Mobile Wave Makes Cost-Cutting Easier for First Horizon

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First Horizon still has a ways to go before reaching its goal of an efficiency ratio in the 60% to 65% range, but it is making progress.

The Memphis, Tenn., company trimmed expenses by 7% in the first quarter compared with the fourth quarter, and it could make significant further reductions as it works to streamline its branch network.

Along with its financial results First Horizon reported a $3.7 million charge Friday related to ongoing closures of about 10 branches in Tennessee. Going forward, however, the branch plan should trim $4 million to $5 million of annual expenses. Deposit runoff at the branches that have already closed has been minimal, according to Bryan Jordan, First Horizon's chairman and chief executive.

Expense cuts that took effect in the first quarter improved First Horizon's efficiency ratio — noninterest expense divided by revenue other than from securities gains — to 74.45% from 81.94% in the fourth quarter.

There may be more branch closings — and savings — to come.

First Horizon has 176 branches in Tennessee and six other Southeastern states, according to the Federal Deposit Insurance Corp.'s website. It is investing at the same time in mobile and online banking channels, and customers are continuing to migrate there, Jordan said.

Those trends could prompt the $27 billion-asset company to close even more branches this year and next than planned. In a conference call with investors Friday, Jordan said First Horizon would probably close another five to seven branches this year, as well as an undetermined number in 2017.

First Horizon has been downsizing its branch network for about a decade. In past years, however, the company averaged five to 10 closings a year, Dave Miller, its head of consumer banking, said in an interview Friday. Miller attributed the more rapid rationalization pace to a dramatic shift in customer behavior. He said a recent company survey indicated that only 45% of customers were visiting branches at least once a month.

"Five years ago, that figure would have been closer to 70%," Miller said. "Now you have a situation where more people are using digital channels every month rather than the branches."

First Horizon, the holding company for the $27 billion-asset First Tennessee Bank, reported net income of $47.8 million, or 20 cents per share.

Profits rose a modest 2% compared with the final quarter of last year. Year-over-year comparisons are hard because in the first quarter of 2015 the company booked a $212 legal settlement connected to pre-crisis mortgage underwriting practices, resulting in a $77 million loss.

The branch-related charge was one of a series of items that, taken as a whole, limited First Horizon's earnings growth despite strong increases in loans, deposits and total revenue.

On the negative side, net chargeoffs jumped to $9 million, compared with $1.6 million in the fourth quarter, and the company's tax rate climbed to 32%, compared with 5% in the fourth quarter. The company attributed the increase to higher levels of anticipated pretax income. Indeed, in the first quarter, pretax income amounted to $76 million, up a robust 41% from the fourth quarter.

Overall First Horizon is predicting steady growth in 2016, Jordan said.

"We feel that the economy continues to move forward at a reasonable level," he said. "It's a little slower than we would like. I've referred to it in the past as a plow-horse economy, [but] it seems to be very steady and somewhat strong."

First Horizon's chargeoffs included a $6 million energy credit. Nonperforming loans of $219 million were up slightly from the fourth quarter, but down 8% from a year ago. The energy loan has been on First Horizon's watch list for several quarters. The bank decided to write it off after as a result of its spring redetermination of energy credits, Chief Credit Officer Susan Springfield said Friday.

Despite the uptick, First Horizon is not forecasting any significant credit-quality deterioration in its energy portfolio or overall loans.

"We're not particularly concerned in a broad way about softness in the credit market," Jordan said. "I don't intend to say we think that the sky is falling, because we certainly don't. We think that credit is about where it ought to be at this stage in the cycle."

First Horizon recorded year-over-year increases in loans of 5%, and deposits of 8%.

According to Chief Financial Officer William C. Losch III, the $17.6 billion loan portfolio has grown 15% since the first quarter of 2014. Solid, ongoing growth helped the company expand it net interest margin by 6 basis points compared with yearend 2015. Losch sees the widening trend continuing during the remainder of 2016.

"Even if rates stay flat, we still think we can defend the margin at this level and maybe even modestly improve it," Losch said.

While the company remains on the lookout for merger and acquisition opportunities, its top priority is still the recent acquisition of TrustAtlantic Financial, Jordan said. First Horizon completed its acquisition of the $430 million-asset TrustAtlantic, of Raleigh, N.C., in October.

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