Business Context and Reporting Period
Company: First Horizon National Corporation (First Horizon)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: First Horizon is a Tennessee-based bank holding company and financial holding company. As of December 31, 2007, it held total assets of $37.0 billion, ranking 1st among Tennessee-headquartered bank holding companies and 25th nationally. The Corporation operates through four segments: Retail/Commercial Banking (71% of revenue), Mortgage Banking (9%), Capital Markets (18%), and Corporate (2%). The primary subsidiary, First Tennessee Bank National Association, held $37.0 billion in assets and $17.0 billion in deposits.
Key Financial Metrics
Assets and Liabilities:
- Total Assets: $37.0 billion
- Total Net Loans: $21.8 billion (Bank level); $22.1 billion (Consolidated loan portfolio)
- Total Deposits: $17.0 billion (Bank level)
- Short-Term Borrowings: $8.8 billion
Capital Adequacy:
- Total Capital Ratio: 12.75%
- Tier 1 Capital Ratio: 8.12%
- Leverage Ratio: 6.64%
- Capital Status: The Bank qualified as "well capitalized" under regulatory requirements.
Revenue Composition (2007):
- Fee Income: Approximately 52%
- Net Interest Income: Approximately 48%
Liquidity: On a non-consolidated basis, the Corporation held approximately $215.9 million in cash on hand as of December 31, 2007.
Note: Specific consolidated revenue, net income, and cash flow figures for the full year are incorporated by reference to the 2007 Annual Report to Shareholders and are not explicitly stated in the provided text.
Material Changes and Operational Shifts
Segment Revenue Shifts: The Retail/Commercial Banking segment increased its revenue contribution from 63% in 2006 to 71% in 2007. Conversely, the Mortgage Banking segment's contribution dropped significantly from 22% in 2006 to 9% in 2007, reflecting market disruptions.
Dividend Reduction: Due to a loss incurred by the Bank in 2007, regulatory constraints prevented the Bank from declaring common dividends to the Corporation in 2008 without approval. Consequently, the Corporation reduced its common dividend rate by over 50%, from 45 cents per share to 20 cents per share, payable in April 2008.
Mortgage Business Restructuring: In response to market conditions, the Corporation closed selected mortgage offices and was evaluating strategic alternatives for its mortgage businesses. The 10 Texas branches operating under the "First Horizon Bank" name were sold in February 2008.
Loan Portfolio: The total loan portfolio remained relatively flat at approximately $22.1 billion compared to 2006 ($22.1 billion), with specific growth in commercial real estate construction loans offset by declines in residential real estate loans.
Outlook, Risks, and Management Commentary
Regulatory Constraints on Dividends: The Bank cannot legally declare aggregate dividends to the Corporation in 2008 unless earnings exceed $74.0 million plus preferred dividends. The Corporation estimates it has sufficient cash to pay the reduced dividend and meet obligations through 2008 even without Bank dividends.
Market Risks and Disruptions: Management highlighted significant impacts from the 2007 downturn in the housing and mortgage markets, including:
- Stagnation or decline in U.S. residential housing values.
- Sharp fluctuations and disappearance of investor demand for certain mortgage-backed securities.
- Increased delinquencies and loan loss provisions related to mortgages.
- Volatility in mortgage servicing rights (MSR) assets.
- Compression of net interest margin due to falling prime rates and an inverted yield curve.
Strategic Focus: For 2008, growth is expected to be coordinated with a focus on stronger and more stable returns on capital. The strategy emphasizes investing in Tennessee-based retail/commercial banking footprints and expanding capital markets products, while managing liquidity and capital requirements associated with organic growth.
Key Risks:
- Credit Risk: Increased loan losses due to economic downturns and falling collateral values.
- Liquidity Risk: Dependence on the ability to sell or securitize mortgage loans, which faced market disruptions in 2007.
- Interest Rate Risk: Exposure to changes in the yield curve and interest rates affecting net interest margin and MSR values.
- Geographic Concentration: Significant exposure to the Tennessee and mid-South region for traditional banking.
Investor Verification Checklist
- Dividend Sustainability: Verify the Bank's ability to generate the $74.0 million in earnings required to lift regulatory restrictions on common dividends in 2008.
- Mortgage Portfolio Quality: Review the specific allowance for loan losses and delinquency rates for the mortgage and HELOC portfolios given the housing market downturn.
- Liquidity Position: Confirm the Corporation's ability to fund operations and dividends solely from its $215.9 million cash on hand if Bank dividends remain restricted.
- Mortgage Business Strategy: Monitor the outcome of the evaluation of strategic alternatives for the mortgage business, including potential divestitures or closures.
- Net Interest Margin: Assess the impact of the inverted yield curve and falling prime rates on the net interest margin in the upcoming quarters.