First Horizon National Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. First Horizon is a bank holding company operating primarily through First Tennessee Bank, with regional banking, fixed income, corporate, and non-strategic segments. The Capital Bank acquisition closed in November 2017; its results were included for all of 2018 but only December 2017.
Financial results and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $1,220.3 million | $842.3 million |
| Noninterest income | $722.8 million | $490.2 million |
| Net income available to common shareholders | $538.8 million | $159.3 million |
| Provision for loan losses | $7.0 million | $0 |
| Total assets, year-end | $40.8 billion | $41.4 billion |
| Total loans, year-end | $27.5 billion | $27.7 billion |
| Total deposits, year-end | $32.7 billion | $30.6 billion |
| Total term borrowings, year-end | $1.17 billion | $1.22 billion |
| Total shareholders’ equity, year-end | $4.79 billion | $4.58 billion |
- Reported net interest income plus noninterest income was $1.94 billion, up from $1.33 billion in 2017. The company attributed about 63% of 2018 revenue to net interest income and 37% to fee and other noninterest income.
- 2018 earnings included a $212.9 million pretax gain from selling Visa Class B stock. The filing does not provide enough information in the excerpt to calculate earnings excluding that item.
- Net interest income growth reflected the full-year contribution from Capital Bank, loan growth, and higher rates. Noninterest income increased substantially, mainly due to the Visa sale; fixed income revenues remained pressured by market conditions.
- Year-end short-term borrowings were $1.47 billion, down from $4.32 billion in 2017. Deposits were the principal funding source; the company also relied on financial-institution financing and capital markets. The excerpt does not provide a clear cash-flow total or net interest margin figure.
- Net charge-offs were $16.1 million, versus $12.5 million in 2017; the allowance for loan losses was $180.4 million at year-end. The filing describes recent credit losses as low and cautions that losses will rise as the credit cycle changes.
- At December 31, 2018, FHN’s Common Equity Tier 1, Tier 1, total capital, and leverage ratios were 9.77%, 10.80%, 11.94%, and 9.09%, respectively. The Bank’s respective ratios were 9.81%, 10.72%, 11.32%, and 9.10%; the filing says the Bank qualified as well capitalized.
- The Bank could declare approximately $156.2 million in dividends to FHN without regulatory approval as of January 1, 2019, subject to applicable restrictions.
Material changes versus 2017
- Net income available to common shareholders rose to $538.8 million from $159.3 million. Comparability is affected by the Capital Bank acquisition, which contributed a full year of earnings in 2018, and by the significant negative tax adjustment that drove a large fourth-quarter loss in 2017 following tax reform.
- Deposits increased by about $2.1 billion, while reported loans declined slightly. The filing says regional-bank growth and acquisition-related growth offset attrition in the non-strategic loan portfolio over the broader period.
- Mortgage repurchase losses were a net reserve release of $1.0 million, compared with a $22.5 million release in 2017. Litigation and regulatory matters expense fell to $0.6 million from $40.5 million.
- Capital Bank systems integration was completed in May 2018. Total assets were lower year over year despite higher deposits; the excerpt does not explain this balance-sheet movement in detail.
Outlook, commentary, and risks
- No specific financial guidance or quantified earnings outlook is provided in the supplied filing text. Management identifies profitable organic growth, expense discipline, risk-adjusted returns, customer service, and technology investment as continuing priorities.
- The company noted four Federal Reserve rate increases in 2018 and that the yield curve had flattened. Early in 2019 the Fed signaled a possible pause; the filing says rate and yield-curve changes could affect net interest margin, loan demand, and fixed income revenue.
- Key risks include intense competition and technology-driven disruption; cyber, fraud, vendor, and operational risks; economic downturns and rising credit losses; and exposure to financial-services borrowers. Finance and insurance and mortgage-company lending together represented about 29% of C&I loans.
- Legacy mortgage exposures remain, including potential repurchase, servicing, foreclosure, indemnity, and litigation claims. The company says outcomes are uncertain and losses beyond existing accruals could be material.
- The company expected to adopt CECL credit-loss accounting in 2020, which it warned could accelerate loss recognition and increase provisions and volatility. It also identified uncertainty surrounding the transition away from LIBOR after 2021.
- Other relevant exposures include regulatory and legal change, deposit pricing and funding availability, capital and dividend restrictions, and possible adverse effects from regional economic or natural-disaster events.
- Management concluded disclosure controls were effective at year-end, and reported no material fourth-quarter change in internal control over financial reporting.
Investor verification priorities
- Review the incorporated annual-report statements and notes for operating cash flow, cash and cash equivalents, net interest margin, and segment-level results; these values are not clearly stated in the supplied text.
- Reconcile reported 2018 earnings for the Visa gain, acquisition effects, and tax-related comparability with 2017.
- Assess loan-quality trends, allowance coverage, and concentrations in financial-services and legacy residential real-estate lending.
- Review the detailed disclosures on legacy mortgage contingencies, litigation reserves, and potential losses beyond accrued amounts.
- Confirm current capital, liquidity, dividend capacity, and funding needs, including maturities and the effects of interest-rate and LIBOR transition risks.