First Horizon National Corp
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|First Horizon National Corp. |(FHN – NYSE) |$19.54 |
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18 Earnings Update
Prev. Ed: 4Q17 and 2017 Earnings Update, Mar 12, 2018
Brokers’ Recommendations: Positive: 64.3% (9); Neutral: 35.7% (5 firms); Negative: 0.0% (0) Prev. Ed.: 5; 7; 0.
Brokers’ Target Price: $22.36 (↑11 cents from the last edition, 14 firms) Brokers’ Avg. Exp. Return: 14.4%
Note: A Flash Update on 1Q18 Earnings was done on Apr 13, 2018.
Portfolio Manager Executive Summary
Incorporated in 1968, First Horizon National Corporation (FHN) is a financial services company based in Memphis, TN. It is the parent company of First Tennessee Bank and FTN Financial.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed towards the positive side with 64.3% of the firms in the Digest group rating the stock positive and 35.7% rating it neutral. Target prices provided by the firms range from a low of $21.00 to a high of $25.00 per share. The average came in at $22.36, implying a positive return of 14.4%.
Chief Investment Considerations:
▪ Inorganic growth opportunities
▪ Strong capital position
▪ Improving credit quality
▪ Ability to return capital to its shareholders
▪ Loan growth
▪ Low Regulatory Issues
▪ Rising interest rate environment
▪ Gradual ease in pressure on net interest margin
Positive or equivalent outlook – Nine firms or 64.3%: According to these firms, First Horizon remains well positioned for growth supported by a focused management lineup, improving asset quality and investment in technological enhancement. Further, the firms expect the company to benefit from its improving operating trends, and growing market share and loans. Management has positioned the company well to absorb credit weakness, prepared it to take advantage of opportunities in its core market and benefit from a recovering economy. Also, the company is expected to break even on its non-strategic business after successive run-offs in the prior quarters. Additionally, its solid fundamentals and capital deployment activities continue to be positives. Also, the recent interest rate hikes by the Fed is likely to ease the pressure on net interest margin. Moreover, lower commercial tax rate is likely to support earnings growth
Neutral or equivalent outlook – Five firms or 35.7%: According to these firms, First Horizon’s inorganic growth strategy along with improving interest income will support revenues. The company’s plan to return excess capital to shareholders in the coming period indicates strong balance sheet position. However, legacy mortgage issues and lower quality non-strategic assets may hinder growth going forward. Given the concerns related to the company’s potential exposure to private label securitization losses, the neutral firms expect the upside potential to be constrained in the near term.
May 17, 2018
Formerly known as First Tennessee National Corporation, First Horizon National Corporation is a financial services company based in Memphis, TN which was incorporated in 1968. The company began as a small community bank chartered in 1864. It is the holding company for First Tennessee Bank and FTN Financial. First Tennessee Bank offers deposit products, loans, investments, insurance, financial planning, trusts, asset management and cash management services in Tennessee. FTN Financial provides capital markets and investment banking services. As of Mar 31, 2018, First Horizon had $40.5 billion in total assets, $27.2 billion in loans net of unearned income and $30.8 billion in deposits.
In December 2017, First Horizon acquired Capital Bank Financial Corp. for a total value of $2.2 billion and became the fourth largest regional bank in the Southeast. In April 2017, FTN Financial, a division of First Tennessee Bank, completed the acquisition of Houston-based financial company, Coastal Securities. First Tennessee Bank is a subsidiary of First Horizon. The $160-million deal was signed in October 2016, for payment in cash, based on the book/market value of acquired net assets at closing. The deal was immediately accretive to First Horizon’s earnings per share, return on tangible common equity and return on assets.
The company has four business segments: regional banking, capital markets, corporate and non-strategic.
▪ The Regional Banking segment offers financial products and services, including traditional lending and deposit taking, to retail and commercial customers in Tennessee and surrounding markets. Regional banking provides investments, financial planning, trust services and asset management, credit card, cash management and first-lien mortgage originations within the Tennessee footprint. Additionally, the regional banking segment includes correspondent banking, which provides credit, depository and additional banking-related services to other financial institutions.
▪ The Fixed Income segment consists of fixed income sales, trading and strategies for institutional clients in the U.S. and abroad, loan sales, portfolio advisory and derivative sales.
▪ The Corporate segment consists of gains from the extinguishment of debt, unallocated corporate expenses, subordinated debt issuances and preferred stock expenses, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenues and deferred compensation plans expenses, funds management, low-income housing investment activities and various charges related to restructuring, repositioning and efficiency.
▪ The Non-strategic segment includes the wind-down of national consumer lending activities, legacy mortgage banking elements including servicing fees, and associated ancillary revenues and expenses related to these businesses. It also consists of the wind-down trust preferred loan portfolio and exited businesses along with related restructuring, repositioning and efficiency charges.
