger with IBERIABANK Corporation (IBKC); 2020 includes only post-merger results from July onward, limiting year-over-year comparability.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $3.070 billion | $3.154 billion | Down $84 million; 2020 included a $533 million IBKC purchase-accounting gain. |
| Net interest income | $1.994 billion | $1.662 billion | Up $332 million, primarily reflecting the full-year contribution of IBKC. |
| Net interest margin | 2.48% | 2.86% | Down 38 basis points, mainly from lower earning-asset yields and excess cash; lower deposit costs partly offset the decline. |
| Noninterest income | $1.076 billion | $1.492 billion | Down $416 million, largely because of the 2020 purchase-accounting gain; fee income benefited from the full-year merger impact. |
| Provision for credit losses | Benefit of $310 million | Expense of $503 million | Improved with a better macroeconomic outlook, positive credit migration and lower loan balances. |
| Noninterest expense | $2.096 billion | $1.718 billion | Up $378 million, mainly due to the merger; includes $187 million of merger and integration expense. |
| Net income / income available to common shareholders | $1.010 billion / $962 million | $857 million / $822 million | Common diluted EPS was $1.74 versus $1.89; 2020 EPS benefited from the non-taxable merger gain. |
| Cash flows | Operating $741 million; investing $(4.617) billion; financing $4.016 billion | Operating $172 million; investing $(4.967) billion; financing $5.176 billion | Cash and cash equivalents ended 2021 at $1.788 billion. |
Balance sheet and funding: At year-end, total assets were $89.092 billion, total loans and leases were $54.859 billion, net loans were $54.189 billion, and deposits were $74.895 billion. Loans declined 6% year over year, largely due to a $3.0 billion reduction in Paycheck Protection Program (PPP) loans and consumer loan paydowns. Excluding PPP, commercial loan growth was reported. Deposits rose 7%, including a $5.7 billion increase in noninterest-bearing deposits, while time deposits fell $1.6 billion. Estimated uninsured deposits were $39.756 billion.
Short-term borrowings were approximately $2.1 billion on the balance sheet; term borrowings were $1.590 billion, down $80 million. Total liabilities were $80.598 billion and total equity was $8.494 billion. The Bank had $14.5 billion of additional Federal Home Loan Bank borrowing capacity at year-end; the average loans-to-core-deposits ratio was 80%, compared with 99% in 2020.
Credit and capital: Net charge-offs were $2 million, versus $120 million in 2020. Nonperforming assets declined to $285 million from $406 million, and nonperforming loans were 0.50% of loans. The allowance for loan and lease losses was $670 million, or 1.22% of loans, compared with $963 million, or 1.65%, in 2020. The broader allowance for credit losses was $736 million, or 1.34% of loans. Management cautioned that provision expense and charge-offs are expected to exceed unusually low 2021 levels.
At year-end, First Horizon Corporation’s CET1, Tier 1 and total risk-based capital ratios were 9.92%, 11.04% and 12.34%, respectively; the Bank’s were 10.75%, 11.22% and 12.41%. Both were reported above well-capitalized standards and the capital conservation buffer. Common dividends declared were $0.60 per share for 2021. The company repurchased $416 million of common shares.
Material changes and unusual items
- The IBKC merger drove larger average earning assets, loans, deposits and expenses. Main systems conversion was completed in February 2022; the company expected to achieve $200 million of annualized pretax merger cost savings by the fourth quarter of 2022.
- The 2020 comparison included a $533 million non-taxable IBKC purchase-accounting gain. In 2021, merger and integration expense was $187 million, and long-lived asset impairment expense was $34 million, primarily related to integration, office-space reductions and banking-center optimization.
- First Horizon recorded a $26 million loss on redemption of legacy IBKC trust preferred securities. A further $19 million of derivative valuation adjustments related to prior Visa Class B share sales affected 2021 expense.
- Banking-center optimization included 65 closures in 2021 and 10 more in the first quarter of 2022.
Outlook, risks and contingencies
Management identified the timing and extent of interest-rate increases and the yield curve as major 2022 uncertainties. Its year-end static-balance-sheet model estimated higher net interest income under upward rate shocks, but actual results depend on deposit and loan repricing, balance-sheet changes and the yield curve. Rising rates could also reduce fixed-income revenues and mortgage origination, title and mortgage-company lending activity. The company expected fixed-income performance to moderate and mortgage-related revenues to be pressured as rates rose.
PPP loans outstanding were about $1.0 billion at year-end, nearly all expected to be paid in 2022; management noted that program-loan runoff could restrain loan growth. COVID-19 variants, economic conditions, inflation, credit migration, concentrated exposure to financial-services borrowers (26% of C&I loans), and geographic concentration in the Southeast are material risks. The company also highlighted cybersecurity, fraud, competition, integration execution, regulation and funding risks. LIBOR transition remained a significant operational and financial uncertainty: $17 billion of commercial loans, $4 billion of consumer loans and $10 billion of customer swaps were scheduled to mature after June 2023.
Legacy pre-2009 mortgage claims remain possible; the recorded repurchase and foreclosure liability was $17 million. Aggregate liabilities for other litigation loss contingencies were $2 million, with estimable reasonably possible losses above those liabilities reported as zero to less than $1 million; certain older mortgage indemnification claims could not be estimated. Management stated that no pending or known threatened matter met its definition of a material loss contingency at year-end.
Subsequent event: On February 27, 2022, after the reporting period, First Horizon agreed to be acquired by TD. The agreement provides $25.00 cash per common share, subject to shareholder and regulatory approvals and other closing conditions. If the deal had not closed by November 27, 2022, shareholders were to receive an additional amount at an annualized rate of $0.65 per share for the delay. TD also agreed to buy approximately $493.5 million of Series G convertible preferred stock, convertible into up to 4.9% of common shares in specified circumstances. The deal could be delayed, conditioned or terminated; the filing describes a potential termination fee of up to $435.5 million in certain circumstances.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management and the auditor reported effective internal control as of December 31, 2021.
Investor verification priorities
- Track TD merger approvals, closing timing, termination provisions, potential termination fee and Series G conversion terms.
- Verify delivery of the targeted $200 million annualized IBKC cost savings and the remaining integration costs.
- Monitor credit-loss provision, allowance coverage, delinquency trends and the effect of PPP runoff, particularly in mortgage-company and other financial-services exposures.
- Assess net interest margin and deposit pricing as rates and the yield curve change; validate sensitivity assumptions against actual balance-sheet behavior.
- Review uninsured deposit levels, liquidity capacity, capital ratios, share repurchases and dividend capacity.
- Follow LIBOR contract conversions and developments in legacy mortgage, Visa-related and other contingent exposures.