Business Context and Reporting Period
Company: First Horizon National Corporation (First Horizon)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Overview: First Horizon is a Tennessee-based bank holding company and financial holding company. As of December 31, 2008, it held total assets of $31.0 billion, ranking first among Tennessee-headquartered bank holding companies. The company operates through five segments: Regional Banking, Capital Markets, Mortgage Banking, National Specialty Lending (largely discontinued in 2008), and Corporate. The principal subsidiary, First Tennessee Bank National Association, held $30.8 billion in assets and $14.5 billion in deposits.
Key Financial Metrics
Assets and Deposits:
- Total Assets (Corporation): $31.0 billion
- Total Assets (Bank): $30.8 billion
- Total Deposits (Bank): $14.5 billion
- Total Net Loans (Bank): $20.4 billion
Revenue Composition (2008):
- Fee Income: Approximately 62% of total revenue
- Net Interest Income: Approximately 38% of total revenue
Capital Adequacy (Corporation):
- Total Capital Ratio: 20.18%
- Tier 1 Capital Ratio: 15.03%
- Leverage Ratio: 12.22%
Loan Portfolio (Total): $21.28 billion (down from $22.10 billion in 2007).
Short-Term Borrowings: $6.39 billion (down from $8.81 billion in 2007).
Note: Specific revenue, profit, and cash flow figures for the fiscal year are incorporated by reference to the 2008 Annual Report to Shareholders and are not explicitly stated in the provided text.
Material Changes vs. Prior Period
- Strategic Shift: The company exited its national mortgage origination and servicing platforms (sold to MetLife Bank N.A. in August 2008) and closed national specialty lending operations to refocus on Tennessee-based markets and capital markets.
- Revenue Mix Shift: Regional Banking revenue contribution dropped from 51% in 2007 to 35% in 2008, while Mortgage Banking revenue contribution rose from 10% to 27% (likely due to retained servicing rights and legacy assets).
- Loan Portfolio Contraction: Total loans decreased by approximately $825 million year-over-year, driven by a significant reduction in Real Estate Construction loans (Commercial and Retail).
- Dividend Policy: The Corporation discontinued quarterly cash dividends to common stockholders in 2008, replacing them with common stock dividends. This was influenced by regulatory constraints and TARP participation.
- Government Capital Injection: In November 2008, the company participated in the Treasury's Capital Purchase Program (CPP), issuing preferred stock and warrants for $866.54 million.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary:
Management anticipates continued economic recession and elevated credit risks. The strategy focuses on organic growth in Tennessee retail/commercial banking and capital markets. The company expects credit losses to remain at historically high levels and notes that demand for loans has diminished.
Key Risks:
- Credit Risk: Increased default rates and declining collateral values, particularly in residential real estate and legacy national mortgage assets.
- Liquidity and Funding: Disruptions in capital markets have limited access to institutional funding; reliance on deposits has increased. There is a risk of deposit run-off due to economic uncertainty.
- Regulatory and Legislative: The Emergency Economic Stabilization Act (EESA) and the American Recovery and Reinvestment Act impose strict compensation restrictions on executives and limit the ability to increase cash dividends or repurchase stock without Treasury approval.
- Interest Rate Risk: Falling interest rates have compressed net interest margins. The yield curve inversion has increased hedging costs for mortgage servicing rights.
Unusual Items:
- TARP Participation: Issuance of $866.54 million in preferred stock to the U.S. Treasury with a 5% dividend rate (increasing to 9% after five years) and a warrant to purchase 12.7 million common shares.
- Legacy Asset Risks: Retention of significant mortgage servicing rights and loans from exited businesses, which continue to generate losses and repurchase obligations.
Investor Verification Checklist
- Verify the adequacy of the Allowance for Loan Losses given the reported increase in credit losses and declining real estate values.
- Review the valuation and impairment status of retained Mortgage Servicing Rights (MSR) assets.
- Assess the impact of TARP compensation restrictions on executive retention and performance incentives.
- Monitor the Bank's ability to pay dividends to the holding company, which is currently restricted by regulatory capital requirements and losses.
- Examine the specific terms and potential dilution effects of the Treasury warrant issued in November 2008.
- Track the resolution of loan repurchase obligations related to legacy national mortgage sales.