First Horizon National Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to March 31, 2014 or December 31, 2014, as noted. Unaudited consolidated results. First Horizon operates regional banking, capital markets, corporate and non-strategic businesses.
Financial results and condition
Unless otherwise stated, amounts are in millions.
| Metric | Q1 2015 / March 31, 2015 | Comparable period |
|---|---|---|
| Total revenue | $286.6 | $298.1 in Q1 2014 |
| Net interest income | $156.9 | $152.4 in Q1 2014 |
| Net interest margin | 2.74% | 2.88% in Q1 2014 |
| Provision for loan losses | $5.0 | $10.0 in Q1 2014 |
| Noninterest income | $129.7 | $145.7 in Q1 2014 |
| Noninterest expense | $376.2 | $218.0 in Q1 2014 |
| Net income (loss) | $(72.4); $(76.7) available to common shareholders; diluted EPS $(0.33) | $50.0; $45.6 available to common shareholders; diluted EPS $0.19 in Q1 2014 |
| Operating cash flow | $(141.6) | $342.5 provided in Q1 2014 |
| Cash and cash equivalents | $1,157.4 | $1,071.4 at December 31, 2014 |
| Total assets | $25,715.9 | $23,936.8 at March 31, 2014 |
| Total loans, net of unearned income | $16,732.1 | $15,119.5 at March 31, 2014 |
| Total deposits | $18,638.6 | $16,672.7 at March 31, 2014 |
| Term borrowings | $1,573.2 | $1,507.0 at March 31, 2014 |
| Total equity | $2,499.3 | $2,532.5 at March 31, 2014 |
- The net interest spread was 2.61%, down from 2.74% a year earlier. Management cited excess cash at the Federal Reserve, lower-yielding commercial loans and runoff of non-strategic loans as factors pressuring margin.
- Cash flow from investing activities was $580.4 million provided; financing activities used $352.8 million. Cash and cash equivalents increased $86.0 million during the quarter.
- Regulatory capital at March 31, 2015: First Horizon common equity Tier 1 ratio 10.31%, Tier 1 ratio 11.85%, and total capital ratio 14.08%. The filing states both First Horizon and its bank subsidiary met well-capitalized standards.
- Loans-to-core-deposits ratio was 90%, versus 92% a year earlier. Average core deposits rose 11% year over year to $17.8 billion.
Material changes versus the prior period
- Results shifted from profit to loss, principally because of a $162.5 million Q1 litigation and regulatory expense associated with an agreement in principle with DOJ and HUD, along with higher personnel expense. Noninterest expense rose $158.2 million year over year.
- Revenue fell $11.5 million. Lower mortgage banking income—especially the absence of approximately $20 million in servicing fees recognized in Q1 2014—and lower securities gains outweighed higher net interest income and capital markets revenue.
- Net interest income increased 3%, but NIM contracted 14 basis points. Average earning assets rose to $23.5 billion from $21.6 billion.
- Credit measures generally improved: allowance for loan losses fell 8% to $228.3 million; net charge-offs declined 45% to $9.1 million; and nonperforming assets fell to $236.8 million from $345.5 million.
- Average loans increased 7% year over year, led by commercial lending; retail loans declined 7%, reflecting legacy portfolio runoff. Period-end C&I loans included $1.6 billion of loans to mortgage companies.
Outlook, risks and unusual items
- Outlook: Management expected NIM to remain under pressure during 2015, with possible mitigation if interest rates rose later in the year. It expected asset quality to remain relatively stable, subject to continued economic recovery; non-strategic consumer real estate and permanent mortgage portfolios were expected to continue running off. No specific earnings or revenue guidance was provided.
- DOJ/HUD matter: In April 2015, after quarter-end, FHN reached an agreement in principle to pay $212.5 million to settle potential claims concerning certain FHA-insured mortgage originations. The Q1 income statement includes $162.5 million of litigation and regulatory expense; the filing separately reports $212.5 million for the agreement in principle within aggregate established material loss-contingency liabilities of $218.7 million. A final written settlement remained subject to negotiation. FHN asserted potential insurance coverage up to $75 million, but insurers had not agreed to fund the settlement and disputed or reserved coverage rights; FHN’s recovery was not considered probable.
- Other legal exposure: Management estimated reasonably possible losses in excess of established liabilities across material matters could range from zero to approximately $100 million. Some mortgage securitization matters had no estimable loss range. The filing describes legacy mortgage repurchase and servicing disputes, including an established repurchase liability of $116.4 million and an active repurchase/related-claims pipeline of $167.8 million at March 31, 2015.
- Concentrations and market risks: Residential real estate represented 32% of total loans. Finance and insurance plus mortgage-company lending represented 38% of C&I loans, exposing that portfolio to financial-services industry conditions. Management cited economic, housing-market, interest-rate, regulatory and competitive uncertainty. A modeled +200 basis-point rate shock indicated a favorable 12.2% change in 12-month net interest income; management cautioned that such scenarios are hypothetical.
- Capital and funding: Basel III implementation, losses, dividends, repurchases and higher risk-weighted assets reduced reported capital ratios versus 2014. FHN said ratios were expected to remain significantly above well-capitalized standards through 2015. The bank subsidiary’s dividend capacity was restricted: the filing reports negative $52.2 million available for dividends without prior regulatory approval as of March 31, 2015.
- Shareholder returns: FHN repurchased $15.8 million of shares under its $100 million program in Q1; cumulative purchases under the program were $54.3 million. The board approved a $0.06-per-common-share dividend payable July 1, 2015.
- Accounting change: FHN retroactively adopted the proportional amortization method for qualifying affordable-housing investments, revising prior-period amounts. The filing states interim results are not necessarily indicative of future results.
Important facts for investors to verify
- Review the final DOJ/HUD settlement terms and whether FHN obtains any recovery under the disputed insurance policies.
- Track recurring earnings apart from the unusually large litigation charge, and assess the sustainability of net interest income, NIM and capital markets revenue.
- Monitor deposit growth and funding mix, capital ratios under Basel III, and any regulatory constraints on subsidiary dividends or parent-company liquidity.
- Follow credit trends and concentrations, especially mortgage-company/financial-services lending, residential real estate, HELOC draw-period expirations and legacy non-strategic portfolios.
- Assess developments in mortgage repurchase, securitization and servicing litigation, including changes to the $116.4 million repurchase liability, $167.8 million active pipeline and disclosed possible-loss estimates.