First Horizon National Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily to December 31, 2018. First Horizon is a regional banking and financial services company operating across the southeastern U.S., with regional banking, fixed income, corporate, and non-strategic segments.
Financial performance and condition
- Profitability: Net income was $103.4 million, up from $95.0 million in Q1 2018. Net income available to common shareholders was $99.0 million, or $0.31 per diluted share, versus $90.6 million, or $0.27. Pretax income was $130.5 million versus $124.9 million.
- Revenue and margins: Net interest income was $294.5 million, down from $301.2 million; net interest margin declined to 3.31% from 3.43%. Noninterest income rose to $141.0 million from $136.0 million, led by fixed income revenue and deferred compensation income. Total revenue was approximately $435.6 million versus $437.2 million.
- Credit costs and expenses: Loan-loss provision was $9.0 million, compared with a $1.0 million provision credit in Q1 2018. Noninterest expense declined 5% to $296.1 million, substantially reflecting lower merger and integration costs and cost savings. The efficiency ratio is not stated in the supplied filing text.
- Cash flow: Operating activities provided $122.5 million; investing activities used $92.7 million; and financing activities used $222.2 million. Cash and cash equivalents fell $192.5 million during the quarter to $1.21 billion.
- Balance sheet and funding: Total assets were $41.1 billion and total deposits were $32.5 billion. Loans, net of unearned income, were $28.0 billion, up from $27.5 billion at year-end; allowance for loan losses was $184.9 million, or 0.66% of loans. Term borrowings were $1.18 billion. Period-end short-term funding included federal funds purchased, repurchase agreements, trading liabilities, and other short-term borrowings; the filing does not present these collectively as a single debt measure.
- Liquidity and capital: FHN reported $5.5 billion of available FHLB borrowing capacity and a 92% ratio of loans (excluding loans held-for-sale and restricted real estate loans) to core deposits. FHN’s CET1, Tier 1, total capital, and leverage ratios were 9.62%, 10.65%, 11.78%, and 9.02%, respectively; the company said it met well-capitalized standards and the capital conservation buffer.
Material changes versus comparable periods
- Common earnings and diluted EPS improved year over year despite lower net interest income and a higher loan-loss provision.
- Net interest margin pressure reflected higher deposit costs, lower loan accretion, and increased average excess cash held at the Federal Reserve; balance-sheet growth partly offset the pressure.
- Fixed income noninterest income increased 18% to $53.7 million. Management attributed the stronger trading environment in part to Federal Reserve commentary and expectations of flat or lower rates.
- Regional Banking pretax income declined to $145.4 million from $167.0 million, primarily due to weaker revenue and higher loan-loss provision. Fixed Income pretax income increased to $9.9 million from $4.1 million. Corporate pretax loss narrowed to $34.9 million from $60.2 million, while Non-Strategic pretax income declined to $10.1 million from $14.0 million.
- Period-end loans grew 2% from year-end, chiefly in commercial and industrial lending; deposits declined 1% from year-end but average deposits increased 2% sequentially and 8% year over year.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected near-term asset quality to remain relatively stable if the economy remained stable, while noting that commercial credit metrics could vary and legacy portfolios would continue to run off. Management’s interest-rate simulation estimated favorable 12-month net interest income effects under upward rate shocks and an unfavorable effect under downward shocks; outcomes depend on deposit pricing and mix assumptions.
- Expense initiatives: FHN began a company-wide expense optimization review and recorded $12.2 million of restructuring and repositioning charges in Q1, mainly severance and professional fees. The stated goal is to improve profitability and create capacity for technology and revenue-generating investment.
- Credit and concentration risks: Nonperforming loans rose to $181.6 million from $147.7 million at year-end, primarily due to three C&I credits; the NPL ratio rose to 0.65% from 0.54%. Net charge-offs were $4.5 million, or 0.07% of loans, versus $1.4 million, or 0.02%, a year earlier. Finance and insurance lending and loans to mortgage companies together represented 28% of the C&I portfolio. Residential real estate represented 23% of total loans.
- Legal and legacy mortgage exposures: Accrued liabilities for material litigation matters were $32.9 million; estimated reasonably possible losses above established liabilities ranged from zero to approximately $20 million. The separate mortgage repurchase and foreclosure liability was $31.9 million at quarter-end. A $12.6 million indemnification settlement payment made in Q2 2019 was expected to reduce that reserve. Certain former-mortgage-business claims, including servicing indemnification claims, remain difficult to estimate.
- Accounting and other items: Adoption of the new lease standard added approximately $185 million of lease assets and $204 million of lease liabilities. FHN said it could not yet reasonably estimate the impact of adopting CECL, effective for the company in 2020, and that the impact could be material. The April 2019 sale of Superior Financial Services, disclosed after quarter-end, was expected to remove approximately $25 million of subprime consumer loans held-for-sale.
- Other risks: Management cited sensitivity to deposit competition, interest rates and yield-curve changes, economic conditions, legacy mortgage claims, and the transition away from LIBOR after 2021.
Important facts for investors to verify
- Whether deposit-cost pressure and lower loan accretion continue to weigh on net interest margin and net interest income.
- Whether the three C&I credits behind the increase in nonperforming loans lead to further deterioration, and how commercial concentration risks evolve.
- How the $12.6 million Q2 settlement affects the mortgage repurchase reserve and whether remaining legal or servicing claims require additional accruals.
- Progress, costs, and realized savings from the company-wide efficiency program, including the timing and amount of any future restructuring charges.
- The eventual CECL transition impact, and the company’s execution of LIBOR-related contract and systems changes.
- Capital, liquidity, dividends, and repurchases relative to loan growth and regulatory requirements; the filing reported $53.4 million of Q1 share repurchases and a $0.14 common dividend per share.