First Horizon National Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. Comparisons are primarily with Q1 2015. The filing is unaudited. First Horizon operates regional banking and fixed-income businesses, alongside corporate and non-strategic segments.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period |
|---|---|---|
| Total revenue | $306.4 million | $286.6 million, Q1 2015 |
| Net interest income | $172.1 million; net interest margin 2.88% | $156.9 million; margin 2.74% |
| Noninterest income | $134.3 million | $129.7 million |
| Provision for loan losses | $3.0 million | $5.0 million |
| Noninterest expense | $226.9 million | $376.2 million |
| Net income attributable to common shareholders | $47.8 million; diluted EPS $0.20 | Loss of $76.7 million; diluted loss per share $0.33 |
| Total assets | $27.0 billion | $25.7 billion |
| Loans, net of unearned income | $17.6 billion | $16.7 billion |
| Total deposits | $20.3 billion | $18.6 billion |
| Cash and cash equivalents | $1.08 billion | $1.16 billion |
| Term borrowings | $1.32 billion | $1.57 billion |
| Allowance for loan losses | $204.0 million; 1.16% of loans | $228.3 million; 1.36% of loans |
Operating cash flow was negative $111.0 million and investing cash flow negative $268.3 million; financing activities provided $430.4 million. Cash and cash equivalents increased $51.1 million during the quarter. The filing reports regulatory capital ratios of 10.33% Common Equity Tier 1, 11.56% Tier 1, and 12.73% total capital. Management said both FHN and its bank subsidiary met the applicable well-capitalized standards.
Changes versus Q1 2015
- Revenue rose 7%, supported by 10% growth in net interest income and stronger fixed-income revenue. Net interest margin improved 14 basis points.
- Expenses fell 40%, principally because Q1 2015 included a $162.5 million litigation and regulatory accrual tied to the FHA lending settlement. The $52.2 million of Q1 2016 net income therefore compares against a prior-year loss substantially affected by this unusual charge.
- Loans increased 5% year over year: commercial lending growth, including commercial real estate, more than offset runoff in consumer and legacy portfolios. Deposits rose 9%.
- Credit measures were mixed but generally favorable: nonperforming assets declined to $219.6 million from $236.8 million, while the allowance fell 11%. C&I charge-offs increased, including a $5.7 million charge-off on one energy-related credit; consumer real estate performance improved.
- Capital ratios were mixed year over year: Common Equity Tier 1 edged up, while Tier 1 and total capital declined. The filing attributes pressure in part to asset growth and redemption of trust preferred securities.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided. Management expected asset quality to remain relatively stable in the near term if the economic recovery continued; legacy consumer real estate and permanent mortgage portfolios were expected to continue running off. Management noted that margin expansion remained challenging in a historically low-rate environment.
- Interest-rate sensitivity: On a static balance sheet, management estimated next-12-month net interest income would increase 1.0% under a 25-basis-point rate shock, 5.2% under 100 basis points, and 10.5% under 200 basis points. A flattening yield curve scenario reduced estimated net interest income by 1.5%. These are modeled scenarios, not forecasts.
- Liquidity: Available funding sources include securities, federal funds, deposits, loan sales and Federal Reserve access; FHN reported $2.9 billion of incremental FHLB borrowing capacity. The bank subsidiary’s dividend capacity was negative $134.6 million under applicable rules; OCC approval was required for dividends to the parent. Parent dividends depend on regulatory approval, capital and liquidity needs, and subsidiary distributions.
- Legacy mortgage exposure: The repurchase and foreclosure liability was $115.0 million at quarter-end. Material litigation loss-contingency liabilities totaled $14.4 million; management estimated reasonably possible future losses in excess of established liabilities could range from zero to approximately $108 million. Other legacy mortgage indemnity claims were not included in that range and could not be estimated clearly.
- Other contingencies: A former subservicer demanded $43.5 million for costs and damages; FHN disputed the demand and had made no payment. FHN also described pending mortgage-securitization litigation and a possible insurance recovery related to the $212.5 million DOJ/HUD settlement paid in 2015. Management said litigation losses were not expected to materially affect consolidated financial condition, but could materially affect results in a particular period.
- Unusual Q1 items: Q1 2016 included a $3.7 million impairment charge related to planned branch closures and a $1.7 million gain on an exchange of approximately $294 million of available-for-sale securities. FHN repurchased $75.0 million of shares under its repurchase program.
- Other risks: Management cited economic and housing-market uncertainty, interest-rate and yield-curve changes, credit concentrations (including financial services and mortgage-company lending), regulatory developments, and potential claims tied to legacy mortgage servicing and loan sales.
Important facts for investors to verify
- How much of the year-over-year earnings improvement reflects the absence of the prior-year $162.5 million settlement accrual, versus sustainable growth in net interest income and fixed-income activity.
- Developments in legacy mortgage litigation, indemnification demands, repurchase exposures, and the potential losses above recorded liabilities.
- Credit trends in C&I, particularly energy-related and financial-services exposures, alongside ongoing improvement or runoff in consumer real estate.
- Whether deposit growth, asset growth, capital ratios, and share repurchases remain consistent with liquidity needs and regulatory constraints on subsidiary dividends.
- The effect of future rate movements and balance-sheet changes on net interest margin; the filing’s rate-sensitivity estimates depend on assumptions and are not forecasts.