Its website is:
The key positives and negatives as identified by the analysts are addressed below:
|Key Positive Arguments |Key Negative Arguments |
|First Horizon has executed several strategic repositioning efforts to |Slow rate of economic growth might impact loan demand. |
|improve long-term profitability. |Above average mortgage repurchase exposure weighs on profitability. |
|Increasing revenue base with rising interest income. |Uncertainty surrounding the impact of mortgage repurchase activity |
|The company possesses a unique combination of credit leverage and |(specifically the private label exposure) is a challenge for First Horizon. |
|capital strength. | |
|Significant efforts recognized in reducing risk and de-leveraging | |
|balance sheet. | |
|Excess capital could be deployed through acquisitions, buybacks or | |
|eventual growth in the balance sheet. | |
|Rising interest rates and lower tax rates to benefit the company. | |
Note: First Horizon operates on a calendar year basis.
May 17, 2018
First Horizon has implemented several strategic repositioning measures to improve long-term profitability. It was one of the first banks to address its credit problems in this cycle. Prior to 2008, the company focused on a national lending strategy that included a construction lending business and a mortgage origination and servicing platform. The company’s exposure to national mortgage and construction lending made a severe impact on the company, leading to its exit from these business lines and focus on its core Tennessee banking franchise.
In 2008, First Horizon sold much of the mortgage business to MetLife and put the legacy national lending portfolio into run-off. As the portfolio was wound down, the company should have deployed excess capital to execute a deal in and around the nine states that border the bank’s core franchise, improving long-term profitability. Management remains committed to enhance productivity and efficiency levels in the long run.
Overall, the firms believe that with the Southeast having ample distressed bank acquisition opportunities, M&A could be a catalyst for First Horizon’s earnings growth, given the option to leverage a very strong capital position. Although the company has been inactive for several years on the M&A front, the Troubled Asset Relief Program (TARP) repayment and the subsequent renewal of cash dividend proved to be an inflection point. Management is interested in Federal Deposit Insurance Corporation (FDIC)-assisted deals and others, provided they match its risk profile.
The company is grappling with some issues, particularly in its national mortgage and construction lending businesses. The firms support the strategic decisions, which were made in late 2007, to exit these business lines and focus on growing its core Tennessee banking franchise. As the non-strategic businesses continue to wind down, the company will be able to reallocate the capital that was associated with these businesses into its core markets. This should improve the long-term growth outlook. The firms expect additional challenges in the medium term as the macro credit environment remains a headwind.
First Horizon reiterated its long-term targets. The company expects net charge-off ratio in a range of 0.20-0.60%. Also, it continues to anticipate Tier 1 Common Equity Ratio within 8-9%.
NIM is expected in a range of 3.25-3.50%. Further, fee income, as a percentage of revenues, is anticipated within 30-40% range. Also, it expects long-term efficiency ratio in the range of 60-65%.
Additionally, Return on Tangible Common Equity (ROTCE) is expected to trend above 15%, while long-term Return on Assets (ROA) is projected in the range of 1.1-1.3%.
May 17, 2018
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
|Rating Distribution |
|Positive |64.3%↑ |
|Neutral |35.7%↓ |
|Negative |0.0% |
|Average Target Price |$22.36↑ |
|Maximum Upside from Current Price |27.9% |
|Minimum Upside from Current Price |7.5% |
|Upside from Current Price |14.4% |
|Digest High |$25.00 |
|Digest Low |$21.00 |
|Number of Analysts with Target Price/Total |14↑/14↑ |
Risks to the target price include, but are not limited to, extended subdued fixed income trading revenues, credit deterioration related to its commercial real estate and home equity portfolios, lower-than-expected capital markets income, increasing competition in its core Tennessee footprint, weakening economic conditions, interest rate volatility, credit risk and materially increased regulatory requirements or costs.
On Apr 13, 2018, First Horizon announced 1Q18 results. Adjusted earnings per share of 34 cents surpassed the Zacks Consensus Estimate by 13.3%. The adjusted figure excludes pre-tax acquisition-related expenses and gain on sale of a building.
The results reflected improvement in net interest income and non-interest income. Further, better efficiency ratio during the quarter was a tailwind. However, substantial rise in expenses and weakening of capital position were the key headwinds.
Net income available to common shareholders for the quarter was approximately $90.6 million, up 68% from the prior-year period.
Segment wise, quarterly net income at Regional Banking surged 98% year over year to $127.7 million. Also, net income for Fixed Income and Non-Strategic segments jumped 23% and 76%, respectively, from the prior-year quarter. However, the Corporate segment incurred net loss of $42.4 million compared with net loss of $12.2 million in the prior-year quarter.
Total revenues in 1Q18 came in at $437.2 million, up 43% year over year (y/y).
Net interest income (NII) was $301.2 million, up 59% y/y. The rise was mainly due to higher interest income partially offset by rise in interest expenses.
