First Horizon National Corporation — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011. First Horizon is a Memphis-based bank holding company operating primarily through First Tennessee Bank and reporting four segments: regional banking, capital markets, corporate, and non-strategic. Its strategy centers on regional banking and capital markets while winding down legacy businesses. The company reported $24.8 billion in consolidated assets at year-end.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net interest income | $700.8 million | $730.8 million | Down 4.1% |
| Noninterest income | $786.0 million | $932.7 million | Down 15.7% |
| Revenue (net interest income plus noninterest income) | $1,486.8 million | $1,663.5 million | Down 10.6% |
| Provision for loan losses | $44.0 million | $270.0 million | Down 83.7% |
| Total assets | $24.789 billion | $24.699 billion | Up 0.4% |
| Total deposits | $16.213 billion | $15.208 billion | Up 6.6% |
| Total term borrowings | $2.482 billion | $3.228 billion | Down 23.1% |
| Total shareholders’ equity | $2.685 billion | $2.678 billion | Up 0.2% |
About 53% of 2011 revenue came from fee and other noninterest income and 47% from net interest income. The Bank reported $16.0 billion in net loans; the filing’s loan portfolio table shows $16.397 billion in loans. The filing text provided here does not give clear values for 2011 net income, operating cash flow, net interest margin, or other margin measures; detailed financial statements and MD&A are incorporated by reference.
Consolidated regulatory capital ratios at December 31, 2011 were 17.99% for total capital, 14.23% for Tier 1 capital, and 11.41% for the leverage ratio. The Bank qualified as “well capitalized.” The filing says the Bank’s cash dividends to the holding company were restricted absent regulatory approval.
Material changes versus the prior comparable period
- Loan-loss provision fell sharply to $44.0 million from $270.0 million, reflecting improving credit quality; management nevertheless said reserves remained elevated by historical standards and portfolio performance was volatile in some areas.
- Revenue declined, particularly noninterest income. Regional banking’s share of revenue rose to 56% from 51%; non-strategic’s share fell to 14% from 18%, while capital markets’ share declined to 25% from 27%.
- Deposits grew by approximately $1.0 billion, while term borrowings fell by approximately $746 million. Total assets were broadly stable.
- Gross loans declined to $16.397 billion from $16.783 billion. Residential commercial real estate loans fell to $121 million from $264 million, while commercial, financial and industrial loans increased to $8.015 billion from $7.338 billion.
Outlook, risks, contingencies, and unusual items
- Management expected overall credit trends to continue improving into 2012, but that outlook depended on a continued mild economic recovery. A weaker economy could reverse credit improvement and increase loan-loss expense.
- Debit-card interchange fee rules effective October 2011 were expected to reduce Bank fee income by approximately $4–5 million per quarter. The Bank had adjusted some fees and expected mitigation efforts to continue in 2012.
- Legacy mortgage exposures remain significant. From 2005–2008, the company sold $69.5 billion of first-lien mortgage loans to GSEs; it also securitized $47.0 billion of first-lien loans from 2000–2007. Repurchase demands, mortgage-insurance cancellations, litigation, and foreclosure-related remediation could produce additional losses. At year-end, the company was defending four lawsuits involving private first-lien securitizations and reported no reserve for potential losses on those claims; it also reported no reserve for private HELOC securitization losses beyond the loan-loss allowance.
- The company was not party to the February 2012 $25 billion mortgage-servicing settlement announced by federal and state authorities. The OCC required the Bank to assess foreclosure practices and report findings; potential remediation costs were unknown.
- The common dividend resumed in January 2011 at $0.01 per share, substantially below its pre-2008 level. Regulatory limits on Bank dividends, capital needs, and earnings may constrain future shareholder distributions.
- Management warned that Dodd-Frank implementation could raise compliance and deposit-insurance costs, constrain revenue, and affect capital markets, mortgage, and derivatives activities. Potential future capital rules could also reduce flexibility for dividends and share repurchases. The company cited a potential $200 million reduction in Tier 1 capital from the phased exclusion of trust preferred securities.
- Other material risks include interest-rate and yield-curve changes, funding-market access and ratings downgrades, credit and collateral deterioration, capital-markets inventory and counterparty risk, vendor and cybersecurity risk, and regulatory or litigation developments. Management noted limited direct exposure to European assets but potential indirect effects from market disruption.
Important facts for investors to verify
- Review the incorporated 2011 Annual Report financial statements and MD&A for net income, cash flows, net interest margin, allowance coverage, nonperforming assets, and segment results, which are not clearly provided in the filing text supplied here.
- Assess the size, assumptions, and adequacy of mortgage repurchase, foreclosure, and servicing-related reserves, and track subsequent claims, settlements, or remediation.
- Confirm the Bank’s ability to obtain regulatory approval for dividends and the holding company’s capacity to fund its own obligations and shareholder distributions.
- Evaluate deposit stability, funding access, debt ratings, and the impact of forthcoming capital, liquidity, and deposit-insurance rules.
- Check whether credit improvement persisted after 2011, particularly in legacy real estate portfolios, and whether fee-income pressure from interchange limits was offset.