First Horizon National Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017 unless stated otherwise. First Horizon is a regional banking and fixed-income company. Results include Capital Bank Financial (CBF), acquired November 30, 2017, and Coastal Securities, acquired in April 2017.
Key financial results
| Metric | Q1 2018 | Comparison |
|---|---|---|
| Total revenue | $437.2 million | $306.6 million in Q1 2017; up 43% |
| Net interest income | $301.2 million | $189.7 million; up 59% |
| Net interest margin | 3.43% | 2.92%; up 51 basis points |
| Noninterest income | $136.0 million | $116.9 million; up 16% |
| Noninterest expense | $313.3 million | $222.2 million; up 41% |
| Net income | $95.0 million | $58.4 million |
| Net income available to common shareholders | $90.6 million | $54.0 million |
| Diluted earnings per share | $0.27 | $0.23 |
| Cash dividends declared per common share | $0.12 | $0.09 |
Revenue growth was led by acquired loans and deposits, organic commercial loan growth, and higher short-term rates. Fee income also benefited from CBF, while lower fixed-income revenue partly offset the increase. Expenses rose mainly due to acquisition integration, added personnel and the expanded operating footprint. The reported Q1 2018 expense included $30.1 million of CBF merger and integration costs.
Financial position, liquidity and credit
- Assets and funding: Total assets were $40.5 billion, down from $41.4 billion at year-end. Loans, net of unearned income, were $27.2 billion, versus $27.7 billion; deposits were $30.8 billion, versus $30.6 billion.
- Cash and cash equivalents: $1.43 billion at quarter-end, compared with $1.45 billion at year-end. Cash flows were negative $204.4 million from operations, positive $1.27 billion from investing and negative $1.08 billion from financing; net cash and cash equivalents declined $19.0 million.
- Borrowings: Term borrowings were $1.21 billion. Other short-term borrowings fell to $1.33 billion from $2.63 billion at year-end; total liabilities were $35.9 billion. FHN reported $1.9 billion of available FHLB borrowing capacity.
- Capital: Total equity was $4.57 billion. FHN’s CET1, Tier 1, total capital and Tier 1 leverage ratios were 8.98%, 9.98%, 11.25% and 8.50%, respectively. FHN and its bank subsidiary met the filing’s well-capitalized standards.
- Credit quality: The allowance for loan losses was $187.2 million, or 0.69% of loans, versus $189.6 million at year-end. Net charge-offs were $1.4 million, or 0.02% of average loans. Nonperforming assets were $172.7 million, down from $177.2 million; potential problem assets increased to $342.4 million from $327.2 million.
Material changes and unusual items
- CBF’s acquisition materially increased the scale of the business: average assets were $40.4 billion versus $28.8 billion in Q1 2017; average loans and deposits increased 44% and 32%, respectively. The filing attributes much of the year-over-year earnings and expense movement to the acquisition.
- Corporate pre-tax loss increased to $54.8 million from $25.2 million, chiefly reflecting CBF integration costs. A $3.3 million building-sale gain partially supported noninterest income.
- Other comprehensive loss was $67.0 million, largely reflecting unrealized losses on available-for-sale securities and cash-flow hedges; accumulated other comprehensive loss reached $390.1 million.
- Adoption of accounting standards in 2018 changed certain classifications, including equity securities and pension costs; management reported no significant cumulative effect on revenue recognition or hedging results.
- FHN divested two branches in March 2018 in connection with regulatory commitments related to the CBF merger.
Outlook, risks and contingencies
- Outlook: No specific earnings or revenue guidance is provided. Management expects near-term asset quality to remain relatively stable if economic growth continues. It described the balance sheet as moderately asset-sensitive: its static-balance-sheet model estimated 12-month net interest income would rise 0.8%, 1.6%, 3.0% and 5.6% under rate shocks of +25, +50, +100 and +200 basis points, respectively, and fall 1.1% under a 25-basis-point decline. These are scenarios, not forecasts.
- Interest-rate and market risks: Faster deposit-cost increases, a flattening yield curve or falling rates could reduce the benefit of rising rates. Fixed-income revenue was pressured by rate increases, a flatter curve and low market volatility.
- Legal and legacy mortgage matters: Recorded liabilities for material loss-contingency matters totaled $42.6 million; estimated reasonably possible losses beyond recorded liabilities ranged from zero to approximately $22 million. The company noted other exposures for which it could not estimate a loss range. A former subservicer demanded $43.5 million, which FHN disputes; additional mortgage indemnity claims may lead to litigation.
- Other exposures: The repurchase and foreclosure liability was $34.2 million at quarter-end. FHN also reported litigation involving legacy mortgage securitizations and Visa-related matters; outcomes and timing remain uncertain.
- Integration and controls: CBF systems and processes were still being integrated. Management stated disclosure controls were effective, while noting integration could affect internal controls in future periods.
Investor facts to verify
- How much of revenue and earnings growth reflects ongoing organic performance versus CBF and Coastal acquisitions, and whether integration costs decline as planned.
- Whether deposit pricing, funding costs and loan growth sustain the reported 3.43% net interest margin.
- Developments in nonperforming and potential problem assets, consumer real-estate delinquencies, and the adequacy of the allowance.
- Updates to legacy mortgage, subservicer indemnity and securitization exposures, including changes in recorded reserves or estimated possible losses.
- Capital and liquidity trends after the acquisition, including any material share repurchases, dividends or regulatory restrictions.