First Horizon Corporation (FHN) — Q2 2021 Form 10-Q
Business context and reporting period
FHN is a regional financial holding company serving primarily the southern United States. This unaudited report covers the quarter and six months ended June 30, 2021. Comparisons with 2020 are not fully like-for-like: FHN’s July 2020 IBERIABANK merger and acquisition of Truist branches added substantial assets and operations to reported results.
Financial performance and condition
- Q2 earnings: Net income was $311 million; net income available to common shareholders was $295 million, or $0.53 diluted EPS, versus $57 million, $52 million, and $0.17, respectively, in Q2 2020. Pretax income was $399 million.
- Revenue and margin: Net interest income was $497 million, up 63% year over year, while net interest margin was 2.47%, down 43 basis points year over year and 16 basis points sequentially. Noninterest income was $285 million, up 38% year over year; noninterest expense was $498 million, up 56%. Pre-provision net revenue, a non-GAAP measure, was $284 million.
- Credit provision and quality: The provision for credit losses was a benefit of $115 million, compared with expense of $121 million in Q2 2020. The allowance for loan and lease losses was $815 million, or 1.44% of loans, versus $963 million and 1.65% at year-end 2020. Net recoveries were $10 million in Q2; nonperforming assets were $362 million, down from $406 million at year-end.
- Six-month results: Net income was $546 million and diluted EPS was $0.93, versus $73 million and $0.21 in the first half of 2020. Net interest income was $1.004 billion; the credit-loss provision was a $160 million benefit.
- Balance sheet and funding: At June 30, total assets were $87.9 billion, loans and leases $56.7 billion, and deposits $73.3 billion. Deposits rose 5% from year-end, led by noninterest-bearing balances; loans declined 3%. Cash and cash equivalents were $1.925 billion at period-end. Total short-term borrowings were $2.246 billion and term borrowings $1.672 billion.
- Cash flows: For the first half, operating cash flow was $1.015 billion, investing cash flow was negative $3.946 billion, and financing cash flow was $3.208 billion. Cash and cash equivalents increased $277 million.
- Capital and shareholder returns: FHN’s CET1, Tier 1, and total risk-based capital ratios were 10.28%, 11.44%, and 13.14%, respectively, all higher than at year-end 2020. Tangible common equity to tangible assets was 6.87% (non-GAAP). FHN declared a $0.15 common dividend per share and repurchased $126 million of common stock in the first half.
Material changes, outlook, risks, and unusual items
- Year-over-year revenue and earnings growth reflects the acquired IBKC and Truist operations as well as lower credit-loss provisioning. Higher operating expenses likewise reflect the expanded company. The $115 million Q2 provision benefit reflected a better macroeconomic outlook, positive credit-grade migration, and lower loan balances.
- Management cited lower loan balances, lower spreads, and excess cash as pressures on net interest income and margin. Its static-balance-sheet sensitivity analysis estimated net interest income would increase 2.2% with a 25-basis-point rate rise and 17.8% with a 200-basis-point rise over 12 months; a 50-basis-point decline was estimated to reduce it 1.9%. These are scenario estimates, not guidance.
- Management reported that lending pipelines began improving in several areas late in Q2 and expected COVID-19 restrictions’ effects to diminish, while noting continued uncertainty from the pandemic and variants, borrower credit performance, economic conditions, and interest rates. FHN planned to close 52 banking centers in July 2021 and another 20 in Q4, citing digital adoption and merger integration.
- Merger and acquisition-related expense was $32 million in Q2 and $102 million in the first half, including integration and asset-impairment costs. Q2 also included $11 million of securities gains, primarily related to a legacy IBKC investment.
- FHN reported a limited April 2021 account-security incident: an unauthorized party obtained less than $1 million, which was reimbursed to clients; the company said the incident had no material adverse effect.
- Legal contingencies included $1 million of established liabilities and an estimated $0–$6 million of reasonably possible losses above established liabilities for material matters. Certain legacy mortgage indemnification claims have no estimable loss range; the separate repurchase and foreclosure liability was $16 million.
- FHN highlighted the transition away from USD LIBOR, including planned cessation of new LIBOR lending late in 2021 and uncertainty over which alternative rates clients would adopt. Series A preferred stock was redeemed July 10, 2021; the NYSE subsequently suspended and delisted its depositary shares.
Most important facts for investors to verify
- How much of earnings growth and balance-sheet expansion is attributable to the IBKC merger and branch acquisition, versus underlying organic performance.
- Whether net interest margin stabilizes as excess cash, loan demand, deposit costs, and market rates change.
- Whether credit quality and the allowance remain adequate as COVID-related borrower support and deferrals unwind; note that qualifying COVID deferrals may not appear as past due.
- Progress and costs of merger integration and planned banking-center closures, including whether expected efficiencies materialize.
- Capital, liquidity, and shareholder distributions relative to regulatory requirements and the company’s evolving funding needs.
- Developments in legacy mortgage claims, LIBOR transition execution, and cyber controls.