First Horizon National Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless noted. Figures are unaudited and in U.S. dollars.
Business context and results
First Horizon operates regional banking, fixed income, corporate, and non-strategic businesses. It reported higher earnings year over year, as stronger net interest income and lower expenses more than offset weaker fixed income revenue.
Key financial metrics
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Total revenue | $306.6 million | $306.4 million in Q1 2016; essentially flat |
| Net interest income | $189.7 million | $172.1 million; up 10% |
| Net interest margin | 2.92% | 2.88% in Q1 2016 |
| Noninterest income | $116.9 million | $134.3 million; down 13%, principally from lower fixed income revenue |
| Noninterest expense | $222.2 million | $226.9 million; down 2% |
| Provision for loan losses | $1.0 million credit | $3.0 million expense in Q1 2016 |
| Net income attributable to controlling interest | $55.6 million | $49.4 million |
| Net income available to common shareholders; diluted EPS | $54.0 million; $0.23 | $47.8 million; $0.20 |
| Return on average assets | 0.82% | 0.79% in Q1 2016 |
| Common equity / regulatory capital | CET1 10.20%; Tier 1 11.35%; total capital 12.39%; leverage 9.31% | FHN stated it and its bank subsidiary met well-capitalized thresholds |
At March 31, total assets were $29.6 billion, total deposits $23.5 billion, total liabilities $26.9 billion, and total equity $2.7 billion. Loans were $19.1 billion, down from $19.6 billion at year-end; the allowance for loan losses was $202.0 million. Term borrowings were $1.04 billion. Cash and cash equivalents were $1.24 billion and interest-bearing cash was $2.11 billion. The loan-to-core-deposit ratio was 97%, and $3.1 billion of FHLB borrowing capacity was available.
Cash flows for the quarter were negative $71.2 million from operations and negative $554.3 million from investing, offset by $823.7 million from financing, mainly reflecting deposit growth. Cash and cash equivalents increased $198.2 million. The common dividend declared was $0.09 per share, versus $0.07 in Q1 2016.
Material changes and management commentary
- Net interest income rose on commercial loan growth, higher loan yields, and lower long-term funding costs. Average loans were $18.8 billion, up 9% year over year; average deposits were $22.8 billion, up 14%.
- Fixed income product revenue fell 26% to $42.7 million, which management attributed to reduced customer activity amid rate increases and low market volatility. Fixed income segment pretax income declined to $3.3 million from $11.2 million.
- Regional Banking pretax income increased to $101.2 million from $71.4 million, supported by net interest income growth and lower credit provisioning. Non-Strategic pretax income declined to $6.5 million from $16.0 million, partly because its provision credit was smaller.
- Management described consolidated credit quality as strong: net recoveries were $0.9 million, compared with $9.2 million of net charge-offs in Q1 2016. Nonperforming assets declined to $161.3 million from $164.6 million at year-end; the allowance-to-loans ratio was 1.06%.
Outlook, transactions, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expected near-term asset quality to remain relatively stable if modest economic growth continues, while noting possible portfolio volatility and risks from property oversupply, economic uncertainty, unemployment, and housing conditions.
- The balance sheet was described as positioned to benefit from higher short-term rates. A modeled 100-basis-point rate increase indicated a 4.6% favorable 12-month net interest income variance; a 25-basis-point decrease indicated a 2.5% unfavorable variance. These are hypothetical scenarios, not forecasts.
- After quarter-end, FHN agreed to acquire Capital Bank Financial Corp., which had approximately $10 billion of assets. Announced transaction value was approximately $2.2 billion, including about $411 million in cash; Capital Bank shareholders were expected to receive FHN shares representing approximately 29% of post-merger shares. Closing was expected in Q4 2017, subject to approvals and other conditions.
- On April 3, 2017, FTN Financial acquired substantially all of Coastal Securities’ assets and assumed substantially all of its liabilities for approximately $130 million in cash.
- Legacy mortgage exposures remain material. FHN reported $1.6 million of established liabilities for material litigation matters and estimated reasonably possible losses in excess of established liabilities of zero to approximately $52 million. Its separate repurchase and foreclosure liability was approximately $65 million. A former subservicer demanded $43.5 million, which FHN disputes. Outcomes and ultimate losses remain uncertain.
- FHN had paid $212.5 million in 2015 to settle FHA-related claims and is pursuing insurance coverage subject to a $75 million aggregate policy limit; a recovery was reasonably possible but not considered probable. Visa litigation also leaves the timing and value of FHN’s restricted Visa Class B shares uncertain.
- FHN disclosed concentration risk: finance and insurance lending plus mortgage-company lending represented 35% of its C&I portfolio. It also noted regulatory limits on bank-subsidiary dividends: prior OCC approval was required for certain distributions to the parent.
Important facts for investors to verify
- Whether Capital Bank approvals, closing timing, purchase accounting, integration costs, and expected share dilution evolve as planned.
- Whether the improvement in net interest income and margin persists as deposit costs rise and rates, loan balances, and fixed income activity change.
- Trends in commercial loan concentrations, potential problem assets, delinquencies, nonperforming loans, and the adequacy of credit and repurchase reserves.
- Developments in legacy mortgage litigation, the $43.5 million subservicer demand, the estimated $0–$52 million additional reasonably possible litigation-loss range, and potential insurance recoveries.
- Capital, liquidity, and dividend capacity, including regulatory approval requirements for subsidiary-to-parent distributions.