First Horizon National Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. First Horizon operates regional banking and fixed income businesses, alongside corporate and non-strategic/runoff activities. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $296.9 | $283.7 | $583.5 | $581.8 |
| Net interest income | $166.6 | $156.8 | $323.5 | $309.1 |
| Net income (loss) attributable to common shareholders | $50.6 | $77.5 | $(26.2) | $123.1 |
| Diluted earnings (loss) per share | $0.22 | $0.33 | $(0.11) | $0.52 |
| Net interest margin | 2.92% | 2.97% | 2.83% | 2.92% |
| Provision for loan losses | $2.0 | $5.0 | $7.0 | $15.0 |
| Operating cash flow | Not stated separately for the quarter | $111.1 | $390.6 |
- Balance sheet at June 30: Assets were $25.2 billion; loans net of allowance were $16.7 billion; deposits were $18.7 billion; total liabilities were $22.7 billion; and total equity was $2.5 billion.
- Capital: Holding-company Tier 1 capital ratio was 11.98%, down from 14.19% a year earlier; Common Equity Tier 1 was 10.41% under Basel III. Management said the company and bank remained above well-capitalized thresholds.
- Credit quality: Allowance for loan losses was $221.4 million, or 1.31% of loans, versus $243.6 million, or 1.54%, a year earlier. Nonperforming assets were $238.5 million versus $339.6 million; portfolio nonperforming loans were $203.1 million, down 12% year over year.
- Liquidity and funding: Cash and cash equivalents were $1.17 billion. Average core deposits rose 16% year over year to $18.1 billion in Q2; the loan-to-core-deposit ratio was 92%. Management’s general liquidity objective is excess liquidity of at least 15% of assets, excluding discount-window access.
Material changes versus comparable periods
- Q2 common earnings declined to $50.6 million from $77.5 million despite 5% higher revenue, as expenses rose to $218.4 million from $163.2 million. The prior-year quarter included $47.1 million of Sentinel litigation-related expense recoveries; 2015 also had higher personnel and FDIC expenses.
- First-half results swung to a $26.2 million common-shareholder loss from $123.1 million of income. The main unusual driver was a $162.5 million litigation and regulatory expense accrual related to the FHA settlement; lower mortgage-banking income also weighed on revenue.
- Net interest income increased, supported by commercial loan growth and loans to mortgage companies, but margin contracted amid competitive loan pricing, runoff of legacy portfolios, higher excess cash, and lower-yielding securities.
- Average loans increased 9% in Q2, led by commercial lending, while runoff reduced consumer real estate and permanent mortgage balances. Deposits grew, and short-term borrowings declined.
- Asset quality generally improved, though Q2 commercial provision expense rose in regional banking due to loan growth, a longer estimated loss-emergence period, and reserves related to borrower fraud. Credit card net charge-offs also increased.
Outlook, risks, contingencies, and unusual items
- Management expected asset-quality trends to remain relatively stable for the rest of 2015, conditional on continued economic recovery. It noted that commercial credit metrics could vary and that runoff may distort non-strategic portfolio ratios.
- Management cautioned that net interest margin could face pressure in the second half of 2015 from competition and persistently low rates. Its rate-shock modeling estimated 12-month net interest income increases of 2.5% to 11.3% for upward shocks of 25 to 200 basis points; these are scenario estimates, not guidance.
- FHN paid $212.5 million to settle potential DOJ and HUD claims concerning FHA-insured mortgage underwriting and origination. It is pursuing insurance coverage with a stated aggregate policy limit of $75 million; insurers denied or reserved rights to deny coverage, and recovery was not considered probable.
- For material litigation matters, FHN reported $6.3 million of established liabilities and estimated reasonably possible additional losses above recorded liabilities of up to approximately $75 million. Management said timing and outcomes are difficult to predict. These disclosures are distinct from mortgage repurchase obligations.
- The legacy mortgage repurchase and foreclosure reserve was $116.6 million at June 30. The active repurchase/related-claims pipeline was $177.7 million; amounts in the pipeline are not equivalent to expected losses. Mortgage securitization investor suits and former-servicer disputes remain risks.
- Other exposures include concentrated lending: residential real estate represented 32% of loans, and finance/insurance plus mortgage-company lending represented 39% of C&I loans. FHN also disclosed $310.6 million of portfolio troubled debt restructurings.
- TrustAtlantic’s proposed acquisition, estimated at approximately $109 million, remained subject to regulatory approvals and customary closing conditions. In late July 2015, FHN announced an increase and extension of its share repurchase authorization and called junior subordinated debt for redemption in August; these were post-quarter events.
Important facts for investors to verify
- Reconcile the $212.5 million FHA settlement payment with the $162.5 million expense accrual and confirm any later insurance recovery or related litigation developments.
- Track resolution of mortgage-related litigation and the repurchase pipeline, including whether claims produce losses beyond the recorded reserve.
- Assess whether commercial loan growth, especially mortgage-company and finance/insurance exposures, remains within the company’s risk appetite and whether credit costs stay controlled.
- Monitor net interest margin, deposit costs, loan pricing, and capital ratios following Basel III implementation and the planned debt redemption.
- Confirm whether the TrustAtlantic acquisition closed and how subsequent repurchases, dividends, and funding changes affected capital and liquidity.