Business Context and Reporting Period
Company: First Horizon National Corporation (FHN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: FHN is a bank holding company operating through Regional Banking, Capital Markets, Mortgage Banking, National Specialty Lending, and Corporate segments. The company is actively restructuring, having sold its national mortgage origination platform to MetLife in 2008 and agreeing to sell its institutional equity research division (FTN ECM) in Q3 2009. The company participated in the U.S. Treasury's Capital Purchase Program (CPP) in late 2008.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Loss (Attributable to Common) | $(52.9) million | $(125.1) million | $(258.8) million | $(136.3) million |
| Loss Per Share (Diluted) | $(0.24) | $(0.58) | $(1.19) | $(0.74) |
| Total Assets | $26.47 billion | $32.80 billion | - | - |
| Total Loans (Net) | $17.58 billion | $20.84 billion | - | - |
| Allowance for Loan Losses | $944.8 million | $760.5 million | - | - |
| Net Interest Income | $190.9 million | $223.1 million | $586.6 million | $690.1 million |
| Noninterest Income | $303.8 million | $296.1 million | $987.3 million | $1,124.1 million |
| Provision for Loan Losses | $185.0 million | $340.0 million | $745.0 million | $800.0 million |
| Net Cash Provided by Operating Activities | - | - | $660.6 million | $2,935.2 million |
| Regulatory Capital Ratios (FHN) | Tier 1: 16.20% Total: 21.61% |
Tier 1: 11.10% Total: 16.07% |
- | - |
Material Changes vs. Prior Period
- Improved Loss Profile: Net loss attributable to common shareholders improved significantly in Q3 2009 compared to Q3 2008, driven by a $155 million decrease in the provision for loan losses and reduced restructuring charges.
- Balance Sheet Contraction: Total assets declined by approximately $6.3 billion year-over-year, primarily due to a $3.1 billion reduction in the loan portfolio as the company winds down national construction and consumer portfolios.
- Capital Strength: Total equity increased to $3.37 billion (from $2.87 billion in Q3 2008), bolstered by the issuance of preferred stock and warrants under the Treasury's Capital Purchase Program (CPP).
- Asset Quality: Nonperforming loans (NPLs) increased to $1.12 billion (5.87% of total loans) from $0.90 billion (4.12%) in Q3 2008. Net charge-offs increased to $201.7 million in Q3 2009 from $154.7 million in Q3 2008.
- Segment Performance:
- Capital Markets: Reported pre-tax income of $10.4 million in Q3 2009, a turnaround from a $5.6 million loss in Q3 2008, driven by strong fixed income sales.
- Mortgage Banking: Revenues and income declined significantly due to the 2008 divestiture of national operations, though hedging gains provided some offset.
- National Specialty Lending: Pre-tax loss improved to $72.0 million from $217.2 million, reflecting the wind-down of high-risk construction portfolios.
Guidance, Outlook, Risks, and Unusual Items
- Discontinued Operations: Results for the FTN ECM equity research division are reported as discontinued operations. A $14.0 million goodwill impairment was recognized in Q3 2009 related to the pending sale.
- Restructuring: Net restructuring costs for the nine months ended September 30, 2009, were $20.7 million, significantly lower than the $81.1 million incurred in the same period in 2008.
- Foreclosure and Repurchase Reserves: Provision for foreclosure and repurchase losses increased to $25.7 million in Q3 2009 (from $0.8 million in Q3 2008) due to higher repurchase activity and loss severity in legacy loan sales.
- Outlook: Management anticipates continued challenges in the housing and credit markets through 2010. While asset quality is stabilizing, elevated loan loss provisions and foreclosure costs are expected to persist.
- Regulatory Risks: The company faces potential impacts from proposed Consumer Finance Protection Agency (CFPA) legislation, which could increase compliance costs and restrict consumer product offerings.
- Accounting Changes: The company is assessing the impact of new FASB standards (ASC 810 and ASC 860) regarding Variable Interest Entities (VIEs), which may require the consolidation of certain securitization trusts in 2010.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming loans and net charge-offs, specifically within the Income CRE and OTC construction portfolios.
- Allowance Adequacy: Review the coverage ratio of the Allowance for Loan Losses (ALLL) to nonperforming loans (0.87x) and the methodology for collateral-dependent loans charged down to Net Realizable Value (NRV).
- Legacy Exposure: Assess the sufficiency of reserves for foreclosure and repurchase obligations related to loans sold prior to the 2008 MetLife divestiture.
- Capital Constraints: Confirm the impact of CPP restrictions on the ability to pay common dividends or repurchase shares.
- VIE Consolidation: Monitor the potential balance sheet impact of consolidating off-balance sheet securitization trusts under new accounting rules effective in 2010.
- Discontinued Operations: Track the final closing and financial impact of the FTN ECM sale.