First Horizon Continuing To Deliver Good Results Ahead Of A Transformative Merger – First Horizon National Corporation (NYSE:FHN)

With good countercyclical opportunities like the trading business and mortgage warehouse lending, First Horizon (FHN) is doing pretty well at a more challenging point in the banking cycle. Loan growth prospects aren’t looking quite so exciting into 2020, but First Horizon seems to be doing more than holding its own, and the impending merger with IBERIABANK (IBKC) should unlock meaningful operating leverage down the line.

I liked First Horizon last quarter and after the IBERIABANK merger announcement, and the shares have been outperforming. I still like them now, with upside to the $19-$20 range and greater long-term opportunities from the IBERIABANK deal.

Solid Across The Board

There really wasn’t much bad news in First Horizon’s fourth quarter results, as all of the major line items came in positively relative to expectations. Revenue, core efficiency ratio, pre-provision profits, and core EPS were all higher than expected, and First Horizon was one of the relatively few banks to exceed sell-side expectations for loan growth.

Revenue rose 20% yoy and 5% as reported, exceeding expectations by about 6%. Net interest income rose 3% yoy and 4% qoq, surpassing estimates by more than 3%, with a better than expected net interest margin (10bp beat, down 12bp yoy and up 5bp qoq) and larger-than-expected balance sheet both contributing.

Fee income growth was strong, as First Horizon continued to leverage trading opportunities from increased volatility. Overall fee income rose 66% yoy and about 7% qoq, almost 10% better than expected, with fixed income trading revenue up 103% yoy and 4% qoq, with average daily revenue up almost 11% qoq.

Core operating expenses rose 3% yoy and 5% qoq, and while core expenses came in above expectations in absolute terms, the core efficiency ratio was more than a point better than expected (in other words, First Horizon had to spend more to support better revenue growth, but came out ahead for it). Pre-provision profit jumped 39% year over year but was basically flat sequentially. Still, that was good for a 4% beat versus expectations, or about $0.025/share. At the bottom line, core earnings beat by about $0.02 per share.

Healthy Balance Sheet Growth And Good Credit

Loans rose about 13% yoy on both an end-of-period and average balance basis, while the qoq comparisons were more mixed – down a little less than 1% end-of-period and up more than 2% on an average balance basis. Both C&I and CRE lending were stronger than national averages, growing 2.4% and 2.9% qoq, respectively. First Horizon’s mortgage lending was down (down 0.4% qoq) and arguably surprisingly weak relative to the peer group (which saw growth in the quarter). Mortgage warehouse lending was down 12% sequentially, but still holding at a strong overall level (up 120% yoy).

First Horizon did a little better than average with loan yields, with the average yield declining 28bp yoy and 13bp qoq, helped by both mix (more commercial) and good stability in consumer lending (yield down just 4bp qoq).

Deposit-gathering wasn’t as strong, with period-end deposits down about 1% yoy and up 1.5% qoq, while average balances rose 3% and a little more than 1%. Non-interest-bearing deposit growth was strong, though, rising almost 8% yoy and 2% qoq, as management continues to deliver well on a strategy to replace more expensive wholesale funding with core deposits (the acquisition of branches from Truist (TFC) will also help). Overall deposit costs shrank another 15bp qoq, with interest-bearing deposit costs down 13bp yoy and 19bp qoq.

Credit remains a non-issue, with lower than expected provisioning expense and a very low charge-off rate.

IBERIABANK Will Keep Management Occupied

First Horizon management can’t provide an exact closing date for its merger with IBERIABANK, but did guide to a mid-2020 close, which is consistent with past expectations. I remain bullish on the long-term potential of this deal, as it will build up First Horizon’s operations in Florida and Texas, two attractive markets, as well as commercial real estate lending more broadly. While the Carolinas will shrink as a percentage of First Horizon’s overall business, and the Carolinas remain an attractive market, attracting competitors like U.S. Bancorp (USB) and JPMorgan (JPM), First Horizon will still have organic branch-based growth opportunities after the deal closes.

Given the meaningful synergy potential from the acquisition, and frankly a significant need to execute on those synergy opportunities, I don’t expect First Horizon to be looking for other significant transactions for a while.

The Outlook

The exact timing of the IBERIABANK deal does introduce some uncertainty into the modeling process. On the other hand, management’s comments about the prospects for loan growth and non-interest income growth in 2020 were positive for the underlying core outlook.

I expect the combination with IBERIABANK to drive close to 20% growth in core earnings over the next five years and close to 12% growth over the next decade. I do note, though, that mergers of equals have in the past faced more integration issues than typical whole bank acquisitions, so there is still execution risk in play here.

The Bottom Line

Between discounted core earnings, a PE-based approach, and an ROTCE-driven P/TBV approach, I believe fair value for First Horizon is in the neighborhood of $20. That, in turn, suggests attract upside for what I believe will be among the most attractive franchises in the Southeast U.S..

Disclosure: I am/we are long JPM, TFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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