First Horizon National Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. First Horizon is a regional banking and fixed-income financial services company headquartered in Memphis, Tennessee.
Financial results and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $1.210 billion | $1.220 billion |
| Noninterest income | $654.1 million | $722.8 million |
| Net income | $452.4 million | $556.5 million |
| Net income available to common shareholders | $434.7 million | $538.8 million |
| Diluted EPS | $1.38 | $1.65 |
| Net interest margin | 3.28% | 3.45% |
| Total assets at year-end | $43.31 billion | $40.83 billion |
| Loans, net of unearned income | $31.06 billion | $27.54 billion |
| Deposits | $32.43 billion | $32.68 billion |
| Term borrowings | $791.4 million | $1.171 billion |
- Total revenue, calculated as net interest income plus noninterest income, was approximately $1.864 billion. Net income declined 19%; common diluted EPS declined 16%.
- The 2018 comparison benefited from a $212.9 million pretax gain on the sale of Visa Class B shares. Excluding that unusual gain, 2019 noninterest income benefited from a strong recovery in fixed-income activity: fixed-income revenue rose to $278.8 million from $167.9 million.
- Interest-rate cuts and higher deposit costs pressured 2019 net interest income and margin. Average earning assets grew 4%, supported by loan growth, but net interest income fell 1%.
- Provision for loan losses was $47.0 million, versus $7.0 million. The allowance was $200.3 million, or 0.64% of loans, versus $180.4 million, or 0.66%. Net charge-offs rose to $27.1 million from $16.1 million; nonperforming assets were 0.57% of loans and related assets, down from 0.62%.
- Operating cash flow was $830.3 million; investing cash flow was negative $2.390 billion and financing cash flow was positive $1.421 billion. Cash and cash equivalents decreased $138.4 million to $1.267 billion.
- Year-end short-term borrowings rose to $4.024 billion from $1.469 billion, principally reflecting higher Federal Home Loan Bank borrowing. The company reported $3.4 billion of available FHLB borrowing capacity. A $400 million bank senior debt issue was redeemed in November 2019; the parent had $500 million of senior notes due in December 2020.
- First Horizon’s CET1, Tier 1, total capital, and leverage ratios were 9.20%, 10.15%, 11.22%, and 9.04%, respectively. The bank was reported well-capitalized and both entities met applicable capital requirements.
Material changes and management commentary
- Regional Banking pretax income increased 2% to $671.1 million, with higher fee income and lower expenses partly offset by higher loan-loss provision.
- Fixed Income pretax income improved to $67.8 million from $11.1 million as falling rates and greater market volatility increased trading revenue.
- Management cited expense discipline, profitable loan growth, investment in technology and customer experience, and growth in specialty lending. A company-wide efficiency review generated $39.8 million of restructuring and repositioning charges; rebranding and acquisition-related expenses also affected results.
- In November 2019, First Horizon agreed to acquire 30 branches from SunTrust/Truist, including approximately $2.4 billion of deposits and $410 million of loans, with closing expected in the second quarter of 2020.
- First Horizon also agreed to a merger of equals with IBERIABANK Corporation. The announced exchange ratio was 4.584 First Horizon shares per IBKC share; former IBKC shareholders were expected to own approximately 44% of the combined company. The filing anticipated a mid-2020 close, subject to shareholder, regulatory, and other approvals.
- Effective January 1, 2020, CECL adoption was expected to reduce retained earnings by approximately $100 million, raise loan-loss coverage to about 1.00%, and reduce CET1 by approximately 7 basis points.
- Management expected near-term asset quality to remain relatively stable if economic growth continued. It noted that lower rates could pressure margin and that outcomes depend on deposit pricing, loan growth, and market conditions. No specific earnings guidance was provided.
Risks, contingencies, and unusual items
- Key exposures include interest-rate and yield-curve changes, deposit competition and funding costs, loan losses, commercial lending concentrations, economic downturns, cybersecurity and fraud, regulatory change, and execution and integration risks from the pending transactions.
- Loans to mortgage companies were $4.4 billion, or 22% of C&I loans; finance and insurance lending was $2.8 billion, or 14% of C&I. Management identified the financial-services portion of C&I as sensitive to rates, regulation, real-estate activity, and economic conditions.
- Legacy pre-2009 mortgage activities remain a source of repurchase, servicing, indemnification, and litigation exposure. The mortgage repurchase and foreclosure liability was $14.5 million, down from $32.3 million, largely after a settlement payment. Management could not estimate potential losses for certain mortgage-related claims; litigation outcomes may affect results unevenly.
- At year-end, the aggregate recorded liability for the disclosed material litigation contingency matters was $0.7 million. The Visa-related derivative liability was $22.8 million; its valuation depends on uncertain litigation resolution amounts and timing.
- The filing identifies LIBOR transition after 2021 as an uncertainty for variable-rate loans, derivatives, and certain funding instruments. It also warns that CECL may increase and make more volatile credit-loss provisions.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The collective allowance for loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether the IBKC merger and 30-branch acquisition closed as expected, and the realized costs, synergies, dilution, and integration results.
- How CECL adoption affected actual 2020 reserves, earnings, and regulatory capital compared with the filing’s estimates.
- Whether loan growth, charge-offs, nonperforming loans, and the $4.4 billion mortgage-company lending exposure changed materially after year-end.
- How deposit pricing, wholesale borrowing, and the December 2020 parent-company debt maturity affected liquidity and net interest margin.
- Developments in legacy mortgage claims and Visa-related litigation that could change reserves, cash requirements, or reported earnings.