Business Context and Reporting Period
Company: First Horizon National Corporation (FHN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Overview: FHN is a bank holding company operating through Regional Banking, Capital Markets, National Specialty Lending, Mortgage Banking, and Corporate segments. The quarter was significantly impacted by the ongoing financial crisis, the sale of national mortgage origination operations to MetLife in August 2008, and participation in the U.S. Treasury's Capital Purchase Program (CPP).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income/(Loss) Available to Common Shareholders | $(82,801) | $7,920 |
| Diluted Earnings/(Loss) Per Share | $(0.39) | $0.06 |
| Total Assets | $31,208,024 | $37,267,945 |
| Total Loans (Net of Unearned Income) | $20,572,477 | $21,932,020 |
| Total Deposits | $14,910,055 | $16,188,542 |
| Net Interest Income | $196,587 | $228,092 |
| Provision for Loan Losses | $300,000 | $240,000 |
| Noninterest Income | $407,869 | $449,076 |
| Noninterest Expense | $417,328 | $434,216 |
| Allowance for Loan Losses | $940,932 | $483,203 |
| Nonperforming Loans | $1,133,108 | $537,252 |
| Tier 1 Capital Ratio | 14.97% | 8.23% |
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $82.8 million available to common shareholders, a reversal from the $7.9 million net income in Q1 2008. This was driven by a $60 million increase in the provision for loan losses and significant charges related to asset quality and restructuring.
- Asset Quality Deterioration: Nonperforming loans more than doubled to $1.13 billion (5.44% of total loans) from $537 million in Q1 2008. Net charge-offs increased to $208.3 million (3.97% annualized) from $99.1 million (1.81% annualized).
- Capital Strength: Total equity increased to $3.5 billion from $2.4 billion, largely due to the issuance of preferred stock and a common stock warrant under the Treasury's CPP ($866.5 million proceeds) and a common stock offering in Q2 2008.
- Segment Performance:
- Regional Banking: Pre-tax loss widened to $89.3 million from $18.7 million due to higher loan loss provisions and lower net interest income.
- Capital Markets: Pre-tax income surged to $74.3 million from $22.8 million, driven by increased fixed income sales revenue ($197.0 million) due to market volatility.
- National Specialty Lending: Pre-tax loss expanded to $192.5 million from $121.2 million, reflecting severe deterioration in construction and home equity portfolios.
- Mortgage Banking: Pre-tax income improved to $83.3 million from $48.3 million, primarily due to $84.7 million in hedging gains, despite a significant drop in origination income following the MetLife divestiture.
Guidance, Outlook, and Risks
- Outlook: Management anticipates 2009 will remain challenging due to uncertainties in housing and credit markets. The reduction of mortgage banking operations is expected to decrease sensitivity to market pricing, but the company remains exposed to the remaining mortgage warehouse and servicing portfolio.
- Liquidity: The company maintains liquidity through core deposits, securities available for sale, and access to Federal Reserve facilities (e.g., Term Auction Facility). However, the bank subsidiary (FTBNA) has been unable to utilize its bank note program due to market conditions.
- Dividends: Due to CPP restrictions, FHN cannot increase its cash common dividend rate for three years without Treasury approval. The Board declared a stock dividend of 1.5782% to be distributed in July 2009 and intends to reinstate cash dividends when conditions improve.
- Key Risks:
- Credit Risk: Significant exposure to residential real estate (52% of total loans), specifically in OTC (consumer construction) and Residential CRE portfolios.
- Market Risk: Volatility in capital markets affecting trading revenues and the fair value of mortgage servicing rights (MSR).
- Regulatory Risk: Compliance with CPP restrictions on compensation and dividends.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming loans and net charge-offs, particularly in the National Specialty Lending and OTC portfolios, which showed the highest deterioration.
- Allowance Adequacy: Assess the $940.9 million allowance for loan losses against the rising volume of impaired loans and the methodology used for collateral-dependent commercial loans (SFAS 114).
- MSR Valuation: Review the fair value assumptions for Mortgage Servicing Rights ($381 million), which are sensitive to prepayment speeds and discount rates.
- Restructuring Costs: Monitor the remaining liability for restructuring and repositioning initiatives ($21.2 million reserve balance) and associated future cash outflows.
- Capital Constraints: Confirm the impact of CPP restrictions on future capital management strategies, including share repurchases and dividend policies.