First Horizon National Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. Unless stated otherwise, dollar amounts below are in millions. FHN operated regional banking, capital markets, corporate, and non-strategic businesses.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period |
|---|---|---|
| Total revenue | $317.8 | $374.4 in Q1 2012 |
| Net interest income | $161.4 | $171.9 in Q1 2012 |
| Net interest margin (FTE) | 2.95% | 3.12% in Q1 2012 |
| Net income attributable to common shareholders | $41.0; diluted EPS $0.17 | $30.5; diluted EPS $0.12 in Q1 2012 |
| Net cash from operating activities | $52.3 | $(162.3) in Q1 2012 |
| Total assets | $25,166 | $25,679 at March 31, 2012 |
| Total deposits | $16,204 | $16,935 at March 31, 2012 |
| Loans, net of unearned income | $15,890 | $15,971 at March 31, 2012 |
| Allowance for loan losses | $265.2; 1.67% of loans | $346.0; 2.17% at March 31, 2012 |
| Total equity | $2,600 | $2,674 at March 31, 2012 |
| Term borrowings | $2,198 | $2,341 at March 31, 2012 |
- Pre-tax income was $62.3 million; income from continuing operations was $44.5 million. Return on average assets was 0.73% and return on average common equity was 7.48%.
- Q1 cash flows were $52.3 million provided by operations, $573.3 million provided by investing, and $690.1 million used in financing. Cash and cash equivalents fell $64.6 million to $1,041.7 million. Investing cash flow benefited from a $795.8 million decrease in loans; it should not be treated as recurring operating cash generation.
- Consolidated Tier 1 and total regulatory capital ratios were 13.54% and 16.06%; Tier 1 common was 10.62%. Management said capital remained above well-capitalized thresholds.
Changes versus Q1 2012 and management outlook
- Common earnings and EPS improved despite a 15% revenue decline. Noninterest expense fell 25% to $240.5 million, chiefly because Q1 2013 had no repurchase and foreclosure provision, compared with $49.3 million in Q1 2012, and personnel costs declined. The expense comparison is therefore materially affected by the prior-year provision.
- Capital markets income declined: fixed-income revenue was $68.0 million versus $99.1 million. Mortgage banking income fell to $9.4 million from $23.3 million, reflecting weaker hedging results and continued mortgage-servicing portfolio runoff. Net interest income also declined, and margin pressure reflected lower reinvestment yields and runoff of non-strategic loans.
- Credit indicators improved overall: net charge-offs were $26.7 million versus $46.3 million; nonperforming assets were $418.4 million versus $511.3 million; and the nonperforming-assets ratio was 1.81% versus 2.56%. Portfolio troubled debt restructurings rose to $368.8 million from $303.3 million; including loans held for sale, total TDRs were $550.9 million.
- Management expected net interest margin to remain under pressure in 2013 amid historically low rates. It expected asset quality to be stable to slightly improving, conditional on continued economic recovery, while noting that improvement could slow and be volatile. No quantified earnings or revenue guidance is provided in the supplied filing text.
- FHN issued $100 million of Series A perpetual preferred stock in Q1 (about $95.6 million net of costs), repurchased $32.5 million of common stock, and declared a $0.05 per-share common dividend. In May 2013 it entered a $40 million prepaid share-repurchase arrangement, subject to customary conditions.
Risks, contingencies, and unusual items
- Mortgage repurchases and litigation: The legacy mortgage repurchase liability was $183.8 million at March 31, 2013; the active repurchase and related claims pipeline was $258.9 million. The filing estimates reasonably possible litigation losses above established liabilities of up to approximately $231 million for specified estimable matters; other claims could not be estimated. Management stated the remaining GSE reserve was adequate, but the estimate depends on claim trends, loss severity, housing conditions, and GSE practices.
- Other legal exposures: Litigation liabilities for matters discussed were $38.2 million. A HUD/Justice Department inquiry into FHA-insured lending could lead to claims, including potentially enhanced damages; FHN had established no liability and could not predict the outcome. A former subservicer sought $8.6 million plus $34.9 million of foreclosure-review costs, which FHN disputed and had not reimbursed.
- Consumer credit and regulation: OCC-related accounting and nonaccrual changes affected reported consumer real-estate problem loans and TDRs. FHN warned that obtaining third-party performance information on senior liens serviced by others could lead to material future additions to nonperforming loans or reserves.
- Funding, rates, and market sensitivity: Deposits declined, including following expiration of unlimited FDIC coverage for noninterest-bearing accounts. FHN reported a 99% ratio of loans (excluding specified items) to core deposits, versus 95% a year earlier. Management cited low-rate reinvestment pressure, regulatory change, economic and housing uncertainty, and exposure to counterparty and market risks.
Investor verification priorities
- Reconcile the $183.8 million repurchase liability with the $258.9 million pipeline and review subsequent claim resolutions, reserve changes, and realized loss severity.
- Track the specified litigation loss range and the unquantified FH securitization, FHA, and subservicer exposures, including subsequent developments.
- Assess whether earnings improvement persists after accounting for the absence of the $49.3 million prior-year repurchase provision and declines in capital-markets and mortgage-banking revenue.
- Monitor net interest margin, deposit trends, funding mix, liquidity, and capital ratios; confirm the effect of share repurchases and preferred dividends.
- Review consumer second-lien performance, TDR migration, and reserve adequacy as FHN obtains third-party senior-lien data and applies regulatory reporting requirements.