First Horizon National Corporation (FHN) — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; filed November 8, 2019. The company provides regional banking, wealth management and fixed-income services. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2019 | Comparable period / context |
|---|---|---|
| Revenue (net interest income plus noninterest income) | $472.4 million | $654.7 million in Q3 2018; prior-year results included a $212.9 million pretax gain from selling Visa Class B shares. |
| Net interest income | $300.7 million | $305.7 million in Q3 2018. Net interest margin was 3.21%, down 23 basis points year over year. |
| Provision for loan losses | $15.0 million | $2.0 million in Q3 2018. |
| Noninterest income | $171.7 million | $349.0 million in Q3 2018, primarily reflecting the Visa gain in the prior-year quarter. Fixed-income revenue increased. |
| Noninterest expense | $307.7 million | $294.0 million in Q3 2018; higher legal-related accruals and restructuring and rebranding costs contributed to the increase. |
| Net income / diluted EPS | $113.9 million / $0.35 | $274.7 million / $0.83 in Q3 2018. Net income available to common shareholders was $109.5 million. |
| Nine-month net income / diluted EPS | $331.1 million / $1.00 | $455.7 million / $1.35 for the first nine months of 2018; common-shareholder income was $317.9 million. |
- Balance sheet at September 30: Assets were $43.7 billion, up from $40.8 billion at year-end 2018. Loans, net of unearned income, were $31.3 billion, up 14%; total deposits were $31.9 billion, down 2%. Shareholders’ equity was $4.7 billion; total equity including noncontrolling interest was $5.0 billion.
- Funding and liquidity: Cash and cash equivalents were $1.50 billion, with a further $364 million of interest-bearing cash. Short-term borrowings were $4.7 billion at quarter-end, versus $1.5 billion at December 31, 2018, mainly reflecting increased FHLB borrowing to fund loan growth. FHN reported $3.4 billion of available FHLB borrowing capacity. The loans-to-core-deposits ratio was 102%.
- Debt: Term borrowings were $1.20 billion. FHB redeemed $400 million of senior debt on November 1, 2019, after quarter-end.
- Cash flow, first nine months: Operating activities provided $716.6 million; investing activities used $2.45 billion, chiefly reflecting loan growth; financing activities provided $1.82 billion, principally from increased short-term borrowings. Cash and cash equivalents increased $90.4 million.
- Credit quality: Allowance for loan losses was $193.1 million, or 0.62% of loans, compared with $180.4 million, or 0.66%, at year-end. Q3 net charge-offs were $14.6 million; annualized net charge-offs were 0.19% of loans. Nonperforming assets were $194.5 million, and the nonperforming-assets ratio was 0.61%.
- Capital: FHN’s CET1, Tier 1, total capital and leverage ratios were 9.01%, 9.97%, 11.01% and 9.05%, respectively. The filing states FHN and its bank subsidiary remained well-capitalized and met the capital conservation buffer requirements.
Material changes versus prior periods
- Q3 earnings declined substantially year over year, but the comparison is heavily affected by the $212.9 million Visa-share gain recorded in Q3 2018.
- Net interest income and margin declined as higher deposit costs and lower loan accretion outweighed the benefit of loan and balance-sheet growth. The Federal Reserve’s 2019 rate cuts may add near-term margin pressure.
- Loan-loss provision rose to $15.0 million in Q3 and $37.0 million for the first nine months, from $2.0 million and $1.0 million, respectively, in 2018. Management cited commercial loan growth, grade migration, charge-offs and specific credit reserves.
- Fixed-income noninterest income rose 73% in Q3 to $77.6 million, supported by market volatility and lower interest rates. Regional banking Q3 pretax income increased to $174.5 million from $167.1 million.
- Noninterest expense rose 5% in Q3, while falling 4% for the first nine months, reflecting lower acquisition and integration costs and expense savings partly offset by 2019 restructuring and rebranding costs.
- FHN repurchased $134.0 million of shares and paid $127.5 million in common dividends during the first nine months of 2019.
Outlook, risks and unusual items
- Outlook: The filing provides no numeric earnings guidance. Management expects asset-quality trends to remain relatively stable in the near term if economic conditions remain stable. It expects lower short-term rates could compress net interest margin, while potentially supporting economic activity. Rate-sensitivity simulations are scenarios, not forecasts: a 100-basis-point increase was estimated to benefit 12-month net interest income by 2.8%, while a 50-basis-point decrease was estimated to reduce it by 2.8%, subject to stated assumptions.
- Restructuring and rebranding: Charges for restructuring, repositioning and efficiency initiatives were $38.7 million in the first nine months of 2019, including severance, professional fees and asset impairments. FHN also recorded rebranding costs and impairments.
- Transactions announced after quarter-end: On November 4, FHN and IBERIABANK announced a merger-of-equals agreement, with closing expected in Q2 2020 subject to approvals and other conditions. On November 8, FHN agreed to acquire 30 SunTrust branches, assume about $2.4 billion of deposits at a 3.40% premium, and purchase about $410 million of loans; closing was expected in Q1 2020, subject to approvals and customary conditions.
- Contingencies: Aggregate recorded liabilities for material litigation loss contingencies were $15.4 million at quarter-end; FHN could not estimate material reasonably possible losses beyond recorded liabilities. Legacy mortgage repurchase and foreclosure liabilities were $17.2 million. The company also disclosed unresolved legacy mortgage indemnification claims.
- Concentration and accounting risk: Loans to mortgage companies were $5.0 billion, and loans to finance and insurance companies were $2.8 billion; together these represented 38% of the C&I portfolio. FHN said it could not yet reasonably estimate the impact of adopting CECL, effective in 2020, and noted the effect could be material.
- Other notable item: FHN corrected a prior classification of approximately $410 million of market-investor CRE loans from C&I to CRE; management said the reclassification had no consolidated balance-sheet impact and an immaterial allowance effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of the earnings decline reflects the nonrecurring 2018 Visa gain versus underlying changes in net interest income, expenses and credit costs.
- Whether loan growth, higher short-term borrowings and deposit trends affect funding costs, liquidity and capital ratios in subsequent quarters.
- Whether commercial credit migration, charge-offs and the allowance remain consistent with management’s stable asset-quality assessment.
- Regulatory and shareholder approvals, timing, consideration and integration risks for the IBERIABANK merger and SunTrust branch acquisition.
- The eventual costs and outcomes of legacy mortgage claims, other litigation, and CECL implementation.