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VOL. 125 | NO. 242 | Tuesday, December 14, 2010

First Horizon to Repay TARP Funds

By Andy Meek

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First Tennessee Bank’s top brass can cross two big items off the company to-do list.

The largest Tennessee-based banking company has announced its intention to repay the investment of $866 million in emergency federal funds injected into the company in late 2008.

That investment was part of the government rescue of the financial system.

First Horizon National Corp., the Memphis-based parent company of First Tennessee Bank, was the largest bank that is based in Tennessee that participated in the government’s Troubled Asset Relief Program.

That program was intended to keep the banking system flush with capital and ensure lending continued at a time when access to credit was drying up.

First Horizon officials in 2010 have repeatedly mentioned two goals they hoped to accomplish this year – returning the company to profitability, which beat most analyst expectations by happening in the second quarter, and repaying TARP funds to the government.

First Horizon is doing the latter via a public offering of $250 million of common stock.

The company intends to grant the underwriters a 30-day option to purchase up to an additional 15 percent of common shares sold pursuant to this transaction.

First Horizon is using those net proceeds, plus the net proceeds of a planned debt offering, to buy back in full the preferred shares in the company that are now held by the government as part of the TARP program.

Goldman, Sachs & Co., J.P. Morgan Securities LLC and Morgan Stanley & Co. Inc. are acting as joint book-running managers for the stock offering. Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., and UBS Securities LLC are acting as co-managers for the stock offering.

Bob Patten, a bank analyst with Morgan Keegan & Co. Inc., said one of the important facts to note about First Horizon’s TARP announcement is that it represents one of the least-dilutive TARP repayments he’s seen.

He said First Horizon’s $250 million common stock offering represents more than a quarter of its TARP amount, whereas most banks have had to raise about 50 percent.

“And that’s because of First Horizon’s strong balance sheet and strong Tier 1 common ratio,” Patten said.

“This clearly is not a surprise. Management said they wanted to be out by year-end. This is a good thing for the company, because it can now resume more organic growth and disciplined acquisition growth.”

Wunderlich Securities bank analyst Kevin Reynolds said the company’s spate of news can only be interpreted one way.

“It’s positive. Very positive,” Reynolds said. “Tell me another bank out there that’s raising capital, repaying TARP and basically raising a cash dividend from nothing to a penny.

“(First Tennessee) is still the local bank of choice in practically all the markets they’re in. And it’s becoming one of the most attractive regional banks in the U.S.”

The consensus estimate among analysts covering First Horizon is that the company will report a profitable fourth quarter, which would be the third profitable quarter in a row for the company.

First Horizon’s second quarter profit this year was its first profit turned in two years.

The other big item that First Horizon has announced is its intention to resume repayment of a cash dividend beginning in 2011.

Since 2008, the company has declared dividends on shares of common stock to be paid in the form of additional shares of stock.

On Nov. 29, First Horizon’s board amended its dividend policy so that future dividends declared on common stock will be paid in cash.

That change is conditioned on the TARP repayment.

PROPERTY SALES 97 418 8,253
MORTGAGES 112 508 9,293
BUILDING PERMITS 194 1,059 18,126
BANKRUPTCIES 46 208 5,367