Net interest margin (NIM) was 3.43%, up 51 basis points (bps) from 2.92% in the previous-year quarter.
Non-interest income of $135.9 million was up 16% y/y. The increase was primarily due to a rise in deposit transaction and investment management fees along with higher insurance income, partially offset by lower fixed income.
Quarterly Business Segments
Regional Banking: The segment reported total revenues of $377.6 million, up 50% y/y. NII was $298.7 million, increasing 55%. Non-interest income came in roughly at $78.9 million, up 34% from the year-ago quarter.
Fixed Income: The segment reported total revenues of approximately $54.1 million, up 4% y/y. NII came in at $8.5 million, increasing significantly y/y. Non-interest income was $45.6 million, down 10% y/y.
Corporate: The segment reported negative revenues of $3.7 million compared with negative revenues of $8.3 million in the year-ago quarter. Net interest expenses amounted to $13.2 million compared with $13.8 million in the previous-year quarter. Non-interest income of $9.5 million was reported, up 73% from the prior-year quarter.
Non-Strategic: The segment generated total revenues of $9.3 million, down 15% y/y. NII came in at $7.2 million, down 22% y/y. Non-interest income was $2.1 million, up 25% from the year-ago quarter.
Total non-interest expenses for 1Q18 were $313.3 million, representing 41% rise on a y/y basis. The increase was due to rise in almost all the components except legal fees and advertising related costs.
Efficiency ratio came in at 71.67% compared with 72.47% in the year-ago quarter. A fall in the efficiency ratio indicates rise in profitability.
Earnings Per Share
First Horizon reported adjusted earnings per share (EPS) of 34 cents in 1Q18.
Net Income available to common shareholders was nearly $90.6 million or 27 cents per share compared with $54 million or 23 cents in 1Q18.
Following 1Q18 results, some of the firms raised their 2018 and 2019 EPS estimates reflecting strong quarterly results, higher accretion benefits from acquisitions and expectations of negative loan loss provision.
However, some of the firms lowered their 2019 EPS estimates reflecting slow loan and fee income growth expectations.
Balance Sheet/ Capital Structure/ Others
As of Mar 31, 2018, total period-end assets were $40.5 billion, up 37% y/y. Total earning assets were $35.9 billion, up 32% y/y. Average loans were $27.1 billion compared with $18.8 billion as of Mar 31, 2017.
Total period-end loans were $28 billion (including loans held for sale as well as loans, net of unearned income), up 50% y/y from the previous-year quarter. Total period-end deposits amounted to $30.8 billion, up 31% from the year-ago quarter.
As of Mar 31, 2018, period-end investment securities increased 22% y/y to $4.8 billion.
First Horizon’s credit quality remained a mixed bag in 1Q18. During the quarter, the company recorded a credit in provision for loan losses of $1 million, flat y/y.
Further, allowance for loan losses was roughly $187.2 million, down 7% from the year-ago quarter. As a percentage of period-end loans, allowance for loan losses was 0.69%, down 37 bps y/y.
The company witnessed net charge-offs of $1.4 million in the reported quarter against net recoveries of $0.9 million in the prior-year quarter. As a percentage of average loans on an annualized basis, net charge-offs were 0.02%.
Nonperforming assets of $172.7 million increased 7% y/y. As a percentage of period-end loans plus foreclosed real estate and other assets, non-performing assets were 0.60% compared with 0.80% in 1Q17.
First Horizon’s capital position weakened during the quarter. As of Mar 31, 2018, Tier 1 common equity ratio was 8.98%, down from 10.20% at the end of the prior-year quarter.
As of Mar 31, 2018, total capital ratio was 11.25% compared with 12.39% as of Mar 31, 2017. Tangible common equity to tangible assets ratio was 6.71%, down from 7.27% in the previous-year quarter. Book value per common share came in at $12.78 compared with $10.05 in the year-ago quarter.
Share Repurchase Update
During 1Q18, no share repurchases were made by First Horizon. In January 2018, the board approved a share buyback program of up to $250 million, which expires on Jan 31, 2020.
On Apr 24, 2018, First Horizon’s board of directors announced a quarterly cash dividend of 12 cents per share. The dividend will be paid on Jul 2 to shareholders on record as of Jun 8.
On Apr 2, 2018, First Horizon’s board of directors paid a quarterly cash dividend of 12 cents per share to shareholders on record as of Mar 9.
May 17, 2018
|Coverage Team |11B |
|QCA |Kalyan Nandy |
|Lead Analyst |Priti Dhanuka |
|Analyst |Radhika Saraogi |
|Copy Editor |Proma Bhattacharjee |
|Content Ed. |Priti Dhanuka |
|No. of brokers reported/Total |14/14 |
|brokers | |
|Reason for Update | Earnings |
May 17, 2018
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