Business Context and Reporting Period
Company: First Horizon National Corporation (FHN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Overview: FHN is a bank holding company operating primarily in Tennessee and surrounding markets through its regional banking segment, alongside a capital markets segment. The reporting period reflects the completion of divestitures for First Horizon Insurance, Inc. (FHI) and Highland Capital Management Corporation, which are now classified as discontinued operations. The company continues to wind down non-strategic legacy mortgage banking and construction lending portfolios.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Net Income (Attributable to Controlling Interest) | $19.99 million | $17.63 million | $60.15 million | $4.90 million |
| Diluted EPS (Available to Common Shareholders) | $0.08 | $0.01 | $0.23 | $(0.11) |
| Total Revenue | $361.6 million | $426.0 million | $731.9 million | $849.6 million |
| Net Interest Income | $172.9 million | $182.1 million | $345.6 million | $362.5 million |
| Noninterest Income | $188.8 million | $243.9 million | $386.3 million | $487.2 million |
| Provision for Loan Losses | $1.0 million | $70.0 million | $2.0 million | $175.0 million |
| Noninterest Expense | $345.8 million | $337.3 million | $661.0 million | $675.3 million |
| Total Assets | $25.05 billion | $26.25 billion | $25.05 billion | $26.25 billion |
| Total Loans (Net of Unearned Income) | $16.06 billion | $17.15 billion | $16.06 billion | $17.15 billion |
| Allowance for Loan Losses | $524.1 million | $781.3 million | $524.1 million | $781.3 million |
| Shareholders' Equity | $2.68 billion | $3.29 billion | $2.68 billion | $3.29 billion |
Material Changes Versus Prior Period
- Profitability Improvement: Net income available to common shareholders increased significantly year-over-year, driven primarily by a drastic reduction in the provision for loan losses ($69 million decrease for the quarter; $173 million decrease for the six months). This reduction reflects improved asset quality and the wind-down of higher-risk non-strategic portfolios.
- Revenue Decline: Total revenue decreased 15% for the quarter and 14% for the six months. This was driven by a $31.2 million decline in mortgage banking income (due to lower net hedging results and portfolio runoff) and a $23.0 million decline in capital markets income (reflecting normalizing fixed income trading conditions).
- Expense Increases: Noninterest expense increased slightly year-over-year. This was due to a $36.7 million litigation settlement accrual and $16.6 million in restructuring charges, partially offset by a $31.6 million decline in the repurchase and foreclosure provision.
- Divestitures: The company completed the sale of FHI and Highland in the second quarter, resulting in after-tax gains of $4.2 million, which are reported in discontinued operations.
- Asset Quality: The allowance for loan losses decreased 33% year-over-year to $524.1 million. Nonperforming assets declined to $747.9 million from $899.8 million, with the nonperforming asset ratio improving to 4.09% from 4.92%.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects net interest margin to remain relatively stable in 2011, assuming the Federal Reserve maintains low interest rates. Asset quality trends are expected to remain favorable if economic conditions continue to improve.
- Repurchase Obligations: A significant risk remains related to legacy mortgage loans sold to Government Sponsored Enterprises (GSEs). The active repurchase pipeline totaled $450.8 million as of June 30, 2011. The company has accrued a liability of $171.9 million for repurchase and foreclosure losses. While inflows into the pipeline have declined, the company notes uncertainty regarding future claims.
- Regulatory Risks: The company faces potential revenue reductions of $15–$20 million annually due to the Durbin Amendment capping debit card interchange fees. Additionally, new OCC supervisory guidance on foreclosure practices may result in increased operational costs and remediation expenses, though the specific financial impact is currently undetermined.
- Unusual Items:
- Litigation Settlement: A $36.7 million pre-tax expense was recognized in Q2 2011 related to a settlement with the Sentinel Management Group Trustee.
- Restructuring: Net pre-tax costs of $29.7 million were recognized for the six months ended June 30, 2011, including a $10.1 million goodwill impairment related to the FHI sale and a $9.0 million charge to terminate a technology services contract.
Important Facts for Investor Verification
- Repurchase Liability Adequacy: Verify the assumptions used to calculate the $171.9 million repurchase and foreclosure liability, specifically the loss severity rates (50-60%) and rescission rates (45-55%) applied to the $450.8 million active pipeline.
- Regulatory Impact Costs: Monitor the actual financial impact of the Durbin Amendment on interchange fees and the costs associated with implementing new foreclosure management standards required by the OCC.
- Non-Strategic Portfolio Wind-down: Track the continued reduction of the non-strategic segment (legacy mortgage and construction loans) and its impact on future provision for loan losses and noninterest expense.
- Capital Ratios: Confirm that Tier 1 Common capital ratios remain well above regulatory minimums despite the redemption of TARP preferred stock and ongoing restructuring costs.
- Discontinued Operations: Ensure that all results related to FHI and Highland are correctly classified as discontinued operations and that no further significant charges related to these divestitures are expected.