First Horizon Corporation — 2020 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2020, not a standalone fourth quarter. First Horizon is a Memphis-based financial holding company operating primarily through First Horizon Bank, with regional banking, specialty banking and corporate segments. The company completed its merger of equals with IBERIABANK Corporation (IBKC) on July 1, 2020, and acquired 30 Truist branches on July 17. Because IBKC results are included only from the merger date, 2020 results combine two quarters of legacy First Horizon and two quarters of the combined company; comparisons with 2019 are therefore materially affected by acquisition timing.
Financial performance and condition
| Metric | 2020 | 2019 | Context |
|---|---|---|---|
| Total revenue | $3.154 billion | $1.864 billion | Includes a $533 million preliminary IBKC purchase accounting gain. |
| Net interest income | $1.662 billion | $1.210 billion | Increased 37%, primarily with acquired earning assets. |
| Net interest margin | 2.86% | 3.28% | Down 42 basis points amid lower rates. |
| Provision for credit losses | $503 million | $45 million | Reflects CECL adoption, COVID-related economic deterioration and acquired-loan provisions. |
| Noninterest income | $1.492 billion | $654 million | Includes the $533 million purchase accounting gain; fixed income and mortgage/title income also increased. |
| Noninterest expense | $1.718 billion | $1.233 billion | Up 39%, mainly reflecting the merger and branch acquisition. |
| Net income available to common shareholders | $822 million; diluted EPS $1.89 | $435 million; diluted EPS $1.38 | Reported growth includes the unusual merger accounting gain. |
| Operating cash flow | $172 million | $830 million | Investing cash flow was $(4.967) billion; financing cash flow was $5.176 billion. |
| Total assets | $84.209 billion | $43.311 billion | Includes substantial acquired balances. |
| Loans and leases | $58.232 billion gross; $57.269 billion net | $31.061 billion gross | Growth reflects acquisitions and PPP lending. |
| Deposits | $69.982 billion | $32.430 billion | Includes acquired deposits and pandemic-related inflows. |
| Term borrowings | $1.670 billion | $791 million | Short-term borrowings were $2.198 billion at year-end. |
| Capital ratios, First Horizon Corporation | CET1 9.68%; Tier 1 10.74%; total capital 12.57%; leverage 8.24% | CET1 9.20%; Tier 1 10.15%; total capital 11.22%; leverage 9.04% | Management reported compliance with applicable requirements; the Bank was well capitalized. |
Other indicators: return on average assets was 1.33% versus 1.08%; return on average common equity was 13.66% versus 9.60%; and the efficiency ratio was 54.37% versus 66.15%. Net charge-offs were $120 million versus $27 million, and the allowance for loan and lease losses was $963 million, or 1.65% of loans, versus $200 million, or 0.64%.
Liquidity disclosures include $14.7 billion of available FHLB borrowing capacity at year-end and a loans-to-core-deposits ratio of 97%, compared with 98% in 2019. The company reported $1.648 billion of cash and cash equivalents at year-end. Uninsured deposits were $33.057 billion.
Material changes versus the prior comparable period
- The IBKC merger and Truist branch acquisition drove much of the balance-sheet and revenue growth. The IBKC transaction added approximately $33.3 billion of assets and $28.2 billion of deposits at closing; the Truist branches added approximately $2.2 billion of deposits.
- The $533 million preliminary, nontaxable purchase accounting gain and $147 million provision for acquired non-PCD loans together produced a $386 million pretax uplift unrelated to ordinary business operations. The gain contributed to the lower 2020 effective tax rate of 8.2%, versus 22.8% in 2019.
- FHN adopted CECL on January 1, 2020, recording a $107 million increase to the loan allowance and a $24 million increase to the reserve for unfunded commitments, reducing retained earnings by $96 million after tax.
- Net interest income rose with acquired assets, but margin contracted as asset yields fell. Lower deposit costs and PPP-related income partially offset the pressure.
- Fixed income noninterest income increased to $423 million from $279 million, supported by market volatility and client activity. Mortgage banking and title income rose to $129 million from $10 million, including acquired IBKC operations and stronger activity in the low-rate environment.
Outlook, commentary, risks and unusual items
Management expected the overall effect of the pandemic to be less in 2021 than in 2020, but did not provide numerical earnings or revenue guidance in the supplied filing text. It expected IBKC integration to be completed in the second half of 2021 and anticipated further significant integration and optimization expenses. Management identified uncertainty around the pandemic, borrower performance, economic recovery and interest-rate normalization.
- Credit and COVID-19: Payment deferrals and other relief measures may delay or obscure signs of borrower stress. At year-end, $518 million of loans had received payment deferrals. Potential problem assets increased to $718 million from $347 million; nonperforming assets were $406 million, or 0.69% of relevant loans and assets, versus $182 million, or 0.57%.
- Portfolio concentrations: About 26% of C&I loans were to mortgage companies or finance and insurance borrowers. Commercial real estate exposure included hospitality and retail, which management identified as pandemic-sensitive. PPP loans totaled $4.1 billion across 32,510 loans and were fully SBA-guaranteed; FHN expected approximately $37 million of net lender fees on year-end PPP loans.
- Rates and funding: Persistently low rates and a flat yield curve may weigh on margin. The transition away from LIBOR could affect contracts, hedges and funding costs; the filing said the impact was not yet determinable.
- Integration and accounting: Merger-related expenses were $140 million in 2020, and acquisition valuations remained preliminary. Management excluded IBKC from its 2020 internal-control assessment; IBKC represented about 33% of year-end assets and 18% of annual revenue. Management and the auditor otherwise reported effective internal controls, and the auditor issued an unqualified opinion on the consolidated financial statements.
- Contingencies: The legacy pre-2009 mortgage repurchase and foreclosure liability was $16 million, versus $15 million in 2019. Aggregate liabilities for disclosed material litigation matters were $1 million; estimated reasonably possible losses above established liabilities were zero to less than $1 million for those matters, while certain legacy mortgage claims had no estimable range.
Most important facts for investors to verify
- How much of reported earnings and efficiency improvement is sustainable after excluding the $533 million purchase accounting gain and other merger-related effects?
- Whether IBKC integration achieves expected cost savings and revenue synergies, and how much additional integration expense is incurred in 2021.
- Whether CECL reserves adequately reflect subsequent borrower performance, especially in pandemic-sensitive sectors and loans whose reported status may be affected by deferrals.
- Whether net interest margin stabilizes or recovers as rates, deposit pricing and PPP fee amortization change.
- How deposit balances, uninsured deposits, wholesale funding needs and regulatory capital ratios evolve as acquired balances normalize.
- Whether the preliminary IBKC purchase accounting valuations, including acquired-loan credit estimates and the purchase gain, are revised during the measurement period.
- Potential exposure from pre-2009 mortgage claims, other litigation, and the LIBOR transition, for which outcomes or impacts remain uncertain.