Business Context and Reporting Period
Company: First Horizon National Corporation (FHN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Overview: FHN is a bank holding company operating primarily in Tennessee and surrounding markets through its Regional Banking segment, alongside Capital Markets, National Specialty Lending, and Mortgage Banking segments. The reporting period reflects the ongoing impact of the 2008 divestiture of national mortgage origination and servicing operations to MetLife, a strategic wind-down of national construction and consumer lending, and severe stress in the housing and credit markets.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Loss (Attributable to Common Shareholders) | $(123.2) million | $(206.0) million |
| Loss Per Share (Diluted) | $(0.58) | $(0.96) |
| Total Assets | $28.76 billion | N/A (Balance Sheet Item) |
| Total Deposits | $14.98 billion | N/A (Balance Sheet Item) |
| Net Interest Income | $199.1 million | $395.7 million |
| Noninterest Income | $292.3 million | $700.1 million |
| Provision for Loan Losses | $260.0 million | $560.0 million |
| Net Charge-offs | $239.4 million | $447.7 million |
| Allowance for Loan Losses | $961.5 million | N/A (Balance Sheet Item) |
| Cash and Cash Equivalents | $951.3 million | N/A (Balance Sheet Item) |
| Net Cash Provided by Operating Activities | N/A | $426.6 million |
Material Changes vs. Prior Comparable Period
- Profitability: The company reported a net loss of $123.2 million for the quarter, a significant deterioration from the $19.1 million loss in the second quarter of 2008. The six-month loss widened to $206.0 million compared to $11.2 million in the prior year.
- Revenue: Total consolidated revenue decreased 23% to $491.4 million in Q2 2009 from $637.9 million in Q2 2008. This decline was driven by a 16% drop in net interest income and a 27% drop in noninterest income, largely due to the reduced scale of mortgage banking operations following the MetLife sale.
- Asset Quality: Nonperforming loans (NPLs) increased to $1.13 billion (5.64% of total loans) from $770 million (3.42%) in Q2 2008. Net charge-offs more than doubled to $239.4 million in Q2 2009 from $127.7 million in Q2 2008.
- Provisioning: The provision for loan losses increased 18% to $260.0 million in Q2 2009 from $220.0 million in Q2 2008, reflecting continued deterioration in the national construction, home equity, and commercial real estate portfolios.
- Capital: Despite the losses, capital ratios improved. Tier 1 capital ratio rose to 15.55% from 10.51% year-over-year, and Total Capital ratio increased to 20.77% from 15.15%, bolstered by the issuance of preferred stock under the Treasury Capital Purchase Program (CPP).
Guidance, Outlook, and Risks
Management Commentary: Management anticipates 2009 will remain challenging due to uncertainties in the housing and credit markets. While the reduction of mortgage banking operations decreases sensitivity to market pricing, the company remains exposed to borrower defaults, loan repurchase obligations, and losses related to private mortgage insurance contracts. The company expects asset quality to remain stressed into 2010.
Outlook:
- Net Interest Margin: Expected to improve modestly in the short term due to loan and deposit pricing focus and the wind-down of national businesses.
- Loan Portfolio: Commercial and consumer construction portfolios are expected to continue contracting in 2009.
- Dividends: FHN is restricted from reinstating cash common dividends for three years under CPP terms. The Board declared a stock dividend of 1.5901% to be distributed in October 2009.
Risks and Contingencies:
- Credit Risk: Significant concentrations in residential real estate (51% of total loans), specifically in One-Time Close (OTC) and Residential Commercial Real Estate (CRE) portfolios, which are under severe stress.
- Foreclosure and Repurchase Reserves: Increased charges were recorded to increase reserves for foreclosure losses and repurchase obligations related to legacy loan sales. The foreclosure reserve increased to $52.5 million.
- Legal and Regulatory: Pending litigation and regulatory changes, including the Supreme Court decision in Cuomo v. Clearing House Association, which may increase compliance costs related to state and local law enforcement.
- Accounting Changes: The company is assessing the impact of new FASB standards (SFAS 166 and 167) regarding transfers of financial assets and variable interest entities, effective in 2010.
Key Facts for Investor Verification
- Asset Quality Deterioration: Verify the composition of the $1.13 billion in nonperforming loans, specifically the exposure in the Residential CRE and OTC portfolios, and the adequacy of the $961.5 million allowance for loan losses.
- Provisioning Trends: Monitor the trajectory of the provision for loan losses, which has increased significantly year-over-year, and the impact of net charge-offs on future earnings.
- Mortgage Banking Exposure: Assess the remaining exposure to legacy mortgage servicing rights (MSR) and the associated repurchase and foreclosure reserves, which have increased due to higher default expectations.
- Liquidity Position: Review the company's reliance on wholesale funding versus core deposits, noting the decline in short-term borrowings and the impact of the contracting balance sheet on liquidity management.
- Capital Constraints: Confirm the restrictions on common stock repurchases and cash dividends imposed by the Treasury Capital Purchase Program (CPP) and the timeline for potential reinstatement.