First Horizon National Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. First Horizon is a Tennessee-based bank holding company with four segments: regional banking, fixed income, corporate, and non-strategic. It reported $28.6 billion in consolidated assets at year-end.
Financial results and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $729.1 million | $653.7 million |
| Noninterest income | $552.4 million | $517.3 million |
| Net income available to common shareholders | $220.8 million | $79.7 million |
| Provision for loan losses | $11.0 million | $9.0 million |
| Provision for litigation and regulatory matters | $30.5 million | $187.6 million |
| Provision for mortgage repurchase losses | $(32.7) million | $0 |
| Noninterest expense | $925.2 million | $1,053.8 million |
| Total loans | $19.6 billion | $17.7 billion |
| Total assets | $28.6 billion | $26.2 billion |
| Total deposits | $22.7 billion | $20.0 billion |
| Total term borrowings | $1.04 billion | $1.31 billion |
| Total shareholders’ equity | $2.71 billion | $2.64 billion |
Net interest income and noninterest income both increased. Management attributed the improvement in net interest income mainly to loan growth and a modest rate increase; stronger fixed-income revenues helped reverse the recent decline in noninterest income. Common-shareholder income rose substantially, while lower litigation and regulatory charges and a mortgage-repurchase provision reversal were notable influences. The filing text does not provide clear cash-flow totals, net interest margin, or other margin figures.
At December 31, 2016, First Horizon’s Common Equity Tier 1, Tier 1, total capital, and leverage ratios were 9.94%, 11.17%, 12.24%, and 9.35%, respectively. The Bank’s corresponding ratios were 9.80%, 10.83%, 11.78%, and 9.16%; the filing states the Bank qualified as “well capitalized.”
Material changes and business developments
- Loans grew approximately 11% year over year, driven by commercial lending; commercial, financial, and industrial loans reached $12.1 billion. Consumer loans declined.
- Deposits increased approximately 14%, outpacing loan growth. Total assets rose approximately 9%.
- Term borrowings declined approximately 21%. The company’s stated funding sources include deposits, other financial institutions, and capital markets.
- Regional banking represented 77% of consolidated revenue and 62% of average assets; fixed income represented 22% of revenue and 9% of average assets. Non-strategic operations continued to wind down.
- First Horizon agreed to acquire Coastal Securities’ fixed-income businesses, with closing expected in 2017.
Outlook, risks, and contingencies
- Management said it would continue focusing on targeted banking and fixed-income growth, expense discipline, risk-adjusted returns, customer service, and technology investment. No numerical earnings or revenue guidance is provided in the supplied text.
- The company described its balance sheet as asset-sensitive: rising rates may help if deposit costs rise more slowly than asset yields, but could also cause deposit outflows and weaken mortgage-related demand. A flat or inverted yield curve could pressure net interest margin and fixed-income revenues.
- Legacy mortgage exposures remain material risks, including loan repurchase and foreclosure claims, servicing disputes, and litigation. First Horizon reported a $212.5 million FHA-related settlement in 2015; it warned that future losses could exceed existing accruals and that outcomes are uncertain.
- Credit risks include concentrations in financial-services-related commercial lending and legacy consumer real-estate loans. The allowance for loan losses was $202.1 million and net charge-offs were $19.2 million in 2016. The filing also notes risks from home-equity loans transitioning to amortizing payments and exposure to energy-sector volatility.
- Regulatory dividend constraints are significant: the Bank’s available dividend capacity was negative $132.5 million at year-end. It therefore could not pay dividends to First Horizon without prior regulatory approval. This may constrain the parent’s ability to fund shareholder dividends and debt service.
- Senior debt ratings were investment grade but near the lowest investment-grade levels; two agencies had stable outlooks and one had a positive outlook. A downgrade could raise funding costs or require additional collateral.
- Other risks include regulatory and compliance costs, competition and technology disruption, cybersecurity and operational incidents, access to funding, and changes in tax or accounting rules. The company noted that adoption of the expected-credit-loss standard (ASU 2016-13) was expected to have significant but then-uncertain effects when implemented.
Important facts for investors to verify
- Review the full annual report’s income statement and cash-flow statement, including the precise drivers of 2016 earnings and expense changes; those details are not included in the supplied filing text.
- Examine the amount and status of mortgage-related litigation, repurchase, foreclosure, and servicing exposures, including reserves and potential loss ranges.
- Confirm the Bank’s dividend capacity and any regulatory approvals or restrictions affecting parent-company dividends and debt payments.
- Assess loan growth, concentrations, asset quality, allowance adequacy, and performance of legacy home-equity loans and financial-services borrowers.
- Track deposit pricing, interest-rate sensitivity, liquidity and funding needs, and the effect of rate movements on margins and fixed-income activity.
- Verify the timing, terms, and financial contribution of the planned Coastal Securities acquisition.