First Horizon National Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report. First Horizon is a bank holding company whose principal subsidiary is First Tennessee Bank; operations are reported across Regional Banking, Capital Markets, Corporate, and Non-Strategic segments.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $627.7 million | $637.4 million | Down 1.5% |
| Noninterest income | $550.0 million | $584.6 million | Down 5.9% |
| Combined net interest and noninterest income | $1,177.7 million | $1,222.0 million | Down 3.6% |
| Provision for loan losses | $27.0 million | $55.0 million | Down 50.9% |
| Provision for mortgage repurchase losses | $(4.3) million | $170.0 million | Improved by $174.3 million |
| Noninterest expense | $841.2 million | $1,158.6 million | Down 27.4% |
| Total assets, year-end | $25.7 billion | $23.8 billion | Up 7.9% |
| Total deposits, year-end | $18.1 billion | $16.7 billion | Up 8.0% |
| Total term borrowings, year-end | $1.88 billion | $1.74 billion | Up 8.1% |
| Total shareholders’ equity, year-end | $2.59 billion | $2.50 billion | Up 3.6% |
The filing text supplied does not provide a clear value for net income, operating cash flow, net interest margin, or other profitability margins; it incorporates the detailed financial statements and MD&A from the 2014 shareholder annual report. Accordingly, profit and cash-flow trends cannot be fully assessed from this text alone.
Loans totaled $16.23 billion at year-end, compared with $15.39 billion in 2013. Net charge-offs were $48.4 million, down from $78.2 million; the allowance for loan losses was $232.4 million. In 2014, 47% of consolidated revenue came from noninterest income and 53% from net interest income. Regional Banking accounted for 73% of revenue, Capital Markets 18%, and Non-Strategic 11% (Corporate was less than 1%; percentages may not sum due to rounding or segment presentation).
At December 31, 2014, consolidated total capital and Tier 1 capital ratios were 16.18% and 14.46%, respectively, and the leverage ratio was 11.43%. The Bank was described as well capitalized under the requirements then in effect. The Bank’s dividend capacity under restrictions was negative $75.7 million at year-end, though the filing states it could legally declare approximately $15.1 million in cash dividends without regulatory approval on January 1, 2015.
Changes versus the prior comparable period
- Revenue declined, while loan-loss provision and noninterest expense fell materially. The mortgage repurchase provision moved from a $170.0 million expense in 2013 to a $4.3 million benefit in 2014, a significant contributor to the lower expense burden.
- Deposits and assets increased; reported loans also grew. Term borrowings rose from 2013, although they remained below earlier historical levels.
- Mortgage repurchase and foreclosure reserves declined to $119.4 million from $165.1 million. The active repurchase-request pipeline, including unresolved mortgage-insurance cancellation notices, fell to $174.9 million from $197.2 million.
- Regional Banking’s share of revenue rose to 73% from 68% in 2013, while Capital Markets’ share fell to 18% from 23%; Non-Strategic’s share was 11% versus 9%.
Outlook, risks, and unusual items
- Management described a prolonged low-rate, relatively flat yield-curve environment as a headwind for lending and fixed-income activity. It noted that Federal Reserve easing ended during 2014 and that future rate and yield-curve movements were uncertain. No specific earnings or revenue guidance is provided in the filing text.
- First Horizon agreed to acquire TrustAtlantic Financial Corporation, which operated five North Carolina branches; closing was expected in the first half of 2015, subject to customary conditions and shareholder approval.
- Basel III capital rules took effect for the company in 2015, with phased-in requirements. The company also faced annual regulatory stress testing and related disclosure requirements.
- Legacy mortgage exposures remain a material contingency. First Horizon reported three lawsuits related to its branded mortgage securitizations, an ongoing government investigation concerning FHA lending, and a dispute with a former subservicer over reimbursement claims. Outcomes and potential losses are uncertain; the filing cautions that some claims could be substantial.
- Other material risks include credit quality and collateral values, concentrated commercial lending exposure to financial-services borrowers, consumer real-estate and second-lien exposures, interest-rate and trading-market risk, funding and credit-rating risk, cybersecurity and operational disruptions, and increased regulatory and compliance costs.
- The company increased its quarterly common dividend to six cents per share in 2015. The Bank’s capacity to upstream dividends remained subject to regulatory restrictions.
Key facts investors should verify
- Review the incorporated 2014 Annual Report statements and MD&A for net income, cash flows, net interest margin, efficiency ratio, and quarterly results, which are not clearly stated in the supplied filing text.
- Assess the adequacy of the $119.4 million mortgage repurchase and foreclosure reserve against remaining claims, litigation, FHA inquiry, and the former-subservicer dispute.
- Confirm the TrustAtlantic acquisition’s closing, integration costs, and expected contribution to earnings and capital.
- Evaluate the effect of Basel III implementation and stress-test results on capital distributions, including dividends and potential share repurchases.
- Track deposit pricing, loan growth and credit performance, especially commercial financial-services exposures and legacy consumer real-estate loans, amid changes in interest rates and the economic environment.