First Horizon National Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 27, 2014. This is an annual report, not a standalone fourth-quarter filing. First Horizon is a bank holding company operating principally through First Tennessee Bank, with Regional Banking, Capital Markets, Corporate, and Non-Strategic segments. Several detailed financial statements and MD&A tables are incorporated by reference from the 2013 Annual Report and are not reproduced in the supplied filing text.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net interest income | $637.4 million | $688.7 million | Down 7.5% |
| Noninterest income | $584.6 million | $671.3 million | Down 12.9% |
| Revenue (net interest income plus noninterest income) | $1,222.0 million | $1,360.0 million | Down 10.1% |
| Provision for loan losses | $55.0 million | $78.0 million | Down 29.5% |
| Provision for mortgage repurchase losses | $170.0 million | $299.3 million | Down 43.2% |
| Total assets, at year-end | $23.790 billion | $25.334 billion | Down 6.1% |
| Total deposits, at year-end | $16.735 billion | $16.630 billion | Up 0.6% |
| Total term borrowings, at year-end | $1.740 billion | $2.227 billion | Down 21.8% |
| Total shareholders’ equity, at year-end | $2.501 billion | $2.509 billion | Down 0.3% |
- The Bank reported $15.1 billion of net loans and $16.7 billion of deposits at year-end. The consolidated loan portfolio was $15.389 billion, down from $16.709 billion in 2012.
- Net charge-offs fell to $78 million from $185 million in 2012. The allowance for loan losses was $253.8 million at year-end, compared with $896.9 million in 2009.
- Consolidated regulatory capital ratios were 16.23% total capital, 13.87% Tier 1 capital, and 11.04% leverage. The Bank was described as well-capitalized; its ratios were 16.84%, 15.43%, and 12.33%, respectively.
- Approximately 48% of 2013 revenue came from fee and other noninterest income and 52% from net interest income. The filing text does not provide a clear consolidated net income, cash-flow, or net interest margin figure; detailed statements are incorporated by reference.
Material changes and management commentary
- Regional Banking increased its share of segment revenue to 68% from 63% in 2012; Non-Strategic’s share declined to 9% from 11%. Management said Regional Banking’s revenue contribution had grown over the prior three years while Non-Strategic revenue share fell.
- The company continued to shrink legacy and non-core activities. Non-Strategic loans had declined approximately 65% from year-end 2008 to $3.0 billion by year-end 2013. Total assets and term borrowings also decreased year over year, while deposits grew modestly.
- In 2013, First Horizon established a Mid-Atlantic region, expanded branches in North Carolina, converted a Richmond office to a branch, and acquired most of Mountain National Bank’s assets and deposits from the FDIC. It expected to convert offices in South Carolina and Florida into branches in 2014.
- The quarterly common cash dividend increased to $0.05 per share in 2013. However, the Bank could not legally declare cash dividends without regulatory approval at year-end; it had requested OCC approval for a preferred-stock dividend payable in April 2014. The Bank is a principal source of holding-company cash.
Outlook, risks, and unusual items
- Management expected asset-quality trends to be relatively stable in 2014, contingent on a continued mild economic recovery. This is not numerical earnings guidance.
- Legacy mortgage exposure remains a major uncertainty. Mortgage repurchase and foreclosure provision expense was $170.0 million in 2013, and the year-end reserve was $165.1 million. The repurchase-request and related mortgage-insurance cancellation pipeline was $197.2 million, down from $333.8 million in 2012. Settlements with the two largest GSE purchasers reduced exposures, but not all claims or loan categories were covered.
- At year-end, the company was a defendant in five lawsuits related to proprietary mortgage securitizations and faced three additional indemnity demands. It also disclosed an ongoing government investigation concerning FHA lending, uncertain foreclosure-related exposures, and a dispute with a former mortgage subservicer that could result in substantial claims. Outcomes and possible losses were not clear from the filing.
- Regulatory and policy risks include Basel III capital rules taking effect for First Horizon in 2015, rising compliance costs, potential further limits on debit-card interchange fees, and the phase-out from Tier 1 capital of approximately $200 million of trust preferred securities by 2015. The company said a further interchange-fee reduction could lower revenue; retroactive application could also create a one-time impact.
- Other principal risks include low rates and yield-curve changes pressuring margins, funding and rating risks, concentrated commercial exposure to financial-services borrowers, legacy second-lien real-estate credit risk, and operational, cyber-security, competitive, and litigation risks. Two of three agencies rated holding-company senior debt investment grade and all three rated Bank senior debt investment grade, though ratings were near the lowest investment-grade levels.
- The company reported a net deferred tax asset of $275.7 million at year-end and identified potential impairment if its taxable-earnings outlook worsens or tax rates fall.
Important facts for investors to verify
- Review the incorporated annual-report income statement, balance sheet, cash-flow statement, and quarterly results for net income, cash generation, margins, and any unusual charges not quantified in this filing text.
- Assess the adequacy of the $165.1 million mortgage repurchase and foreclosure reserve against remaining GSE, private-securitization, mortgage-insurance, FHA, and servicing exposures, including developments after year-end.
- Confirm OCC approval status for Bank dividends and the implications for holding-company liquidity and the $0.05 quarterly common dividend.
- Evaluate credit quality and reserve coverage for legacy second-lien and other consumer real-estate loans, as well as commercial lending exposures to financial-services companies.
- Track the effects of Basel III implementation, trust preferred capital deductions, interchange-fee litigation, and evolving consumer and mortgage regulations on capital, costs, and earnings.