First Horizon National Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparison is with Q1 2010 unless noted. The filing presents unaudited consolidated interim results. FHN operates regional banking, capital markets, corporate and non-strategic businesses.
Financial results and condition
| Metric | Q1 2011 / March 31, 2011 | Prior comparable period |
|---|---|---|
| Total revenue | $370.3 million | $423.6 million |
| Net interest income | $172.8 million; net interest margin 3.22% | $180.4 million; margin 3.18% |
| Provision for loan losses | $1.0 million | $105.0 million |
| Noninterest expense | $315.1 million | $338.0 million |
| Income before taxes | $54.2 million | Loss of $19.3 million |
| Net income attributable to common shareholders | $40.2 million; diluted EPS $0.15 | Loss of $27.7 million; diluted loss per share $0.12 |
| Net cash from operating activities | Use of $224.8 million | Use of $122.6 million |
| Cash and cash equivalents | $864.6 million | $803.0 million at March 31, 2010 |
| Total assets | $24.4 billion | $25.9 billion at March 31, 2010 |
| Total deposits | $15.4 billion | $15.1 billion at March 31, 2010 |
| Loans, net of allowance | $15.4 billion | $16.6 billion at March 31, 2010 |
| Allowance for loan losses | $589.1 million; 3.69% of loans | $844.1 million; 4.83% of loans |
| FHN Tier 1 capital ratio | 14.26% | 16.58% |
FHN reported total liabilities of $21.8 billion and total equity of $2.64 billion at March 31, 2011. Term borrowings were $2.51 billion. The filing does not provide one single total-debt figure. Operating cash use reflected working-capital movements, including higher capital-markets receivables and trading securities. Investing activities provided $881.4 million, while financing activities used $560.8 million.
Material changes and management commentary
- Common-shareholder results turned profitable, primarily as loan-loss provision fell sharply and expenses declined. Revenue nevertheless fell 13%, led by lower fixed-income sales in more normalized markets and smaller gains on debt extinguishment.
- Average loans declined 9% year over year as legacy portfolios continued to run off and loan demand remained weak. Average earning assets fell 5%; consolidated net interest margin edged up from 3.18% to 3.22%.
- Net charge-offs fell to $76.7 million from $182.4 million. Nonperforming assets declined to $819.0 million from $1.04 billion, while total nonperforming loans were $637.1 million. Credit trends improved overall, but residential CRE nonperforming loans remained 42.19% of that portfolio; Income CRE nonperforming loans remained above 10%.
- Capital markets pre-tax income fell to $22.1 million from $33.1 million as fixed-income revenue decreased. Regional banking moved to $64.2 million of pre-tax income from a $3.9 million loss, largely reflecting a provision credit.
- Management expected net interest margin to remain relatively stable in 2011 if rates stayed historically low and loan growth moderated. It expected credit measures to improve if favorable economic trends continued, while noting potential near-term volatility and continued stress in Income CRE.
Outlook, unusual items, risks and contingencies
- FHN agreed to sell First Horizon Insurance and Highland Capital Management; both transactions closed in Q2 2011. The FHI sale caused a $10.1 million pre-tax goodwill impairment, substantially offset by tax benefits. Management expected the total positive earnings effect of the FHI divestiture to be about $4 million after further tax benefits.
- Restructuring and repositioning charges were $13.6 million in Q1, including the FHI goodwill impairment. FHN also expected a $9 million pre-tax Q2 charge for terminating a technology services contract and moving the work to an internal data center.
- Mortgage repurchase and foreclosure liability was $185.6 million, versus $128.8 million a year earlier. The active repurchase/PMI pipeline was $529.3 million; more than 90% of unresolved repurchase and make-whole claims related to GSE loans. Management cited uncertainty in claim outcomes, loss severity and visibility into loans no longer serviced by FHN.
- Other mortgage-related exposures include GSE and private-investor repurchase claims, foreclosure and servicing costs, and investor litigation. FHN reported no material loss as probable for pending litigation at quarter-end, but could not estimate potential losses for several matters. An SEC Wells-notice matter relating to Sentinel was considered probable of resolution; FHN recorded an immaterial liability. A separate branch-sale HELOC arbitration sought repurchase of loans with $26.3 million unpaid principal, including $9.4 million charged off.
- FHN’s $200 million net deferred tax asset remained subject to a realization assessment. Management cited its three-year cumulative loss position as negative evidence but concluded realization was more likely than not.
- Management said it expected the 2011 capital ratios to remain strong and above well-capitalized standards. FTBNA could not pay common dividends to FHN without prior regulatory approval; FHN’s board approved a quarterly $0.01-per-share cash dividend. The existing mortgage subservicing contract expired in August 2011; management was negotiating a replacement and expected direct fees to rise $3–$4 million per quarter, partly offset by improved loss mitigation and lower losses.
- Risks highlighted include housing and commercial real-estate weakness, unemployment, loan demand, interest-rate and mortgage-market changes, mortgage repurchases, foreclosure practices, evolving regulation and compliance costs. Management could not estimate potential costs from changing foreclosure and loss-mitigation requirements.
Key facts for investors to verify
- Whether lower credit provisions reflect durable borrower improvement or portfolio runoff, and how allowance coverage compares with nonperforming and impaired loans.
- Actual repurchase claims, resolutions, loss severities and reserve adequacy, including GSE and PMI exposures and potential securitization litigation.
- Progress on the new mortgage subservicing arrangement, its realized cost and any foreclosure-related liabilities.
- Support for realizing the $200 million deferred tax asset and the final tax and earnings effects of the divestitures.
- Regulatory capital, FTBNA’s ability to upstream dividends, liquidity and the sustainability of FHN’s cash dividend amid operating cash outflows.