First Horizon National Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was signed February 25, 2016. Amounts below are U.S. dollars; “million” and “billion” are stated where relevant.
Business context
First Horizon is a bank holding and financial holding company headquartered in Memphis, Tennessee. Its principal subsidiary is First Tennessee Bank. The company reports four segments: regional banking, fixed income, corporate, and non-strategic. Regional banking accounted for 77% of 2015 consolidated revenue; fixed income, 21%; and non-strategic, 6%. Corporate revenue was negative. Fee and other noninterest income contributed approximately 44% of revenue, with net interest income contributing 56%.
Financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $653.7 million | $627.7 million |
| Noninterest income | $517.3 million | $550.0 million |
| Loan-loss provision | $9.0 million | $27.0 million |
| Mortgage repurchase-loss provision | — | $(4.3) million |
| Total assets, year-end | $26.2 billion | $25.7 billion |
| Total deposits, year-end | $20.0 billion | $18.1 billion |
| Total loans, year-end | $17.7 billion | $16.2 billion |
| Term borrowings, year-end | $1.315 billion | $1.880 billion |
| Total shareholders’ equity, year-end | $2.640 billion | $2.582 billion |
| Net charge-offs | $31.2 million | $48.4 million |
| Allowance for loan losses, year-end | $210.2 million | Not stated in this excerpt |
Net interest income increased about 4% year over year, while noninterest income declined about 6%. The filing excerpt does not provide a clear value for net income, operating cash flow, net interest margin, or other profit-margin measures; the full financial statements and management discussion are incorporated by reference rather than reproduced here.
At year-end, First Horizon reported regulatory capital ratios of 10.45% Common Equity Tier 1, 11.79% Tier 1, 13.01% total capital, and 9.85% leverage. The Bank’s corresponding ratios were 10.81%, 11.95%, 13.09%, and 10.06%. The Bank was described as well capitalized under applicable requirements.
The company reported that deposits, financing from other financial institutions, and capital markets funding were its principal funding sources. Short-term borrowings declined to $1.506 billion from $2.351 billion. Cash-flow totals and a fuller liquidity position are not provided in the supplied text.
Changes versus 2014
- Deposits rose approximately 10.5%, loans approximately 9.0%, and total assets approximately 2.1%.
- Net interest income improved, which management attributed in part to regional banking loan growth despite historically low lending margins.
- Fixed income trading revenue improved as uncertainty about future interest-rate movements eased somewhat.
- Noninterest income fell, and noninterest expense rose to $1,053.8 million from $832.5 million. The filing identifies legacy mortgage-related charges as a source of expense volatility.
- Term borrowings decreased by about $565 million. The company issued $500 million of senior notes due 2020, refinancing an earlier five-year notes issue.
- Mortgage repurchase and foreclosure provision expense was zero in 2015, compared with a $4.3 million provision reversal in 2014. The longer-term legacy mortgage exposures remained unresolved.
Outlook, commentary, risks, and unusual items
Management describes a strategy focused on regional banking and fixed income, with profitable organic growth and selective acquisitions, alongside continued efficiency and repositioning efforts. No quantified earnings or revenue guidance is provided in the supplied text. Management cited low interest rates and a relatively flat yield curve as ongoing pressures on lending margins and fixed income activity.
- Dividend and liquidity constraint: The Bank’s calculated capacity to pay dividends to the holding company was negative $192.8 million at December 31, 2015 and negative $142.0 million on January 1, 2016. Consequently, it could not pay dividends without prior regulatory approval. The company said its common dividend would be seven cents per share starting April 2016; future distributions remain subject to capital, regulatory, and liquidity constraints.
- Legacy mortgage matters: The company settled an FHA-related matter with government agencies for $212.5 million in 2015. It continues to face mortgage securitization litigation, repurchase and foreclosure exposures, and a dispute with a former subservicer that could lead to substantial claims. The filing says possible losses in certain litigation could be material, but does not provide a clear total estimate.
- Credit and concentration risks: Commercial, financial, and industrial loans were about 59% of total loans; consumer real estate was about 27%. The filing highlights exposure to financial-services borrowers, second-lien home equity loans, and potential credit pressure from falling oil prices on the growing Houston lending business.
- Other principal risks: Interest-rate and yield-curve changes, competition, regulatory costs and changes, funding access and credit ratings, cybersecurity and operational disruptions, and uncertainty in credit-loss and other accounting estimates.
- Tax asset: The filing reports a net deferred tax asset of approximately $259.3 million, subject to assumptions about future taxable earnings and tax rates.
- Controls: Management concluded disclosure controls were effective at year-end 2015 and reported no material fourth-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Review the incorporated 2015 Annual Report for net income, cash flows, net interest margin, detailed liquidity data, and complete segment results; these figures are not clear in the supplied filing text.
- Assess the scope, reserves, and potential outcomes of the FHA settlement, securitization cases, repurchase and foreclosure claims, and former-subservicer dispute.
- Confirm the Bank’s dividend restrictions, regulatory approvals, and the holding company’s ability to fund shareholder dividends and debt obligations.
- Evaluate credit quality, especially C&I financial-sector concentrations, legacy home-equity loans and second liens, and Houston energy exposure.
- Check the company’s capital and funding position, including the effect of Basel III phase-in requirements and the removal of trust preferred securities from Tier 1 capital beginning in 2016.