First Horizon National Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report; it does not provide a clear standalone fourth-quarter results summary in the supplied text. First Horizon is a bank holding company headquartered in Memphis, with regional banking and capital markets operations and a non-strategic portfolio of legacy businesses.
Financial performance and condition
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net interest income | $688.7 million | $700.8 million | Down 1.7% |
| Noninterest income | $671.3 million | $786.0 million | Down 14.6% |
| Total revenue (net interest income plus noninterest income) | $1,360.0 million | $1,486.8 million | Down 8.5% |
| Provision for loan losses | $78.0 million | $44.0 million | Up 77.3% |
| Noninterest expense | $1,383.7 million | $1,293.0 million | Up 7.0% |
| Total assets | $25,520.1 million | $24,789.4 million | Up 2.9% |
| Total deposits | $16,629.7 million | $16,213.0 million | Up 2.6% |
| Total term borrowings | $2,226.5 million | $2,481.7 million | Down 10.3% |
| Total shareholders’ equity | $2,509.2 million | $2,684.6 million | Down 6.5% |
The supplied filing text does not provide a clear value for 2012 net income, cash flow, net interest margin, or other profitability margins. Short-term borrowings were $2,912.1 million, compared with $2,406.9 million in 2011. Total loans were $16,708.6 million, up from $16,397.1 million. The allowance for loan losses was $277.0 million, down from $384.4 million; net charge-offs were $185.4 million, down from $324.4 million.
At year-end, the Corporation’s total capital, Tier 1 capital, and leverage ratios were 15.94%, 13.10%, and 10.63%, respectively. The Bank was described as well-capitalized, with corresponding ratios of 16.76%, 14.82%, and 12.24%.
Material changes and significant items
- Total revenue declined, led by lower noninterest income; expenses increased, including charges tied to legacy mortgage activity.
- In the second quarter, First Horizon recorded a $250 million charge after receiving new information from Fannie Mae regarding mortgage repurchase exposure. The filing reports a $299.3 million 2012 repurchase and foreclosure provision and a $232.4 million liability at year-end, versus $165.3 million at year-end 2011.
- The pipeline of mortgage repurchase requests and unresolved mortgage-insurance cancellation notices was $333.8 million at year-end, down from $383.5 million a year earlier.
- Regional banking accounted for 63% of 2012 consolidated revenue; capital markets accounted for 26% and non-strategic activities 11%. Non-strategic activities represented 33% of expenses, significantly affected by the mortgage repurchase provision.
- The Corporation announced in January 2013 that it would raise its quarterly common dividend from one cent to five cents per share. However, the Bank could not legally pay dividends to the Corporation without regulatory approval, and the Corporation identifies Bank dividend restrictions as a constraint on its cash available for shareholder distributions.
Outlook, risks, and contingencies
- Management expected asset quality to be relatively stable to slightly improving in 2013, conditional on a continued mild economic recovery. The filing provides no specific earnings or revenue guidance.
- Legacy mortgage exposures remain material. The Corporation faced GSE repurchase and make-whole claims, six lawsuits related to First Horizon-branded mortgage securitizations, and possible additional claims. It reported no reserve for potential losses on private first-lien securitizations other than for one suit; exposure related to an insolvent monoline insurer was not estimable.
- The company disputed a former mortgage subservicer’s demand for reimbursement of costs and said the dispute could lead to substantial litigation. The ultimate impact of foreclosure-practice reviews and any customer remediation was unknown.
- Key business risks include credit deterioration, concentrations in commercial and consumer real-estate lending, low interest rates and a flat yield curve, funding and deposit volatility, market and counterparty risks, and the execution of expense reductions and strategic growth.
- Management expected increased compliance costs and possible business constraints from Dodd-Frank, consumer-protection rules, changing capital requirements, stress testing, and deposit-insurance changes. Proposed U.S. Basel III rules were not final at year-end.
- The filing identifies a $261 million net deferred tax asset whose value depends partly on future taxable earnings and tax rates. It also notes that the expiration of the government’s unlimited deposit insurance for certain commercial accounts at year-end 2012 could affect deposit levels.
Investor verification points
- Review the incorporated 2012 Annual Report financial statements for net income, operating cash flow, net interest margin, and quarterly results; these values are not clear in the supplied filing text.
- Assess the adequacy and sensitivity of mortgage repurchase and foreclosure reserves, including subsequent GSE requests and litigation developments.
- Confirm the status of OCC approvals affecting Bank dividends and how those restrictions interact with the Corporation’s announced dividend increase.
- Examine changes in credit quality, especially second-lien consumer real-estate loans and commercial lending exposures, and reconcile declining reserves with future loss assumptions.
- Evaluate liquidity and funding composition, including higher short-term borrowings, deposit trends after the TAG program expiration, and near-investment-grade debt ratings.
- Track the effect and implementation of new regulatory capital, stress-testing, consumer-protection, and mortgage-servicing requirements.