Business Context and Reporting Period
Company: First Horizon National Corporation (FHN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: FHN is a bank holding company operating primarily through First Tennessee Bank (regional banking) and FTN Financial (capital markets). In Q1 2010, the company revised its operating segments to focus on regional banking and capital markets, creating a "Non-Strategic" segment to house wind-down operations (legacy mortgage banking, national specialty lending) and exited businesses (institutional equity research).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Interest Income | $180,395 | $196,587 |
| Noninterest Income | $248,263 | $399,346 |
| Total Revenue | $428,658 | $595,933 |
| Provision for Loan Losses | $105,000 | $300,000 |
| Noninterest Expense | $342,673 | $407,803 |
| Net Loss | $(9,893) | $(65,095) |
| Net Loss Attributable to Common Shareholders | $(27,655) | $(82,801) |
| Diluted Loss Per Share | $(0.12) | $(0.37) |
| Total Assets | $25,923,576 | $31,208,024 |
| Total Loans (Net) | $16,640,164 | $19,631,545 |
| Total Deposits | $15,069,700 | $14,910,055 |
| Shareholders' Equity | $3,270,942 | $3,507,676 |
Liquidity & Capital:
- Cash and Cash Equivalents: $802.97 million (down from $954.04 million in Q1 2009).
- Tier 1 Capital Ratio: 16.58% (up from 14.97% in Q1 2009).
- Total Capital Ratio: 21.43% (up from 20.20% in Q1 2009).
- Allowance for Loan Losses (ALLL): $844.06 million (4.83% of total loans).
Material Changes vs. Prior Period
- Improved Loss Position: Net loss attributable to common shareholders improved significantly from $82.8 million in Q1 2009 to $27.7 million in Q1 2010. This was driven by a $195 million reduction in the provision for loan losses and a $65.1 million decrease in noninterest expense.
- Revenue Decline: Total revenue decreased 28% year-over-year. Noninterest income dropped $151.1 million, primarily due to a $91.7 million decline in Capital Markets fixed income revenue (Q1 2009 was a record quarter) and an $80.9 million drop in Mortgage Banking income due to lower hedge gains.
- Asset Quality: Nonperforming assets decreased to $1.04 billion from $1.25 billion. Net charge-offs were $182.4 million, down from $208.3 million in Q1 2009, reflecting the wind-down of high-risk construction portfolios.
- Balance Sheet Contraction: Total assets declined 17% to $25.9 billion, driven by a reduction in the loan portfolio and interest-bearing cash as the company continues to shrink non-strategic portfolios.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects the net interest margin to remain flat over the next few periods, assuming interest rates stay at historical lows.
- The company anticipates 2010 to be challenging due to housing market and national economic uncertainties, which could lead to elevated loan loss provisions and repurchase losses.
- Capital ratios are expected to remain strong and significantly above well-capitalized standards.
Unusual Items & Accounting Changes:
- ASC 810 Adoption: Effective Jan 1, 2010, FHN adopted amendments to ASC 810 regarding Variable Interest Entities (VIEs). This resulted in the consolidation of $245.2 million of consumer loans (primarily HELOCs) and a $10.6 million reduction to opening undivided profits.
- Discontinued Operations: The institutional equity research business (FTN ECM) was closed in Q1 2010. A $3.3 million goodwill impairment and related severance costs are reflected in discontinued operations.
- Repurchase Provision: The "Mortgage banking foreclosure and repurchase provision" increased $28.4 million to $40.7 million due to a growing pipeline of repurchase requests from legacy loan sales.
Risks & Contingencies:
- Repurchase Obligations: FHN faces significant repurchase exposure for loans sold without recourse (approx. $114 billion sold 2005-2008). As of March 31, 2010, the repurchase pipeline was $304 million, with a reserve of $126.0 million.
- Legal Proceedings: Subsidiaries and an executive received SEC "Wells" notices regarding a 2006 securities repurchase transaction with Sentinel Management Group. Management intends to defend vigorously.
- Asset Quality: While construction portfolios are shrinking, stress remains in Commercial, Financial, and Industrial (C&I) loans (specifically bank-related loans) and Income CRE portfolios.
Investor Verification Checklist
- Repurchase Reserve Adequacy: Verify the sufficiency of the $126 million reserve against the $304 million repurchase pipeline and the severity of losses (50-55%) on legacy mortgage sales.
- Non-Strategic Segment Wind-down: Monitor the pace of the wind-down of the "Non-Strategic" segment, specifically the reduction in construction loans and the associated charge-offs.
- ASC 810 Impact: Confirm the ongoing impact of the new VIE consolidation rules on the balance sheet and the specific credit quality of the newly consolidated $245.2 million loan portfolio.
- Capital Markets Volatility: Assess the sustainability of Capital Markets revenue, given the significant year-over-year decline from record 2009 levels.
- Deferred Tax Asset (DTA): Review management's justification for realizing the $262 million net DTA despite a three-year cumulative loss position.